Part 11 Insider Trading (clauses 52-53)

The insider reporting requirements currently in s. 127 to 129 would be repealed.

The civil liability provisions would be completely overhauled to harmonize with provincial securities legislation. In particular, the amendments would expand the definition of "security" for insider trading purposes in order to help deter insider trading by allowing civil actions to be brought based on that broader definition. The definition of "insider" would also be expanded to cover most instances where insider trading might be expected to occur. Finally, new provisions are incorporated, imposing civil liability on persons who communicate undisclosed confidential information. (s. 131).

The insider trading prohibitions (s. 130) would be amended to narrow the application of the penal provisions to prohibit only the purchase of put options and the sale of call options. The maximum fines payable upon conviction would be increased from $5000 to the greater of one million dollars and three times the profit made or loss avoided. The maximum jail term for breach of the penal provisions would remain at six months.

A number of minor technical amendments to both the English and French versions are also included, as well certain amendments which are designed to facilitate the efficient operation and administration of the statute.

Briefing Book
An Act to amend the Canada Business Corporations Act and the Canada Cooperatives Act

Bill Clause  No.52
CBCA Section No .126(1), (2), (3), and (4)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Removes the definition of "distributing corporation" found in s. 126(1).

Narrows the definition of "insider" in s. 126 for the purpose of the speculative trading prohibitions and repeals subs. 126(3).

Amends the definition of "officer" to cover officers of other entities and deletes paragraph (b) of the definition.

Broadens the definition of "business combination" to include similar material business combinations and repeals subs. 126(4).

Modifies par. 126(2)(a).

Purpose of Change 
The definition of "distributing corporation" will now be located in s. 2(1).

The definition of "insider" in s. 126 would, following repeal of the insider reporting provisions (see clause 53), only apply to the speculative trading provisions of the Act. The policy rationale for maintaining the speculative trading prohibitions is the corporate governance concern over possible conflicts of interest if speculative trades by insiders are allowed. Therefore, for the purpose of the speculative trading prohibitions, only those insiders who can influence corporate decisions and who can be in a conflict of interest position should be included in the definition of "insider". The repeal of ss. 126(3) is a consequential amendment.

The amendment to the definition of "officer" in s. 126 is necessary because the relevant individuals may not necessarily work for a CBCA corporation (e.g., an affiliate of the corporation may be incorporated under the laws of a province). The term "entity" is appropriate because of the interrelationship of the various parties named in the definition of "insider" in ss. 131(1) (see clause 54). The reference to the five highest paid employees of the corporation would be deleted because the amount of remuneration received by an employee has no relationship to whether the employee is a decision-maker or has access to confidential information with respect to their employer (eg., a retail broker at an investment dealer does not necessarily have access to confidential information with respect to the investment dealer employer).

The definition of "business combination" now applies only to amalgamations and acquisitions of all or substantially all of the property of one body corporate by another. Provincial securities laws cover other forms of business combinations which can fundamentally change the corporate structure. This amendment would broaden the definition in order to harmonize with provincial securities legislation. The definition would be moved to s. 126(1) because it applies to the Part. Accordingly, the current definition, which is found in subs. 126(4), would be repealed.

The amendments to s. 126(2)(a) are required because of the elimination of paragraph (d) of the current definition of "insider" in s. 126(1). Proposed paragraph 126(2)(a) would, in effect combine these existing provisions and move the numbers to the regulation for flexibility purposes.

The language of s. 126(2)(a) matches with that which is proposed in respect of s. 131(1)(d) of the CBCA.

