Gowlings professionals Dean Blain's and Paul Fornazzari's work with the Ontario Securities Commission (the "OSC") to establish a US-style automatic securities disposition plan (an "ASDP") on behalf of a client led to the release of OSC Staff Notice 55-701 Automatic Securities Disposition Plans and Automatic Securities Purchase Plans ("Staff Notice 55-701").

ASDPs are plans established by insiders of public companies with agent brokers to sell shares of the public company while the insider is not under any restrictions regarding the sale of such shares. Once established, the ASDP allows for pre-programmed sales to be conducted at times when the insider would not otherwise be able to trade, for instance, when a trading "blackout" period is in effect. Under an ASDP, trading can be conducted over a longer time frame than would otherwise be possible, minimizing any impact on the market for such shares.

Insider trading laws prohibit persons with material undisclosed information relating to a public company from trading in the securities of that company and carry penalties ranging from fines to jail time, or both. To limit the risk, public companies impose trading "blackout" periods on their directors, senior officers and certain employees around quarter and annual financial preparations and disclosures, and other periods when insiders and others are in possession of material undisclosed information.

Under the laws of Ontario and most other Canadian jurisdictions an exemption or "safe harbour" from insider trading restrictions exists for trades made through dividend reinvestment plans, share purchase plans or other similar automatic plans. Generally, in order for this exemption to apply, the trade must be made by an agent of the insider in accordance with a legally binding agreement entered into prior to the insider becoming aware of material undisclosed information. It should be noted that New Brunswick securities law does not currently provide such an exemption and in Québec it appears that it is currently only specifically available if the plan is established by the public company.

Traditionally, this exemption had been interpreted as applying only to dividend reinvestment and automatic purchase plans that had been established by a public company. Gowlings successfully argued that a properly structured ASDP entered into by the insider with his or her broker independent of the public company but with the company's consent is an "automatic" plan sufficiently similar to those established by the company and therefore falls within the exemption. An important consideration was the fact that although insiders of inter-listed issuers were able to take advantage of ASDPs in the US, it was not clear that they could do so in Canada under the then existing interpretations even though no public interest concerns would be apparent if the plan were structured appropriately.

Although Staff Notice 55-701 represents only the opinion of the OSC staff, and is not binding on the securities regulatory authorities in other Canadian jurisdictions, Staff Notice 55-701 is, in fact, intended to be a temporary notice pending the development by the Canadian Securities Administrators (the "CSA") of a more widely applicable CSA staff notice.

Pursuant to Staff Notice 55-701, insiders in Ontario may now rely on an ASDP to have shares traded during prohibited periods provided the ASDP is in compliance with the OSC eligibility requirements. In order for the ASDP to be eligible, the insider must have entered into a written agreement in good faith and prior to the insider obtaining any material undisclosed information. The agreement encompassing the ASDP must include detailed trading instructions to be followed by the broker and must place meaningful restrictions on the ability of the insider to terminate or make changes to the ASDP that have the effect of ensuring that the insider cannot profit from material undisclosed information. Under the ASDP, the broker must be prohibited from consulting with the insider regarding trades of securities of the company and the insider cannot disclose to the broker any information concerning the company that might influence the execution of the plan. The company must also provide a certificate to the broker stating that the company is aware of the existence of the ASDP and certifying that, to the best of its knowledge, the insider is not in possession of material undisclosed information about the company.

Disclosure of the ASDP may be required depending on the circumstances of both the insider and the company. Where there is no legal requirement to disclose the existence of the ASDP, it remains advisable to disclose this information at the time it is first signed (even if no trades have been made) to avoid negative perceptions when shares are actually sold. In addition, an insider trading report will be required for each trade under the ASDP.

Questions

For more information on these and other Corporate Finance, Securities and Public M&A issues, please contact: Dean Blain (dean.blain@gowlings.com, (416) 369-7263), Partner (Toronto Office), Paul Fornazzari (paul.fornazzari@gowlings.com, (416) 369-7115), Partner (Toronto Office) or Constance Sugiyama (connie.sugiyama@gowlings.com, (416) 369-7225), Partner (Toronto Office) and National Practice Leader, Gowlings Corporate Finance, Securities and Public M&A Group.