At any point in time a typical public company has one or more pending developments, such as financings, mergers and property transactions. Any one of these pending developments can result in a material transaction, but the exact timing and prospects for completion are not always ascertainable.

In these circumstances, the issue is whether directors, officers and employees can buy and sell securities, including the grant of options, in light of these pending developments. Securities laws require that no trades occur on the basis of undisclosed material information, and material information comprises matters internal to the company which can have an impact on the market price of the company’s securities.

The determination of whether a particular event is material and should be a basis to prohibit trading until disclosed is a legal and factual analysis regarding the nature of the change and the likelihood of occurrence. Remote matters of a minor nature would not necessarily require a prohibition on trading. Remote matters of a transformational nature could justify a prohibition on trading.

Trading at times where there is a pending material undisclosed development is controlled through a black-out where directors, officers and employees are prohibited from trading. The black-out is issued pursuant to a corporate disclosure and insider trading policy which is essential for a public company. Black-out notices are instituted upon determination by senior officers and the board of directors that pending corporate developments are reasonably likely to occur.

The problem is that such determinations are a judgment call that may not be accepted by securities regulators. Four recent decisions of the Alberta Securities Commission display the issues of trading by insiders when corporate developments are ongoing.

In Re Stan insiders were found not to have traded on the basis of undisclosed forecasts in a 14 day hearing. In Re Keith insiders and family members were thought to have access to material information in the context of a corporate take-over. The point is that hearings are not commenced without a sound basis and it was not entirely clear that the trading in question was permissible.

In Re Kapusta it was found that insiders were guilty of insider trading in the context of an oil discovery despite the assertion by the defendants that such information was contingent, speculative and not material to the company as a whole in any event.

In Re Lambert a black-out was considered but not imposed where greater caution should have been exercised. A CEO received an unsolicited expression of interest which was highly conditional with no deal terms. The CEO made a major share purchase within three days of receipt of the expression of interest and within five months the company was sold to the enquirer. In a settlement the CEO acknowledged an “error in judgment” and paid a fine equal to the profit of $129,000 plus costs of $100,000. In addition, the CEO agreed not to serve as a director or officer for a two year period and not trade in securities during this time except through an RRSP or blind trust.
When insiders are aware of any pending development there is always a risk that in hindsight any trading could be viewed negatively. Therefore, this is why it is advisable to use the black-out policy where there is any doubt.

NOTE: This publication is intended to provide information to clients on recent developments in provincial and national law. Articles in this newsletter are not legal opinions and readers should not act on the basis of these articles without first consulting a lawyer who will provide analysis and advice on a specific matter.