Similar Provincial Laws 

Current Wording 
126. (1) …

"distributing corporation" means a corporation, any of the issued securities of which are or were part of a distribution to the public and remain outstanding and are held by more than one person;

"insider" means, except in section 131,

(a) a director or officer of a distributing corporation,

(b) a distributing corporation that purchases or otherwise acquires, except by means of a redemption under section 36, shares issued by it,

(c) a distributing corporation that purchases or otherwise acquires or sells shares issued by any of its affiliates, or

(d) a person who beneficially owns more than ten per cent of the shares of a distributing corporation or who exercises control or direction over more than ten per cent of the votes attached to shares of a distributing corporation, excluding shares owned by an underwriter under an underwriting agreement while those shares are in the course of a distribution to the public;

"officer" means

(a) the chairman, president, vice-president, secretary, treasurer, comptroller, general counsel, general manager, managing director or any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any such office, and

(b) each of the five highest paid employees of a corporation including any individual mentioned in paragraph (a);

(2) For the purposes of this Part,

(a) a director or an officer of a body corporate that is an insider of a distributing corporation is deemed to be an insider of the distributing corporation;

(b) a director or an officer of a body corporate that is a subsidiary is deemed to be an insider of its holding distributing corporation;

(c) a person is deemed to own beneficially shares beneficially owned by a body corporate controlled by him directly or indirectly;

(d) a body corporate is deemed to own beneficially shares beneficially owned by its affiliates; and

(e) the acquisition or disposition by an insider of an option or right to acquire a share is deemed to be a change in the beneficial ownership of the share to which the option or right to acquire relates.

(3) For the purposes of this Part,

(a) if a body corporate becomes an insider of a distributing corporation, or enters into a business combination with a distributing corporation, a director or an officer of the body corporate or a shareholder of the body corporate who is a person referred to in paragraph (d) of the definition "insider" is deemed to have been an insider of the distributing corporation for the previous six months or for such shorter period as he was a director, an officer or such a shareholder of the body corporate; and

(b) if a distributing corporation becomes an insider of a body corporate or enters into a business combination with a body corporate, a director or an officer of the body corporate or a shareholder of the body corporate who is a person referred to in paragraph (d) of the definition "insider" is deemed to have been an insider of the distributing corporation for the previous six months or for such shorter period as he was a director, an officer or such a shareholder of the body corporate.

(4) In subsection (3), "business combination" means an acquisition of all or substantially all the property of one body corporate by another or an amalgamation of two or more bodies corporate.

Proposed Wording 
126. (1)

"insider" means, except in section 131,

(a) a director or officer of a distributing corporation;

(b) a director or officer of a subsidiary of a distributing corporation;

(c) a director or officer of a body corporate that enters into a business combination with a distributing corporation; and

(d) a person employed or retained by a distributing corporation;

"officer" means the chairperson of the board of directors, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, the general manager, a managing director, of an entity, or any other individual who performs functions for an entity similar to those normally performed by an individual occupying any of those offices;

"business combination" means an acquisition of all or substantially all the property of one body corporate by another, or an amalgamation of two or more bodies corporate, or any similar reorganization between or among two or more bodies corporate;

(2)(a) a director or an officer of a body corporate that beneficially owns directly or indirectly, shares of a distributing corporation, or that exercises control or direction over shares of the distributing corporation, or that has a combination of any such ownership, control and direction, carrying more than the prescribed percentage of voting rights attached to all of the outstanding shares of the distributing corporation not including shares held by the body corporate as underwriter while those shares are in the course of a distribution to the public is deemed to be an insider of the distributing corporation;

Bill Clause  No.53
CBCA Section No .127 to 129
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Removes the reporting requirements from the insider trading provisions of the CBCA by repealing sections 127 to 129 of the Act.

Purpose of Change
These requirements currently exist under the CBCA and under provincial securities legislation in order to deter improper insider trading.

Section 127 of the CBCA requires any insider of a distributing corporation to file a report informing the Director under the CBCA of any trades in the shares of the corporation of which he/she is an insider. These reports are published monthly in the Canada Corporations Bulletin. However, very few reports are actually received because most CBCA corporations are exempt from filing with the Director under the single filing provisions of the CBCA, based on the fact that they file the same or similar information with the provincial securities commissions. Provincial securities acts have specific prohibitions and penal remedies to deal with non-compliance. The securities acts also provide substantial investigatory powers (e.g., compelling witnesses to testify under oath) that the CBCA does not have. The securities commissions are also responsible for regulating stock exchanges and have direct links to the stock exchanges and securities dealers, which are the main sources of data and information in any investigation of insider trading.

