In a recent decision, a panel of the Ontario Securities Commission dismissed allegations against two prominent mining executives who were alleged to have committed insider trading and tipping violations in connection with a hostile takeover bid for Baffinland in 2010. Notwithstanding the ruling, the OSC's director of enforcement, Tom Atkinson, has vowed to continue aggressively pursuing such cases and to push for enhanced tools to assist in prosecution.
The Baffinland decision highlights:
- The need for market participants to exercise caution when using and disclosing confidential information that has been imparted by a reporting issuer.
- Why reporting issuers should consider implementing internal policies and procedures for the use of confidential information, especially in circumstances of a potential take-over or significant corporate transaction.
- The difficulty of attempting to predict when an OSC panel will exercise its public interest jurisdiction.
OSC Staff alleged that Baffinland's former consultant, together with the co-respondent, used confidential, material information that was disclosed to him in order to first make a toehold purchase of Baffinland shares and then launch a takeover bid of Baffinland in breach of s.76 of the Ontario Securities Act. Staff also alleged that the respondents acted contrary to the public interest by using the confidential information in this manner, and that the consultant in particular acted contrary to the public interest by not always acting in Baffinland's best interests.
The Panel dismissed the allegations against both respondents. While the respondents were found to be in a "special relationship" with Baffinland, they did not have knowledge of any material fact at time of the toehold purchase or the takeover bid.
Risk Management Implications
As discussed in our Osler Update, the Panel considered important legal issues in Baffinland, including: (i) the test for determining when confidential information constitutes a material fact; (ii) when material facts are considered to be "generally disclosed" (iii) what constitutes a "special relationship"; and (iv) the extent of the Commission's public interest jurisdiction. The decision also has several important risk management implications.
1. Similar Information May Be "Material" in Different Circumstances: Participants in the capital markets should tread carefully before using confidential information that has been disclosed by a reporting issuer or someone close to a reporting issuer. Those who think they may be in a "special relationship" with an issuer may wish to err on the side of caution. While the information that had been imparted to the consultant in this case was not found by the Panel to be material, in particular because it was stale by the time the toehold purchase was made, it is not hard to conceive of a situation where a similar type of information would be found to be material. Each case is fact-specific and a panel of the OSC is not bound to follow the reasoning of prior cases in the way that a court is. Accordingly, trading while possessed of non-public information is often fraught with peril.
2. Industry Disclosure Does Not Equal "General Disclosure": Market participants should not necessarily assume that confidential information has been "generally disclosed" simply because the information has been disseminated outside the organization. In this case, the Panel found that the confidential information at issue was not "generally disclosed", even though Baffinland disclosed the fact that it was in joint venture negotiations to multiple parties, including to the steel industry and sophisticated investors, and the negotiations had been the subject of commentary in industry media. Such disclosure did not meet the test for "general disclosure" since the information had not "been disseminated in a manner calculated to effectively reach the marketplace" and public investors had not "been given a reasonable amount of time to analyze the information."
3. Internal Policies and Procedures Can Mitigate Risk: Internal policies and procedures in respect of the treatment of confidential information, articulated in the absence of a specific set of facts, and consistently applied can go a long way to allay regulator's concerns and demonstrate appropriate use of confidential information by persons who find themselves in a "special relationship". Whether a more robust confidentiality agreement or internal policy would have changed behaviour in this case is a matter of debate, and was not addressed by the Panel. However, in future cases – both before the Commission and/or in civil court – comprehensive internal policies and procedures may be a persuasive piece of evidence, particularly where companies are faced with the allegation that they acted contrary to the public interest.
4. Uncertainty Regarding Application of "Public Interest" Jurisdiction: The decision highlights the difficulty of attempting to predict when a panel of the OSC will exercise its public interest jurisdiction. In Baffinland, Staff urged the Panel to make an order under s. 127 in relation to (i) trading by the consultant while in possession of confidential, albeit non-material, information, that had not been generally disclosed; and (ii) the consultant failing to act in the best interests of the issuer while in a special relationship with the issuer. The Panel refused to make such order in part on the basis that there had been no violation of "securities laws". This finding is arguably inconsistent with a previous decision of the OSC. In Donald, a panel of the OSC found that the respondent's purchase of a reporting issuer's securities while in possession of material facts not generally disclosed did not violate the insider trading provisions of the Act since the respondent was not in a "special relationship" with the issuer. Nevertheless, the Panel still found that the respondent knew the information that had been imparted to him was confidential and therefore his actions had called into question the integrity of the capital markets and that such conduct was contrary to the public interest. Since one panel is not bound to follow the decision of another, and since what is or is not in the public interest is very much in the eye of the beholder, it is difficult to predict what direction the OSC will take in terms of the use of its public interest jurisdiction in future cases.
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.