Part 11 Insider Trading (clause 54)

The insider reporting requirements currently in s. 127 to 129 would be repealed.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.54
CBCA Section No .131(1)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law
Broaden the definition of "insider" for civil liability purposes to ensure that all persons who trade while in possession of material confidential information are covered.

Harmonize the definition with provincial securities legislation.

Purpose of Change 
Revising the CBCA in the manner proposed would promote greater harmonization and cover most instances where insider trading might be expected to occur.

Similar Provincial Laws 
Securities Act (Ontario)
Securities Act (Québec)

Current Wording 
131. (1) In this section, "insider" means, with respect to a corporation,

(a) the corporation;

(b) an affiliate of the corporation;

(c) a director or an officer of the corporation;

(d) a person who beneficially owns more than ten per cent of the shares of the corporation or who exercises control or direction over more than ten per cent of the votes attached to the shares of the corporation;

(e) a person employed or retained by the corporation; and

(f) a person who receives specific confidential information from a person
described in this subsection or in subsection (2), including a person described in this paragraph, and who has knowledge that the person giving the information is a person described in this subsection or in subsection (2), including a person described in this paragraph.

Proposed Wording 
131. (1) In this section, "insider" means, with respect to a corporation,

(a) the corporation;

(b) an affiliate of the corporation;

(c) a director or an officer of the corporation or of any person described in paragraph (b), (d) or (f);

(d) a person who beneficially owns, directly or indirectly, shares of the corporation or who exercises control or direction over shares of the corporation, or who 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 corporation not including shares held by the person as underwriter while those shares are in the course of a distribution to the public;

(e) a person, other than a person described in paragraph (f), employed or retained by the corporation or by a person described in paragraph (f);

(f) a person who engages in or proposes to engage in any business or professional activity with or on behalf of the corporation;

(g) a person who received, while they were a person described in any of paragraphs (a) to (f), material confidential information concerning the corporation;

(h) a person who receives material confidential information from a person described in this subsection or in subsection (3) or (3.1), including a person described in this paragraph, and who knows or who ought reasonably to have known that the person giving the information is a person described in this subsection or in subsection (3) or (3.1), including a person described in this paragraph; and

(i) a prescribed person.

Bill Clause  No.54
CBCA Section No .131(2), (3) and new (3.1)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Adds a definition of "security" to include puts, calls, options and other securities whose market price varies materially with the market price of the securities of the corporation. Current s. 131(2) is replaced by a revised s. 131(3) and a new s. 131(3.1), deeming offerors and their insiders to be insiders of the corporation.

Purpose of Change 
Section 2(1) of the CBCA defines "security" as "a share of any class or series of shares or a debt obligation of a corporation and includes a certificate evidencing such a share or debt obligation."

Provincial securities laws have a much wider definition of "security" for purposes of insider trading. The definition in these statutes include a variety of instruments representing investments based on the underlying shares of the company (puts, calls, options, etc.).

This amendment would adopt this broader definition of "security" for insider trading purposes, in order to deter insiders from circumventing the statute by trading in derivatives or other instruments whose value is linked to the market price of the securities of the corporation.

This provision would be similar to that found in provincial securities acts and would help to harmonize Canadian legislation with respect to insider trading.

The deemed insider provisions set out in s. 131(3) and new (3.1) are designed to broaden the scope of the civil liability regime to harmonize with provincial securities legislation.

Similar Provincial Laws
Securities Act (Ontario)
Securities Act (Québec)
Securities Act (British Columbia)

Current Wording 
N/A

Proposed Wording 
131. (2) For the purposes of this section, the following are deemed to be a security of the corporation:

(a) a put, call, option or other right or obligation to purchase or sell a security of the corporation; and

(b) a security of another entity, the market price of which varies materially with the market price of the securities of the corporation.

(3) For the purposes of this section, a person who proposes to make a take-over bid (as defined in the regulations) for securities of a corporation, or to enter into a business combination with a corporation, is an insider of the corporation with respect to material confidential information obtained from the corporation and is an insider of the corporation for the purposes of subsection (6).

(3.1) An insider of a person referred to in subsection (3), and an affiliate or associate of such a person, is an insider of the corporation referred to in that subsection. Paragraphs (1)(b) to (i) apply in determining whether a person is such an insider except that references to "corporation" in those paragraphs are to be read as references to "person described in subsection (3)".

Bill Clause  No.54
CBCA Section No .131(4) and (5)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 

Amends subs. 131(4) to harmonize it with comparable provisions in provincial securities legislation. In particular by:

(1) deleting the term "specific" from the determination of what constitutes insider information;

(2) deleting the "makes use of" requirement and the words "for his own benefit or advantage"; and

(3) providing for defences comparable to those currently available under provincial securities legislation.

Moves the provision regarding accountability of the insider to the corporation (s. 131(4)(b)) to a new section. Provides that an insider shall have a defence if he/she can establish that he/she reasonably believed that the information had been generally disclosed.