The repeal of the insider reporting requirements would eliminate unnecessary costs of regulatory duplication.

Similar Provincial Laws 

Current Wording 
127. (1) Unless he has filed or has been exempted from filing an insider report under the Canada Corporations Act, chapter C-32 of the Revised Statutes of Canada, 1970, or has been exempted from filing an insider report by the regulations, a person who is an insider of a body corporate on the day on which it is continued as a corporation under this Act shall, if the corporation is a distributing corporation, send to the Director an insider report in prescribed form within ten days after the end of the month in which such day occurs.

(2) A person who becomes an insider shall, within ten days after the end of the month in which he becomes an insider, send to the Director an insider report in the prescribed form.

(3) A person who is deemed to have been an insider under subsection 126(3) shall, within ten days after the end of the month in which he is deemed to have become an insider, send to the Director the insider reports for the period in respect of which he is deemed to have been an insider that he would have been required to send under this section had he been otherwise an insider for such period.

(4) An insider whose interest in securities of a distributing corporation changes from that shown or required to be shown in the last insider report sent or required to be sent by him shall, within ten days after the end of the month in which such change takes place, send to the Director an insider report in the prescribed form.

(5) An insider report of a person that includes securities deemed to be beneficially owned by that person is deemed to be an insider report of a body corporate referred to in paragraph 126(2)(c) and the body corporate is not required to send a separate insider report.

(6) An insider report of a body corporate that includes securities deemed to be beneficially owned by the body corporate is deemed to be an insider report of an affiliate referred to in paragraph 126(2)(d) and the affiliate is not required to send a separate insider report.

(7) An insider report of a person that includes securities deemed beneficially owned by that person shall disclose separately

(a) the number or amount of the securities owned by a body corporate; and

(b) the name of the body corporate.

(8) On an application by or on behalf of an insider, the Director may make an order on such terms as he thinks fit exempting the insider from any of the requirements of this section, which order may have retrospective effect.

(9) A person who, without reasonable cause, fails to comply with this section is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or to both.

(10) Where a body corporate commits an offence under subsection (9), any director or officer of the body corporate who knowingly authorized, permitted or acquiesced in the commission of the offence is a party to and guilty of the offence and is liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or to both, whether or not the body corporate has been prosecuted or convicted.

128. A corporation that proposes to purchase or otherwise acquire its own shares otherwise than by means of a purchase or redemption under section 36 shall, in the prescribed circumstances, give notice to the Director of the proposed purchase or other acquisition in the manner prescribed.

129. The Director shall summarize in a periodical available to the public the information contained in insider reports sent to him under sections 127 and 128 and the particulars of exemptions granted under subsection 127(8) together with the reasons therefor.

Proposed Wording 
N/A

Bill Clause  No. 54
CBCA Section No .130(1) and (3)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Replaces the word "share" with the word "security" in s. 130.

Purpose of Change
The speculative trading prohibitions relate to the sale of a "share" and puts and calls in respect of a "share" of the corporation or any of its affiliates. The CBCA defines a "share" as a voting share. However, there is a similar potential for conflict of interest with respect to securities other than voting shares. Thus, the proposal to include in the trading prohibitions securities such as debt obligations issued by the corporation.

This change would promote harmonization with provincial rules regarding insider trading and would more fully encompass those types of transactions that could give rise to a conflict of interest.

Similar Provincial Laws 
Securities Act (Ontario)

Current Wording 
130. (1) An insider shall not knowingly sell, directly or indirectly, a share of the distributing corporation or any of its affiliates if the insider selling the share does not own or has not fully paid for the share to be sold.

(3) Notwithstanding subsection (1), an insider may sell a share he does not own if he owns another share convertible into the share sold or an option or right to acquire the share sold and, within ten days after the sale, he

(a) exercises the conversion privilege, option or right and delivers the share so acquired to the purchaser; or

(b) transfers the convertible share, option or right to the purchaser.

