Continuous disclosure

• Author: Christopher Nicholls
• Pages: 301-358

301

CHA PTER 9

CONTINUOUS

DISCLOSURE

A. INTRODUCTION AND OVERVIEW

When a company (an issuer) f‌irst sells its securities to the public, as

discussed i n Chapter 6, it is required to produce a detailed informa-

tion disclosure document cal led a prospectus. The prospectus provide s

“full, true and plain disclosure of all material facts relating to the secur-

ities”1 being sold to the public. However, most Canadians who own

securities did not purcha se them directly from the is suer at the time of

a public offering. Rather, they acquired them in the secondary market,

usually through the fac ilities of a stock exchange. People who purchase

securities in t he 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 prospectu s were delivered

to these secondar y market purchasers, it would be of little, or no, use to

them. The prospectus would have been prepared by the i ssuer months

or even years in the past. Such a stale-dated document cannot be relied

upon by an investor tryi ng to assess the cur rent value of a company’s

securities.

Accordingly, it is important that public companies provide regu-

lar, up-to-date information to cur rent and potential investors. The

requirement to produce such information is generally referred to as a

1 See, for example, OSA, s 56(1).

SECU RITIE S LAW302

continuous disclosure obligation. The importance in Canadian secur-

ities law 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.

Public companies (that meet the securities law def‌inition of ”report-

ing issuers,” discussed in the next section and in Chapter 6) are required

to comply with rules relating to two basic types of continuous disclo-

sure obligations:

1) Regular or periodic disclosure of, among other things, annual and

quarterly f‌inancial statements, annual informat ion forms, and infor-

mation circulars in connection with soliciting proxies for sharehold-

ers’ meetings.

2) Timely disclosure of material business developments when they

occ ur.

The increased regulator y emphasis on continuous disclosure ha s

led, in recent years, to important developments and proposals in sev-

eral related areas, including the following:

• Civ il liability for misrepresent ations 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 reg istered in the name of a nominee.

Each of these issues is canvassed later in t his chapter.

Of course, improvements in communications technology, includ-

ing almost universal adoption and use of t he Internet also has import-

ant implications for the ongoing disclosure of inform ation by securities

issuers. Some of those implications a re also discussed brief‌ly in this

chapter.

B. REPORTING ISSUER

Only “reporting issuers” are subject to the continuous disclosure rules.

The term “reporting issuer” i s discussed in Ch apter 6. For purposes of

this chapter, the key point is that the most common way in which an

issuer of securities becomes a reporting issuer is by f‌i ling a prospectus

and obtaining a receipt for it.

Once an issuer becomes a reporting issuer, it is subject to all of the per-

iodic and timely disclosure obligations (discussed in more detail below)

until such time, if any, that the issuer applies to the relevant securities

Continuous Disclosure 303

regulatory authority and is granted an order deeming that it has “ceased

to be a reporting issuer.”2

The concept of “reporting issuer” was introduced into Ontario law

in 1978;3 but, the idea came from an earlier important OSC committee

report, commonly referred to as the Merger Report.4 The Merger Report,

in turn, borrowed the concept from US federal securities legislation.5

The concept is fundamental to the so-called closed system. Those issu-

ers that choose to access the capital markets and raise money from the

public 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 information about such issuers exists, and is regu-

larly updated, facilitates the development of more streamlined proced-

ures for additional public f‌inancings, such as the short-form, shelf, and

PREP procedures discussed in Chapter 6.

C. NATIONAL INSTRUMENT (NI) 51‑102

Most continuous disclosure obligations for Canadian reporting issuers

have, since 2004, been consolidated in NI 51-102, “Continuous Dis-

closure Obligations.” NI 51-102 includes a number of continuous dis-

closure requirements that are also found in provincial secur ities acts

themselves. As the Ontario Securities Commission explained in t he

companion policy that accompanied the rule implementing NI 51-102

as a rule in Ontar io:

NI 51-102 is intended to provide a single source of har monized con-

tinuous disclos ure obligations for reporting issuers ot her than invest-

ment funds. As a res ult, NI 51-102 sometimes repeats (without any

substantive cha nge) certain requirement s that are also dea lt with in

the Act . . . . The cumulative effect of NI 51-102 and the Implementing

Rule is that NI 51-102 supersedes the requirements applic able to

reporting is suers (other than investment fu nds) found in [certain

parts of the st atute dealing wit h continuous disclosure]. Reporting

2 See, for example, ibid, s 83.

3 Securities Act, 1978, SO 1978, c 47.

4 Ontario Se curities Commis sion, Report of the OSC on the Problems of Di sclosure

Raised for Investors by Busi ness Combinations and Priva te Placements (Toronto:

Department of Fi nancial and Commercia l Affairs, 1970) [Merger Report].

5 Securities Excha nge Act of 1934, 15 USC 78a et seq.