Continuous Disclosure

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, Western University
• Pages: 362-431

362

CHA PTER 9

CONTINUOUS

DISCLOSURE

A. INTRODUCTION AND OVERVIEW

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

discussed in Chapter 6, 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 securities”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

oering. Rather, they acquired them in the secondary market, usually

through the facilities of a stock exchange. People who purchase secur-

ities in the secondary market do not receive a copy of the prospectus that

was produced by the company when those securities were f‌irst distrib-

uted 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 regu-

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

requirement to produce such information is generally refer red to as a

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

Continuous Disclosure 363

continuous disclosure obligation. The importance in Can adian secur-

ities law of ongoing or continuous disclosure by public companies is

growing as we move increasingly from a system of transact ion-based

disclosure to a system of integrated or issuer-based disclosure.

Public companies (that meet the securities law def‌i nition of “report-

ing issuers,” discussed in t he 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 information forms, and infor-

mation circulars i n connection with soliciting proxies for sharehold-

ers’ meetings.

2) Timely disclosure of material business developments (“material

changes”) when they occur.

The increased regulator y emphasis on continuous disclosure ha s

led, in recent years, to important developments and proposal s in several

related areas, including t he following:

• Civil liability for misrepresentations in continuous disclosure docu-

ments, including common law remedies and st atutory civil liability.

• Selective disclosure.

• Communication with benef‌icia l owners of securities where those

securities are reg istered in the name of a depository or nominee.

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

Of course, improvements in communications technology, including

almost universal adoption and use of the inter net also has importa nt

implications for the ongoing disclosure of inform ation by securities issu-

ers. Some of those implications are al so discussed brief‌ly in thi s 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

periodic and timely di sclosure obligations (discussed in more detail

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

SECU RITIE S LAW364

securities 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 c ame from an earlier important OSC committee

report, commonly referred to as the Me rger Rep ort.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 t he 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 sec urities of such issuers in the secondar y markets are,

therefore, better able to make informed trad ing decisions. Moreover, the

fact that a body of information about such issuer s exists, and is regularly

updated, facilitates t he development of more streamlined procedures for

additional public f‌inancings, such as the short-form, shelf, and post-re-

ceipt pricing prospectus (PREP) procedures discus sed in Chapter 6.

C. NATIONAL INSTRUMENT 51-102

Most continuous disclosure obligations for Canadian reporting issuers

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

sure Obligations.” NI 51-102 includes a number of continuous disclosure

requirements that are a lso found in provincial securities acts t hemselves.

As the Ontar io Securities Commission explai ned in the 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 harmonized con-

tinuous disclosure obligations for reporting issuers other than invest-

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

substantive change) certain requirements that are also dealt with in the

Act . . . . The cumulative eect of NI 51-102 and the Implementing Rule

is that NI 51-102 supersedes the requirements applicable to reporting

issuers (other than investment funds) found in [certain parts of the

statute dealing with continuous disclosure]. Reporting Issuers can and

should therefore refer to NI 51-102 in place of [those] requirements.6

2 See, for example, ibid, s 1(10).

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

4 Ontario Sec urities Commiss ion, Report of the OSC on the Problems of Disclos ure

Raised for Investors by Busin ess Combinations and Privat e Placements (Toronto:

Department of Fi nancial and Commercia l Aairs, 1970) [Merger Report].

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

6 Companion Policy 51-801CP to OSC Rule 51-801 Implementing NI 51-102, s 1.2.