Your company is contemplating a potential transaction and you
would like to share your project with one or more major
shareholders before any public announcement in order to maintain
good relations with them and validate whether they would be
supportive of the potential transaction. Senior executives of
Canadian public companies often wonder to what extent information
can be shared with major shareholders in such context.
Is such transaction material for your company?
Securities legislation in Canada prohibits a public company from
informing, other than in the necessary course of business,
anyone of any material information before such information has been
generally disclosed. This prohibited activity is commonly known as
It is therefore essential to determine the materiality of the
proposed transaction for your company. Material Information is any
information relating to the business and affairs of your company
that results in or would reasonably be expected to result in a
significant change in the market price or value of any of the
company's securities. It consists of both material facts and
material changes relating to the business and affairs of your
Assuming the proposed transaction is material – is there
any exception to the tipping prohibition?
Selective disclosure of material information is permitted if
doing so is in the necessary course of business. The
question of whether particular disclosure is being made in the
necessary course of business is a mixed question of law and fact
that must be analyzed in each case in light of the policy reasons
for the tipping provisions.
The necessary course of business exception exists so as not to
unduly interfere with a company's ordinary business activities.
For example, the necessary course of business exception would
generally permit communications with (i) vendors, suppliers or
strategic partners on issues such as R&D, sales and marketing
and supply contracts; (ii) employees, officers, and board members;
(iii) lenders, legal counsel, auditors, underwriters, and financial
and other professional advisors to the company; and (iv) parties to
The necessary course of business exception is quite often used,
before any public announcement is made, to approach shareholders in
the context of a proposed take-over bid, business combination or
acquisition (e.g. to enter into voting support or lock-up
agreements) or in the context of a private placement (e.g. to enter
into subscription agreements).
If your company discloses material information under the
necessary course of business exception, it should make sure those
receiving the information understand that they cannot pass the
information onto anyone else (other than in the necessary course of
business), or trade on the information, until it has been generally
disclosed in accordance with securities laws.
Would a confidentiality agreement be sufficient?
Companies sometimes disclose material information pursuant to a
confidentiality agreement so that the recipient is prevented from
further informing anyone of the material information. Obtaining a
confidentiality agreement in these circumstances is generally a
good practice and may help to safeguard the confidentiality of the
information. However, there is no exception to the prohibition
against tipping for disclosure made pursuant to a confidentiality
agreement. The only exception is for disclosure made in the
necessary course of business. Consequently, there must still be a
determination, prior to disclosure supported by a confidentiality
agreement, that such disclosure is in the necessary course of
While it is understandable that public companies will often want
to know their shareholders are supportive of proposed transactions,
caution needs to be exercised. Unless the necessary course of
business exception is available, which may not be the case unless
these shareholders are parties to negotiations in connection with
the transaction (e.g. being asked to enter into a voting support or
lock-up agreement), you may be violating the tipping prohibition
and thereby exposing yourself and the company to civil liability
and penal sanctions.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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