Canada: Unsolicited Expressions Of Interest May Be Material Information

Former Daylight CEO and ASC Settle Insider Trading Allegations

The Alberta Securities Commission (ASC) has entered into a settlement agreement with Anthony Lambert, the former CEO of Daylight Energy Ltd., following allegations by the ASC that Mr. Lambert violated provisions of the Securities Act (Alberta) relating to insider trading and tipping.

In the settlement agreement, Mr. Lambert admitted to making an "error in judgment" when he purchased $462,000 of shares of Daylight Energy Ltd. on August 8, 2011, after having received (on August 5, 2011) an unsolicited letter of interest from Sinopec International Petroleum Exploration and Production Corporation (SIPC), in which SIPC referenced a possible "major strategic investment transaction" involving Daylight. Previously, Mr. Lambert had been made aware of SIPC's interest in Daylight through communications with a representative of Canaccord. SIPC ultimately acquired Daylight on December 23, 2011, resulting in a profit for Mr. Lambert of approximately $129,000 on the shares he purchased on August 8, 2011.

After being made aware of SIPC's potential interest in acquiring Daylight, receiving the unsolicited letter from SIPC and having an e-mail exchange with a representative of Canaccord, Mr. Lambert sought and received advice as to whether he could purchase Daylight shares or whether a trading blackout should be imposed. Daylight's general counsel, external counsel and Governance Committee Chair all expressed the view that no trading blackout was required, as the SIPC letter and related information were not material having regard to a number of factors—the letter was a preliminary expression of interest (it contained no reference to terms, price or the nature of a possible transaction), the letter was unsolicited by Daylight, and Daylight was not "in play" and had not retained advisors. In addition, Mr. Lambert filed insider reports setting out information respecting his August 8, 2011 trade, an indication he believed his acquisition of Daylight shares was not undertaken with knowledge of material undisclosed information. However, in its April 2013 Notice of Hearing, ASC staff alleged that the facts and information concerning SIPC's interest in Daylight were separately and collectively "material facts" (as defined in the Securities Act (Alberta)), and Mr. Lambert's purchase of Daylight shares was undertaken prior to public dissemination of those facts and information and was contrary to the public interest.

In the settlement agreement, which was entered into on July 31, 2013, the ASC did not reach a conclusion as to whether Mr. Lambert had knowledge of material undisclosed facts when he purchased Daylight shares on August 8, 2011. However, Mr. Lambert recognized that, as Daylight's President and CEO, he occupied a position of high responsibility and trust and was obliged to be carefully attuned to trading issues and the possible materiality of information that came to his attention. In addition, while Mr. Lambert maintained he did not believe the August 5, 2011 letter of interest from SIPC was material information that would prohibit trading, he agreed the prudent course of action would have been to err on the side of caution given the circumstances, and refrain from trading in shares of Daylight at the relevant time.

Mr. Lambert agreed to pay $229,000 to settle the ASC's allegations that he acted contrary to the public interest, $129,000 of which represented his profit from the August 8, 2011 trade and $100,000 of which was on account of ASC investigation costs. As part of the settlement, Mr. Lambert also undertook not to become a director or officer of any reporting issuer or trade in securities of any reporting issuer (other than through an RRSP or a blind discretionary account) for a two-year period.

In a news release announcing the settlement agreement, the ASC indicated: "It is important that senior company officials – insiders – understand that insiders cannot trade while in possession of undisclosed material information; whether or not that material information must yet be disclosed under our continuous disclosure regime ... [If] in doubt, insiders should always err on the side of caution and not trade."

Settlement agreements entered into with securities commissions occasionally create difficulties for issuers and their advisors (owing to the absence of detailed legal analysis); the settlement agreements signed in February 2007 between the Ontario Securities Commission and each of Advanced Information Technologies Corporation (AIT) and its President Bernard Ashe (Ashe) illustrate the point. Those agreements, entered into in the context of proceedings involving the acquisition of AIT by 3M, created considerable uncertainty with respect to the point at which negotiations relating to take-over transactions become a "material change" for purposes of securities legislation. The Ashe/AIT/OSC settlement agreements suggested a belief on the part of the Ontario Securities Commission that material changes occur at a much earlier stage in the negotiation of M&A transactions than issuers and legal advisors would otherwise have thought. The uncertainty created by the Ashe/AIT/OSC settlement agreements was not resolved until the Ontario Securities Commission released its formal decision (January 2008) in a proceeding involving another AIT representative who determined not to enter into a settlement agreement with the OSC; that decision was more in line with the position historically taken by issuers and their legal advisors in M&A transactions. (As a result of the formal OSC decision, the Ashe/AIT/OSC settlement agreements were subsequently revoked.)

The settlement agreement entered into with Mr. Lambert is also problematic in certain respects. Nowhere in the "agreed facts" portion of the settlement agreement will a reader find a statement that the SIPC letter of interest and related communications were, as a matter of law, a "material fact"; on the contrary, as noted above, the settlement agreement reiterated Mr. Lambert's belief that the letter of interest and related communications were not material. Nonetheless, the ASC news release suggests a belief on the part of the Commission that Mr. Lambert acquired Daylight securities while in possession of material undisclosed information (consistent with ASC staff allegations). Owing to the absence of legal analysis, the settlement agreement and related ASC news release create additional uncertainty for directors/executives and their advisors.

It is certainly the case that not every expression of interest received by a publicly traded issuer will constitute a "material fact". The probability that a transaction will emerge from an expression of interest is one of the factors to be taken into consideration in assessing materiality. Public oil and gas issuers, for example, receive many expressions of interest that never result in serious discussions or a concluded transaction. Notwithstanding that backdrop (and the fact the initial SIPC communications to Daylight made no reference to price or deal terms), the circumstances surrounding SIPC's expression of interest warranted a very high level of care, as SIPC is a large entity that, at the time, was known to have an appetite for western Canadian oil and gas assets and to be a player likely to pay a significant premium for assets on its radar. Those factors were likely front and center for the ASC (the settlement agreement refers to the substantial premium paid by SIPC for Daylight shares), together with numerous instances of almost instantaneous (and dramatic) market reactions to news that a deep-pocketed potential acquiror is considering a transaction with a large issuer.

Although the combination of the settlement agreement and the ASC news release do not provide the clarity we would expect from a formal ASC decision on the merits, one thing is clear: there is risk in simply concluding (as various directors, officers and advisors have in the past) that early stage communications concerning potential acquisition transactions are too undefined and premature to be material.

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.

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William S. Osler
Jon C. Truswell
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