Repeals par. 131(5)(b) as a result of the repeal of the reporting requirements.

Purpose of Change 

(A) These amendments are designed to clarify the provisions and to harmonize them with the civil liability provisions currently found in provincial securities legislation. In particular,

(1) Subsection 131(4) of the CBCA provides that an insider may be liable if he/she traded on the basis of specific confidential information that, if generally known, might reasonably be expected to affect materially the value of the security. "Specific" is not a defined term nor is it a common term to which a clear interpretation can be attached. It is usually interpreted as the probability of an event's occurrence. Therefore, the information must relate to an event that is at such an advanced stage that it is likely to occur. The civil liability provisions are therefore currently restricted to instances where the information is reliable, precise and relating specifically to the corporation. This bars from consideration confidential information that is general in nature and not sufficiently mature.

(2) Subsection 131(4) of the CBCA provides that an insider who, in connection with a transaction in the securities of a corporation, makes use of any specific confidential material information is liable to compensate any aggrieved person and is accountable to the corporation for any benefit or advantage received. The fact that the insider "makes use of" material confidential information is a required element of the cause of action and therefore must be proved by the plaintiff in a civil action against an insider. This is widely considered an insurmountable evidentiary obstacle. This requirement also allows an insider to avoid liability by showing that, although he/she had knowledge of confidential material information and traded, the trade was not based on this information and the information was not a factor in what he did.

The words "for his own benefit or advantage" found in subs. 131(4) are essentially part of the element of "making use" of the information and would also be removed.

(3) Pursuant to the proposed changes, a plaintiff would only have to demonstrate that the plaintiff purchased or sold securities of the corporation from or to an insider who had knowledge of confidential information that, if generally known, might reasonably be expected to affect materially the value of any of the securities of the corporation. The insider would then be able to avoid liability if he/she is able to establish that either he/she reasonably believed that the information had been generally disclosed (i.e., that it was not confidential information), that the information was known or ought reasonably to have been known by that person or that the purchase or sale of the securities took place in the prescribed circumstances. The latter provision is intended to provide flexibility to the defences harmonized with provincial defences.

(B) Section 131(5) would also be consistent with the treatment of compensation to the corporation under provincial securities legislation, including the provision of the defence.

(C) Paragraph 131(5)(b) only applies to reporting insiders and not to other insiders for liability purposes. It would no longer be relevant if the CBCA's insider reporting provisions are eliminated.

Similar Provincial Laws 
Securities Act (Ontario)
Securities Act (British Columbia)

Current Wording 
131. (4) An insider who, in connection with a transaction in a security of the corporation or any of its affiliates, makes use of any specific confidential information for his own benefit or advantage that, if generally known, might reasonably be expected to affect materially the value of the security

(a) is liable to compensate any person for any direct loss suffered by that person as a result of the transaction, unless the information was known or in the exercise of reasonable diligence should have been known to that person; and

(b) is accountable to the corporation for any direct benefit or advantage received or receivable by the insider as a result of the transaction.

(5) An action to enforce a right created by subsection (4) may be commenced… …

(b) if the transaction was required to be reported under section 127, only within two years from the time of reporting under that section.

Proposed Wording 
131. (4) An insider who purchases or sells a security of the corporation with knowledge of confidential information that, if generally known, might reasonably be expected to affect materially the value of any of the securities of the corporation is liable to compensate the seller of the security or the purchaser of the security, as the case may be, for any damages suffered by the seller or purchaser as a result of the purchase or sale, unless the insider establishes that

(a) the insider reasonably believed that the information had been generally disclosed;

(b) the information was known, or ought reasonably to have been known, by the seller or purchaser; or

(c) the purchase or sale of the security took place in the prescribed circumstances.

(5) The insider is accountable to the corporation for any benefit or advantage received or receivable by the insider as a result of a purchase or sale described in subsection (4) unless the insider establishes the circumstances described in paragraph (4)(a).

Bill Clause  No.54
CBCA Section No . new 131(6) and (7) Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Amends s. 131 to impose civil liability on insiders who communicate confidential information with respect to the corporation that has not been generally disclosed, subject to specified defences.

Amends s. 131 to provide that an insider is accountable to the corporation for any benefit or advantage received or receivable by the insider as a result of the disclosure of information, subject to specified defences.

Purpose of Change 
Unlike provincial securities legislation, the CBCA does not currently impose civil liability on an insider (the tipper) who communicates to another person undisclosed confidential information with respect to the corporation. The concern is that, even if the tippee did not trade, he/she may inform others. These other people could in turn, inform more people and the chain of tippees would grow longer. As this happens it becomes more and more likely that a trade will occur and it becomes more and more difficult to prove that the person who traded knew the information was confidential and originated from an insider. Furthermore, this type of activity creates rumours that may affect trading in the security. If there is unusual trading in a security prior to the public announcement of information, confidence in capital markets is eroded regardless of whether the trading was based on rumour or actual knowledge of inside information.

Provincial legislators have recognized the need to constrain confidential information within authorized business circles. As a result, the provincial securities acts now specifically prohibit the wrongful communication of material confidential information, subject to certain defences. They also contain civil liability provisions which enable a person who suffers damages as a result of a trade made following receipt of the information to claim compensation against all the insiders in the chain of tippees, subject to certain defences. This amendment provides for a comparable civil liability provision. The defences are substantially similar to those provided by provincial securities legislation. For example, the ordinary course of business defence, is a recognition that, in certain circumstances, such as during negotiations to effect a business combination, insiders may be in a position where they must legitimately disclose confidential information which has not been generally disclosed.

Like s. 131(5) (accountability to the corporation for insider trading), s. 131(7) is designed to provide a further clear deterrent to insiders from inappropriately using confidential corporate information.

Similar Provincial Laws

Securities Act (Ontario)
Securities Act (Québec)
Securities Act (British Columbia)

Current Wording 
N/A

Proposed Wording 
131. (6) An insider of the corporation who discloses to another person confidential information with respect to the corporation that has not been generally disclosed and that, if generally known, might reasonably be expected to affect materially the value of any of the securities of the corporation is liable to compensate for damages any person who subsequently sells securities of the corporation to, or purchases securities of the corporation from, any person that received the information, unless the insider establishes

(a) that the insider reasonably believed that the information had been generally disclosed;

(b) that the information was known, or ought reasonably to have been known, by the person who alleges to have suffered the damages;

(c) that the disclosure of the information was necessary in the course of the business of the insider, except if the insider is a person described in subsection (3) or (3.1); or

(d) if the insider is a person described in subsection (3) or (3.1), that the disclosure of the information was necessary to effect the take-over bid or the business combination, as the case may be.

(7) The insider is accountable to the corporation for any benefit or advantage received or receivable by the insider as a result of a disclosure of the information as described in subsection (6) unless the insider establishes the circumstances described in paragraph (6)(a), (c) or (d).

Bill Clause  No.54
CBCA Section No .new 131(8), (9) and 131 (10)
Topic : Insider Trading

Sources of Proposed Law 

Changes From Present Law 
Amends s. 131 to adopt a specific measure of damages for distributing corporations.

Purpose of Change 
The current paragraph 131(4)(a) of the CBCA provides that an insider who improperly trades "is liable to compensate any person for any direct loss suffered by that person as a result of the transaction." In light of the difficulty of assessing damages with respect to impersonal trades in the securities of distributing corporations, some provincial securities acts include provisions to help guide the courts in their assessment of damages. These provincial provisions provide discretion to the court to consider such other measures as may be relevant under the circumstances.

The amendment would accord with provincial securities law, which use an "average market price" test for the securities of distributing corporations. With respect to the securities of non-distributing corporations, where generally no market for securities exists, the court would assess damages in accordance with any measure it considers appropriate in the circumstances.

It should be noted that the measure of damages provision would only apply to damages assessed under the civil liability provisions (e.g., ss. 131(4) and (6)) and not to the "compensation to the corporation" provisions (e.g., ss. 131(5) and (7)). This is because the corporation is not entitled to damages but rather to the disgorgement of the benefits received or receivable by the insider.

Subs. 131(9) is added to clarify that joint and several liability applies to insiders.

A reference to subs. (4) to (7) is added at subs. 131(10) with respect to the limitation regarding insider trading offences.

These changes would further harmonize the CBCA with provincial securities laws.

Similar Provincial Laws 
Securities Act (Ontario)
Securities Act (British Columbia)

Current Wording 
131. (4) An insider who, in connection with a transaction in a security of the corporation or any of its affiliates, makes use of any specific confidential information for his own benefit or advantage that, if generally known, might reasonably be expected to affect materially the value of the security

(a) is liable to compensate any person for any direct loss suffered by that person as a result of the transaction, unless the information was known or in the exercise of reasonable diligence should have been known to that person;

Proposed Wording

131. (8) The court may assess damages under subsection (4) or (6) in accordance with any measure of damages that it considers relevant in the circumstances. However, in assessing damages in a situation involving a security of a distributing corporation, the court must consider the following:

(a) if the plaintiff is a purchaser, the price paid by the plaintiff for the security less the average market price of the security over the twenty trading days immediately following general disclosure of the information; and

(b) if the plaintiff is a seller, the average market price of the security over the twenty trading days immediately following general disclosure of the information, less the price that the plaintiff received for the security Liability

(9) If more than one insider is liable under subsection (4) or (6) with respect to the same transaction or series of transactions, their liability is joint and several, or solidary.

(10) An action to enforce a right created by subsections (4) to (7) may be commenced only within two years after discovery of the facts that gave rise to the cause of action.