Proposed Wording 
130. (1) An insider shall not knowingly sell, directly or indirectly, a security of a distributing corporation or any of its affiliates if the insider selling the security does not own or has not fully paid for the security to be sold.

(3) Despite subsection (1), an insider may sell a security they do not own if they own another security convertible into the security sold or an option or right to acquire the security sold and, within ten days after the sale, they

(a) exercise the conversion privilege, option or right and deliver the security so acquired to the purchaser; or

(b) transfer the convertible security, option or right to the purchaser.

Bill Clause  No.54
CBCA Section No . 130(2)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Amends subsection 130(2) to prohibit only the purchase of put options and the sale of call options.

Purpose of Change
A put option is the right to sell a specified number of securities at a set price by a certain date. Investors buy puts when they believe the price of a security is going to go down, presumably below the strike price. A call option is the right to buy a specified number of securities at a set price by a specific date. Investors buy call options when they think the price of a security is going up and want to lock in the strike price.

The purchase and sale of put and call options place insiders with the power to influence corporate decisions in a possible conflict of interest situation. These insiders can use their power in the corporation to influence decisions that would affect the value of the corporation's shares. The purchase of a put option or the sale of a call option only profits the insider if the value of the corporation's stock decreases. There is therefore a built in incentive for the insider to use his/her position to negatively influence the share price. This is in direct conflict with the interests of the corporation and its shareholders and, accordingly, these trades would continue to be prohibited.

Insiders who sell a put option or purchase a call option will only profit from the options if the value of the corporation's stock increases. In these cases, the interests of the insider become aligned with the interests of the corporation and the (other) shareholders. The outright prohibition of these trades does not further the objective of eliminating potential conflicts between insiders and the corporation and, accordingly, appears to be unnecessary. Thus the proposal to allow these trades which are currently prohibited under the CBCA. An insider who sells a put option or buys a call option with knowledge of material confidential information would be subject to the civil liability provisions set out in s. 131(4) of the Act.

addition of the word "knowingly" clarifies that the short selling offence is a mens rea offence, requiring proof beyond a reasonable doubt of all the elements of the offence.

Similar Provincial Laws 

Current Wording 
130. (2) An insider shall not, directly or indirectly, buy or sell a call or put in respect of a share of the corporation or any of its affiliates.

Proposed Wording 
130. (2) An insider shall not knowingly, directly or indirectly, sell a call or buy a put in respect of a security of the corporation or any of its affiliates.

Bill Clause  No.54
CBCA Section No .130(4)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Amends subs. 130(4) to increase the fine to a maximum of $1 million or three times the profit made, whichever is greater.

Purpose of Change
Currently, a contravention of the speculative trading prohibitions subjects the insider to a summary conviction offence with a maximum fine of $5,000 and/or imprisonment for up to six months. Given the large profits that can be made by breaching the insider trading prohibitions, this penalty is considered an inadequate deterrent.

While there is no specific prohibition against short selling (the sale of a security not owned by the insider) in provincial securities or corporations legislation, such transactions are covered by the general prohibition against improper insider trading (which prohibit an insider from trading with knowledge of a material fact or material change). Provincial penalties for breach of these provisions varies, but the maximum penalty is two years in jail and/or a fine of the greater of $1 million or three times the profit made or loss avoided.

The words "or loss avoided" are omitted from the provision because no losses can result from the types of transactions covered by this section.

This change would increase the deterrent effect of the penalty provision and provide the flexibility for an even larger fine where the profit made is especially large. It would also promote harmonization with provincial legislation.

Similar Provincial Laws 
Securities Act (Ontario)

Current Wording 
130. (4) An insider who contravenes subsection (1) or (2) is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or to both.

Proposed Wording 
130. (4) An insider who contravenes subsection (1) or (2) is guilty of an offence and liable on summary conviction to a fine not exceeding the greater of one million dollars and three times the profit made, or to imprisonment for a term not exceeding six months or to both.