On August 16 of this year, the Tribunal Administratif des
Marchés Financiers (TAMF), formerly the Bureau de
Décision et de Révision, rendered a decision in which
it concludes, among other things, that spring loading is an offence
under the Québec Securities Act (QSA).
The TAMF refers to the concept of spring loading as follows:
[Translation] It is
essentially a financial transaction “initiated” by the
officers of a reporting issuer in possession of privileged
information and consists of issuing options allowing them to
purchase shares of this issuer at market price, all the while
knowing very well that the price of these shares would potentially
increase considerably when the privileged information would be, in
the relatively near future, disclosed to the public.
In this matter, the TAMF held that on January 4, 2010, when the
board of directors adopted and signed the resolution authorizing
NSTEIN to issue 1.2 million stock options of the company, the
directors were in possession of privileged information.
According to the TAMF, the information with regard to,
interalia, (i) the verbal acquisition proposal
of NSTEIN by OpenText presented directly to respondent Luc
Filiatreault, CEO of NSTEIN, on November 27 and 28, 2009 by the
principal director of OpenText and (ii) the subsequent serious
steps taken by NSTEIN to respond to this proposal, were privileged.
The TAMF also held that if the privileged information, known to the
Board of Directors of NSTEIN on January 4, 2010 and unknown to the
public, were disclosed, they would have had an impact on the
decision of a reasonable investor.
The TAMF rejected the arguments invoked by the respondents in
this case, including the one to the effect that the granting of
options was “necessary” in NSTEIN’s course of
business and that, consequently, this transaction was exempted on
the exception provided under section 187, paragraph 2 of the QSA.
In fact, this paragraph provides that it does not constitute
insider trading when both parties to a transaction, within the
meaning of the QSA, are in possession of privileged information.
However, the insider cannot benefit from this exception unless this
transaction is necessary in the issuer’s course of
The respondents explained that by combining the granting of
options to the members of management and to certain employees with
the granting of 225,000 options to the newly hired officer
(Vice-President of NSTEIN), the respondents intended to restrict
the public disclosure of the number of options granted to these
individuals in order to protect their “sensitivity.”
According to the TAMF, the term “necessary” certainly
does not mean “useful” or “desirable.”
Protecting the sensitivity (or susceptibility) of employees and
directors, taking into account public interest, did not meet the
criteria of necessity required under s. 187 of the QSA, concluded
The TAMF also rejected the argument invoked by the respondents
to the effect that the directors did not receive any benefit,
monetary or other, from their decision to issue said stock options.
Rather, the TAMF held that it was not required to demonstrate that
an individual benefited financially from a transaction deemed
illegal in order to be found guilty of insider trading.
According to the TAMF, dissuasive measures were necessary,
particularly due to the lack of repentance from the respondents.
The following administrative penalties were therefore imposed:
CDN$20,000 fine for each director;
an additional CDN$10,000 for the Chairman of the Board of
$144,000/$72,000/$36,000 respective fines for the officers (the
amounts were twice the gross profit made).
This decision is important since a Québec court
acknowledges for the first time the offence of spring loading and
that it interprets the words “necessary in the issuer’s
course of business” provided under the second paragraph of s.
187 of the QSA. Finally, note that this decision could be subject
to an appeal.
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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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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