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The Ontario Securities Commission recently issued proposals to amend Rule 61-501, which governs insider bids, issuer bids, going private transactions and related party transactions. The Rule protects security holders by providing greater disclosure regarding, independent valuation of, and effective veto over, certain transactions with perceived inherent conflicts of interest. The amendments seek to clarify confusing provisions and eliminate regulatory burden where compliance costs may outweigh the benefits.

The proposed amendments:

  • replace the definition of "going private transaction" with "business combination" to clarify that the Rule applies to transactions where an issuer's security holders could receive, without their consent, any combination of cash or securities, including securities of another publicly-traded company, in exchange for their securities of the issuer;
  • confirm the Rule's application to transactions between an issuer and: (i) an arm's length party, where collateral benefits are afforded to a related party of the issuer; and (ii) a related party, where no collateral benefits are provided to any related party;
  • confirm that the existence of lock-up or support agreements are not determinative of whether an entity is a joint actor in a business combination or related party transaction;
  • exempt "downstream transactions" (defined as transactions between an issuer and an entity in which the issuer holds a control block, provided that another related party of the issuer does not also hold a significant position in the entity) from the rules pertaining to business combinations and related party transactions;
  • exempt from the collateral benefits prohibition any employment benefits granted to related parties that are consistent with industry practices, provided that the related parties which receive the benefits do not hold, in aggregate, more than 10% of the outstanding securities;
  • exempt certain junior issuers from the formal valuation requirement for business combinations or related party transactions, provided that two-thirds of the issuer's independent directors approve the transaction;
  • eliminate the valuation requirement for: (i) business combinations where related party involvement is minimal; (ii) certain financial assets involved in related party transactions, including publicly-traded securities, provided all material information regarding the issuer and its securities have been previously disclosed; and
  • confirm that valuations for any securities that security holders receive in connection with a business combination or related party transaction should include any adjustments affecting the value of such securities.

The Commission is accepting comments on the proposed amendments until June 9 2003.

Bryce Kraeker

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