Canada: Insider Trading at Private Companies

Originally Published In The Lexpert Magazine, February 2011

Shareholders of private companies may not be subject to securities regulation, but as guest columnists Gary Solway and Benjamin Gliksman of Bennett Jones LLP write, that doesn't mean they can flout insider-trading rules

If you thought insider trading laws only applied to publicly traded companies in Canada, you would be in good company. But you would be wrong. Canadian courts have frequently held that shareholders do not have fiduciary duties to each other, so it might be fair to assume that this is the end of the issue. It is not.

Since directors of private companies are often shareholders who trade the company's shares, this insider trading issue raises a corporate governance concern for directors. Subsection 131(4) of the Canadian Business Corporations Act (CBCA) – and similar provisions in some provincial legislation including the Business Corporations Act (Ontario) – provides that:

An insider who purchases or sells a security of the corporation with knowledge of confidential information that, if generally known, might reasonably be expected to affect materially the value of any of the securities of the corporation is liable to compensate the seller of the security or the purchaser of the security, as the case may be, for any damages suffered by the seller or purchaser as a result of the purchase or sale ...

The CBCA provision targets insiders of both public and private companies. The term "insiders" is broadly defined and includes directors and shareholders owning 10 per cent or more of a company's stock. For some reason, these provisions are not at all well known, and there has been very little judicial guidance on their meaning.

In the two cases that have addressed these provisions, the issue was whether a purchasing shareholder, aware of a third party's potential interest in buying the entire company and not having fully disclosed that information to the vending shareholder, used "specific confidential information" improperly in its purchase of shares from the vending shareholder. In both cases, all purchased shares were resold subsequently by the purchasing shareholder, at a higher price. The plaintiffs argued that they should be compensated for the price difference.

In the 1996 decision of Tongue v. Vencap Equities, the Alberta Court of Appeal upheld the lower court's decision finding the purchasing shareholders liable for insider trading under the CBCA. Prior to the plaintiffs' sale of shares, the purchasing shareholders were aware of a "serious expression of interest by a major company." The lower court held that the purchasing shareholders deprived the plaintiffs of information that materially affected the value of the stock they had sold.

Although the defendants had disclosed that there were potential offers to purchase the company and had caused the plaintiffs to sign acknowledgements and waivers to that effect, the defendants had failed to disclose that a particular expression of interest was from a major, international firm and that the offer was for potentially more than three times the purchase price. The courts found that the information had reached the threshold of "specific confidential information."

The court also found that the absolute general release signed by the plaintiffs was unenforceable because, under s. 122(3) of the CBCA, directors are forbidden from contracting out of their duties under the CBCA. The court held that the only exception would be if the plaintiff were aware that he or she had not been treated in accordance with the CBCA and still signed the release.

In the 2005 decision of Agrium Inc. v. Hamilton, the Alberta Queen's Bench distinguished Tongue, holding that the defendant shareholders were not liable for insider trading under the Business Corporations Act (Alberta) because the third party's mere expression of interest without a specified price did not constitute "specific confidential information." The lack of a specific price was the key differentiating factor.

These two cases are not determinative in analyzing s. 131(4), because the word "specific" was removed from the CBCA in 2001 with the intention of broadening the scope of the provision. A plain reading of the statute suggests that insider trading while in possession of any confidential information that might reasonably be expected to affect materially the value of the shares could be a violation of the section. The Business Corporations Act (Ontario) and the Business Corporations Act (Alberta) have retained the phrase "specific confidential information."

Defences are available to directors. The most significant is that a director will not be liable under the CBCA if the confidential information was known or "ought reasonably to have been known" by the plaintiffs, although this is not entirely clear.

In the context of the sale of a business by way of a share sale, where the purchaser sues a selling director-shareholder for failing to disclose confidential information, the director might well argue that the purchaser ought to have known the information. The director might say that the purchaser conducted due diligence and received representations and warranties in the sharepurchase agreement that were intended to address everything the purchaser was interested in knowing about.

If the purchaser did not ask a question, a director could contend that the purchaser's diligence was deficient (or adequate to the purchaser's needs) and the purchaser ought reasonably to have known (or did not care about) the confidential information. In other words, the claim should be denied if reasonable due diligence would have revealed the confidential information.

The scope of the insider trading provision, however, is extremely broad, and caveat emptor does not seem to offer much of a defence. Rather, the section seems to put the onus on the insider to disclose confidential information that could affect the value of the security — even if he or she is prohibited from disclosing that information by confidentiality restrictions. The director is restricted in his or her ability to contract out by virtue of s. 122(3), as noted in Tongue.

Directors are also protected if they reasonably believed the information had been generally disclosed or they conducted trades pursuant to certain pre-existing legal obligations. It is not clear whether "generally disclosed" means "public" disclosure or simply that the director believes the information was disclosed to the third party transacting with the director.

In situations where a director is a representative of a corporate insider shareholder, it is not clear what happens if the shareholder sells while the director is in possession of confidential information. If the director has not disclosed the information to the individual making the decision on behalf of the corporate shareholder to sell, it would seem unfair to impute the director's knowledge to the selling shareholder. The Securities Act (Ontario) has certain exemptions in cases of this sort; the CBCA does not.

One approach to resolving this issue, as a seller, may be to obtain an acknowledgement in the share-purchase agreement that the purchaser has asked all the questions it wants to ask and that the answers are reflected in the representations and warranties given by the seller in the agreement. The agreement should also state that, to the extent any of the representations or warranties is wrong, the purchaser agrees to some predetermined maximum amount of damages (probably some percentage of the purchase price) and that, absent a breach of the representations and warranties, the purchaser will not be entitled to any compensation or other remedies for lack of disclosure.

These insider trading prohibitions can also be problematic in the context of the rights of first refusal that are frequently contained in the shareholders' agreements of private companies. Typically, these provisions require that, in the event shareholders want to sell their shares, they must offer them to other shareholders before selling them to a third party.

Ordinarily, the other shareholders would simply decide whether they wanted to accept the selling shareholder's offer. However, if a shareholder is a director or other insider, he or she also needs to consider whether he or she is in possession of material confidential information relating to the private company. If so, it would seem that the insider is obliged to tell that information to the selling shareholder before buying shares from him or her, or risk liability under the insider trading provision.

If the director is restricted from disclosing that information – due to confidentiality obligations to the company or a third party – the director may not be able to purchase company shares under the offer, even though those shares will likely be sold to a third party at the same price offered to the director. The result is that the director is deprived of one of the principal benefits under the shareholders' agreement and potentially ends up with a new (unwanted) partner or a diluted stake in the company.

The Canadian Bar Association is encouraging the federal government to change these provisions, and that initiative has had some success. A recent report of the Standing Committee on Industry Science and Technology entitled Statutory Review of the Canada Business Corporations Act, dated June 2010, concluded that the issue of whether insider liability for tipping on private companies should be removed from the CBCA was one of a number of CBCA issues that should be reviewed through broad public consultation over the next two years.

However, for the time being, given the lack of judicial guidance and the fact-specific nature of these questions, a director of any private company selling or buying shares of the company should consider seeking legal advice regarding his or her potential disclosure obligations.

Gary Solway is Managing Partner of the Bennett Jones Technology, Media and Entertainment practice group and Co-Head of the Corporate Commercial Transactions practice group. His practice focuses on corporate/commercial, corporate governance and securities matters. Benjamin Gliksman is an articling student at Bennett Jones LLP currently in his corporate practice rotation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions