RSS FeedFederal Securities Regulation
On Oct 22 an anonymous Law is Cool contributor posted a comment about the Federal Government’s intention to submit a reference to the SCC about whether a federal securities regulator is intra vires the Constitution. As expected, Quebec is going to resist any efforts by the federal government to regulate that which has traditionally been regulated by provinces, according to the Globe and Mail. However, there are a number of issues which always get glossed over when the matter is discussed. For example, the SEC is always cited as an example of a federal securities body. Somehow Canada is behind the times because we are not like the U.S. in this respect. However the SEC shares jurisdiction with State regulators, and I doubt that the Canadian government wishes to duplicate this model. The implicit intention of creating a federal regulator is that it be a single national regulator rather than one more regulator in addition to all of the provincial & territorial regulators.
This raises the sticky point about covering the field. It is one thing to ask the SCC if the federal government has the authority to regulate securities (and this is an empty exercise — few legal scholars doubt that the federal government can do so). It is another thing to ask the SCC to hand ALL authority to regulate everything associated with securities over to the federal government. This would be an enormous restructuring of the balance between national concerns and property & civil rights. There are political ramifications to such a ruling and no doubt the Court would prefer that such an invasive move be made through negotiations between governments rather than via a reference to the SCC.
It should be noted that securities regulation in Canada grew up under a provincial head of power. As a result, it is written in the language of property and civil rights. I have no idea if this is significant with respect to “federalizing” the laws, but I wonder. If the SCC decides that some securities transactions are federal and some are not, then the language of the laws could become significant. A ground-up rethinking and rewording might be in order.
The take-home point: The transition to a single Federal securities regulator seems quite simple at first blush, but it is not.
Canada’s own version of SEC to be vetted by Supreme Court
Ottawa to seek top court ruling on single securities regulator
Unlike the US, Canada doesn’t have a national securities regulator. Canadian constitution is somewhat equivocal in its division of powers between provinces and Ottawa. It sounds like a good idea for the federal government to refer its plans to the Supreme Court before spending money and influencing securities markets. Especially, since one province is not happy about these plans at all.
Les Whittington writes for the Toronto Star:
[Flaherty] has been supported by the province of Ontario and many other provinces. But the province of Quebec is against a single regulator, which it considers an infringement on its political autonomy under the constitution.
The RIM vs. Ericsson Beef
What’s in it for RIM?
Patents. Currently RIM pays millions of dollars for patents to use in their blackberry devices. However, RIM would save some big figures with the purchase of Nortel’s patents, because the assets RIM is mainly interested in are patents Nortel holds in next-generation wireless technology called Long-Term Evolution, or LTE.
Analysts say the patents would reduce the millions of dollars in royalty fees RIM pays annually for technology it uses in its handsets.
Nortel has said the three bidders that entered into the auction– Ericsson, Nokia Siemens Networks and U. S. private equity firm MatlinPatterson — all agreed to the same terms it gave RIM, however, the auction did not include the sale of the LTE patents, Nortel’s lawyers said in court July 28.
The transaction has ignited a political firestorm over whether the assets, which include leading-edge technology for next-generation cellphone networks, should be allowed to be sold to a foreign firm or whether Ottawa should cancel the sale through national “net benefit” and security rules newly written into the Investment Canada Act.
There are 2 ways to review under the Investment Canada Act
(1) The final decision for the sale now lies with Industry Minister Tony Clement, who has said his ministry is checking into whether the deal deserves to be reviewed to see whether it violates the foreign-investment rules. The current rules demand a federal review of any asset sale to a foreign firm that exceeds $312-million.
(2) George Riedel, Nortel’s chief strategy officer told the committee the book value of the assets being sold was US$149-million. A separate review may be required if the sale is deemed a national-security concern, which carries no monetary conditions.
A senior government official told The Globe and Mail last week that Ottawa is evaluating the assets of the transaction at book value for the purposes of deciding whether the deal must be reviewed under the Investment Canada Act. Nortel and Ericsson have set the book value of their deal at $149-million, far short of the $312-million (Canadian) threshold that triggers a review.
Book value reflects the balance sheet value of a deal’s assets not including such intangible assets as intellectual property and employee talent.
Richard Corley, a lawyer with Blake, Cassels & Graydon LLP and counsel to Ericsson, says “High technology businesses are quite often asset-light.” “You are not buying the values of the chairs and the bits and pieces. What you’re buying is the earnings capacity.”
On national security, Ericsson says that as an equipment supplier it does not manage or control sensitive information. Further reason for the government to not interfere.
RIM’s beef over the pending sale of certain wireless assets of Nortel to a foreign rival, called on Ottawa to speed up the adoption of new rules in the Investment Canada Act that could be used to cancel the controversial transaction.
“RIM thinks that a $1.13-billion (USD) transaction must be reviewed to ensure that Canada’s national interests are met.”
Under current legislation: deals involving the sale to foreign firms of technologies in sensitive sectors such as telecommunications are subject to federal scrutiny and possible annulment. However, that applies only if the asset value exceeds $312-million. Nortel told a parliamentary committee that the book value of the wireless assets going to Ericsson was just $149-million, meaning a government review is not required.
On the other hand, the Canadian government has amended the Investment Canada Act this year to consider the “enterprise value” rather than book value in such deals. Enterprise value includes intellectual property and employees going to the foreign firm. The new rules, however, are not yet in force, leaving federal authorities to use the current framework.
Federal authorities have shown little enthusiasm for blocking the sale and Prime Minister Stephen Harper, has already stated there would be no attempt to alter Canada’s current foreign investment rules.
RIM releases a Survey: From market researcher Strategic Counsel that showed 55% of Canadians who were aware of the Ericsson sale were opposed to it.
At the end of August, the U. S. tax authorities sent chills to Nortel Networks Corp. creditors by submitting an unexpected and very large US$3-billion claim for back taxes, interest and/or penalties. If valid, the IRS claim would apply only to Nortel’s US unit, Nortel Networks Inc. Since tax claims often receive priority in a bankruptcy proceeding, this raises the possibility of wiping out a substantial majority of the claims from US bondholders, suppliers and employees owed severance pay.
The IRS claim may intensify the pressure for U. S. claimants in the meantime to prevent further transfers of cash from Nortel’s U. S. operations to Canada. Because under Nortel’s complicated global structure, the company shifts money from cash-rich regions such as the United States (where revenues from the sale of products generally exceed expenses) to jurisdictions such as Canada — which does a lot of expensive R&D but generates relatively few revenues for the company.
Canadian creditors had been concerned that Nortel Canada’s low cash balances would translate into a claims settlement ratio as low as 12¢ on the dollar, while U. S. and British claimants were expected to receive 45¢ on the dollar. But now the IRS bill could significantly deteriorate the U. S. return rate.
The New Poster Child for Shareholders’ Remedies
JLL drops Patheon bid, freezes out new suitor
Step asside BCE and Peoples, make way for Patheon v. JLL!
I must begin by declaring my personal involvement: I own a modest block of Patheon shares and I find it galling that JLL, the majority shareholder who owns 57% of the outstanding shares, sought to buy out the remaining shares for $2.00 but refuses to sell its shares for $3.50.
But is this really oppressive? The more I ponder, the less sure I am. Shouldn’t the keen entrepreneurs at JLL be allowed to make a good faith offer to buy shares at a price that they believe to be a bargain, particulalry when it is at a premium to the current market price? Is a slim majority interfering with the investment activities of a large minority or is this the bid-and-ask process of the marketplace finding the true market value? After all, both offers could fall short of the actual market value of this company despite the fact that small blocks of shares can be purchased for $3.00 on the TSX.
Australian Securities Regulators In Policy Quandary
First posted on Commercial Law international on July 1, 2009.
The question that faces Australian securities regulators is what to do about two or more Chinese state owned enterprises together owing substantial shareholdings in an Australian company?
At first blush it would appear that this is a case of China take over fear, however there is much more to the story than this. Indeed, there is a legal/regulatory story here as well. Now I am not trying to say there is or isn’t a China phobia here, it is a given that all nations have their own xenophobic tendency, however I cannot speak on this as I know very little about Australia and what I do know comes from watching Rugby, Crocodile Dundee and Steve Irwin (may he rest in peace). Moreover, while I am not versed in Australian law, I believe that my legal training and experience thus far permits me an insightful comment or two.
This question has come to the fore because of the increased interest of Chinese companies in Australia´s mineral wealth – this is in fact a global trend and not one peculiar to Australia – just take a look at the recent attempt by Chinalco to increase its stake in Rio Tinto to see my point.
In Australia it isn’t that two or more state entities is per say barred from investing in the same company, as the law currently is, not at all. Then what is the problem, you might ask? The issues here are the concepts of associated entities and substantial shareholdings.
You see in Australia, under their securities regime, two or more entities that are associated – related in some way, namely through ownership and control – that combined own more than 5% of a listed company must declare a substantial shareholding. However, due to a lack of clarity in the law and the absence of a clear policy position the question remains open if two or more Chinese state owned companies would be considered associated and required to declare a substantial shareholding?
The securities regulators face several related sub-problems and they must approach this issue with some degree of sensitively to the political nature of dealing with entities belong to another state. With that in mind regulators have to be cognizant of the fact that they are not dealing with subsidiaries here but foreign state owed companies; state ownership is not equal in all these enterprises; state control is not equal in all these enterprises; and these enterprises while having the same state owner might indeed be fierce competitors with opposing interests.
I do not envy the regulators their task but it will be interesting to watch what if any policy position is developed or if the law is changed to address this issue.
Legitimate-Content Bay?
I was surprised to see in numerous newspaper (here, here, etc.) that a Swedish firm called Global Gaming Factory signed an agreement to buy the Pirate Bay. For those unaware, the Pirate Bay, also based in Sweden, is the world’s largest Bit Torrent tracker, providing easy access to a multiplicity of files using peer-to-peer technology. An estimated 90% of these are copyrighted, and a Swedish court held the company and its founders liable in mass copyright infringement. It’s founders and financial backer have recently been sentenced to one year each in prison and millions of dollars in fines (the case is under appeal and some of the founders are no longer in Sweden).
But now, Global Gaming Factory is agreeing to pay US $7.8 million for the file sharing website, tracker, and community of users. Global Gaming’s business plan is weird to say the least. It plans to pay royalties to the copyright owners for the files that are transferred using the tracker and make money using a mix of advertizing and the selling of bandwidth on the peer-to-peer network to internet service providers and other entities. The latter means that if a user is downloading or uploading a bit torrent file using Pirate Bay, their spare CPU, memory, and internet connection capacity will be sold to a third party who can use it for anything from SETI to DDoS attacks. The company is also planning a revenue-sharing program to kick back a part of the earnings to its users.
All of this sounds great (or not so great in the case of DDOS attacks, but the company assures us that it is legitimate), there’s just one problem: Global Gaming does not seem to have any plan on making this happen. Case(s) in point: they have not approached any of the copyright holders to attempt to negotiate prices. They have no idea how much they will have to pay to make Pirate Bay go legitimate. Analysts are also saying that ISPs will likely balk at buying bandwidth back from its own users. Users selling bandwith (which they are if there’s a revenue sharing plan) is also against the Terms of Service of most ISPs.
To add to their problems, Global Gaming is now being investigated for insider trading. Authorities noticed an unjustified spike in the price and trading volume of the company’s shares weeks before the announcement to purchase Pirate Bay was made. AktieTorget, the Swedish exchange on which the company was listed is also saying that it will broaden its investigation into the activities of the company once the sale is completed. Any illegal activities (such as distributing copyrighted content without permission) are grounds for removal from the exchange.
I find the move to buy the Pirate Bay to be a little bit weird. Global Gaming seems to be a legitimate company that owns internet cafes and produces software. It is highly unlikely that they would put out $7.8M USD if they did not have a plan. There’s something missing. For now, Pirate Bay’s previous owners are optimistic and there’s some cautious optimism in the Pirate Bay community as well. If Global Gaming manages to pull off what they’re promising, they have found a brilliant new business plan that may legalize all kinds of file sharing. The costs of failiure however, are very high. Global Gaming has a huge uphill battle ahead.
The Cozy Bank-Law Firm Relationship May Not Be So Cozy After All…These days Anyway, Part II.
First posted on Commercial Law International on June 17, 2009.
This is case that has the potential to redefine the very cozy relationship law firms have with their banker clients. No longer will bankers be given blanket coverage under conflict of interest rules to prevent law firms from being representatives in claims brought against them.
The operative word here being potential, as you shall will see.
The relevant facts of the case in brief are as follows: the defendants in the case included the underwriting syndicate of Gammon Gold´s public share offering. Two member of the syndicate included BMO Nesbitt Burns Inc. and TD Securities Inc., both subsidiaries of BMO and TD respectively. It just so happens that Siskinds, who represented the representative plaintiff, McKenna, in the class action, was concurrently retained by BMO and TD to undertake debt enforcement and personal bankruptcy matters. As a result the defendants raised the issue of conflict of interest, seeking to get Siskinds removed from the case.
The judge in the case, Madame Justice Lax, was having none of it; holding that there was no conflict. In her ruling Justice Lax made it clear that ¨the underwriters and banks are separate and sophisticated business and legal entities that are individually governed and autonomous. She went on to say further that ¨the banks had no reasonable expectation that their subsidiaries would be treated as clients.¨
And rightly so. While I fully agree with the judgment, it still remains unclear how it will be received by banks but more importantly, law firms. This is why I said it has the potential to redefine the bank-law firm relationship. It will all depends on how it is read. If the case is read very narrowly and confined to the particular facts of the case, that is where there is a parent and subsidiary relationship and they are separate, sophisticated business and legal entities, individually governed and autonomous, then there is no conflict. This is the extreme and I don’t believe that it will be this narrowly read. However, I do believe that there is the strong potential for it to be read narrowly enough as to preserve largely if not totally the existing regime. It will all depend on the mood (i.e. economic conditions) of the law firms I guess.
On the other hand, if the decision is read more globally, it could usher in a new era of freedom to act o the part of law firms. I hope it is the latter; however, I would not be surprised if it is some form of the former.
In a passing note in Part I of this post I referred to lawyers as attack dogs, this was meant as no offence – I even referred to myself as an attack dog in training. However it was said to provoke some self examination and self evaluation on the part of myself and those more senior in the profession. All too often clients see us in that role and we sometimes do little or nothing to disprove this perception. While I know that I have a long way to go in the profession, I am after all only an articling student, for me; a lawyer is an advocate, a professional that aggressively safeguards the interest s of their clients, however, this dusty must be balance against other professional and personal considerations.
Am I wrong or just being naive?
The Cozy Bank-Law Firm Relationship May Not Be So Cozy After All…These Days Anyway, Part I
First posted on Commercial Law International on Jun 5, 2009.
In Canada an Ontario Superior Court of Justice ruling (McKenna v. Gammon Gold Inc.) has the potential to go viral like the latest YouTube sensation and challenge what can only be called one of the most incestuous relationships in the commercial world.
What am I talking about?
Well I am referring to the relationship, the very close relationship, between banks and law firms.
Ever wonder why, if and when, a bank or other financial institution is being sued it is very rare to find a big name law firm representing the plaintiff but they are very much present to represent the defendant bank? This my friends is no coincidence, it is a deliberate strategy on the part of the banks and other financial institutions. They set out to exploit the conflict of interest rules that lawyers are bound by – a lawyer may not generally represent two clients on opposite sides on the same matter – and they do a very good job of it. This is evidenced by the fact that banks and other financial instructions will spread the legal work they have around to as many international, national, regional and local based (powerhouse) law firms as they can in any market they operate.
The strategy is simple but effective: tie up the biggest, the brightest, the best and if need be the most belligerent legal talent out there. The benefits of this strategy accrue to banks in two significant and interconnect ways. The first is that they have the best legal talent working for them on ordinary transactions while at the same time having them in reserve ready to be unleashed like a pack of attack dogs. The second, which flows from the first, is that having such well trained and impressive attack dogs – oh sorry, I mean lawyers – at the ready will and does inspire fear in not only prospective claimants but other lawyers as well (though most would not admit it).
The law firms are not entirely innocent here, in fact not at all. They are willing subjects or is that objects of the strategy to exploit the conflict of interest rules. They enter this relationship; in fact they actively seek to forge these links, with their eyes, arms and billable hour’s dockets´ all wide open. Law firms know that the work from the banks is not only constant but very lucrative as well, so they are more than happy to be attack dogs for hire.
However, we now live in different times, as this once cozy relationship is being undone or at least it has hit a rocky patch called the current global recession. Whoever first said: it´s all about the money was so right. It is indeed all about the money for both banks and law firms. The former having less work to spread around now is also lacking a commercial rational that would satisfy shareholder costs´ accountability of having such high paid attack dogs in reserve. Consequently, the banks are now looking to cut costs and have aggressively gone after external legal costs reducing the number of attack dogs – sorry, I mean lawyers – it holds in reserve and how much it pays them.
The law firms for their part, seeing the writing on the wall have, have begun to seek out other clients. In fact this has resulted in the once impossible, law firms, well at least in this case, have begun to represent claimants against the banks.
The conflict of interest rules once untested and applied broadly, I would say too broadly, to the bank-law firm relationship is now set for realignment. No longer will law firms simply refuse or not actively seek out work, simply because a suit might be brought against one of their clients. I know I am only an attack dog in training- pardon me, I should say student at law – but my reading of the conflicts section of the Ontario Rules of Professional Conduct does not support such a broad application. Provided the issues are not related, the clients’ information in possession of the lawyer bares no relevance to each other and the lawyers that handle each client´s matter are different, it is difficult to see where a conflict of interest would be created.
Thankfully I don’t have to stand alone in my opinion. I now have Justice Lax in McKenna v. Gammon Gold Inc. to back me up when she ruled that Siskinds should not be disqualified for a conflict of interest from prosecuting a class action against an underwriting subsidiary of a client bank that it acts for in separate matters.
And how so? Well you are just going to have to stay tuned for part two.
Credit-Related Derivatives are “Financial WMD’s”
American investor and philanthropist Warren Buffet calls credit-related derivatives a financial weapon of mass destruction, and he claims they just went off.
Prof. Jesse Fried of Boalt Hall School of Law, University of California, Berkeley, posted an article today on the Harvard Law Corporate Governance Blog. Fried points out,
Over the last two years, Wall Street financiers took home more than $60 billion in bonuses, much of it in cash. Lehman Bros. alone shelled out almost $6 billion in bonuses in 2007; it recently filed for bankruptcy.
Analysts have pointed to the Lehman Brothers and AIG bailout as the reason for the massive economic slowdown in the U.S.
A Scotiabank Group report indicated yesterday that this may affect Canada as well,
We are now forecasting recessions in both countries.
Fried recommends a claw back of Wall Street bonuses to share the cost of economic troubles, and avert future risks. He points to the Bankruptcy Code as the basis for recovering pre-bankruptcy bonus payments.
If companies do not become insolvent, the New York “fraudulent conveyance” statute allows insider payment recovery if:
- fair consideration for payment was not received
- an unreasonable small capital for business operations existed
Fried explains,
Some courts have held that managerial services do not constitute fair consideration for purposes of this type of statute. The statute may thus permit the government, to the extent it is considered an unpaid creditor of a bailed-out firm, to recover a bonus payment to one of that firm’s executives.
A National Securities Commission?
Time to Unify
Is it time to call for a unified body to regulate Canadian securities?
Currently Canada is the only major, developed economy without a centralized, national
body regulating securities. Instead it’s fragmented, with regulation administered provincially.
This leads to all thirteen provincial and territorial jurisdictions having their own independent set of rules governing the public offering and sale of securities.
Not only is their disparity across the country in the regulations themselves, but also in enforcement powers, tribunal mechanisms, priorities and sanctions.
Number of security firms in Canada
Consequences
The consequences of this incongruity are numerous:
- Dilution of regulatory resources
- Less transparency and confusion regarding accountability
- Decrease in the efficiency of information flow, which can lead to costly delays
- Act as an impediment to effective enforcement
- Disparities in enforcement experience and capability across jurisdictions
- Frustration for small and mid-sized firms trying to expand beyond their home jurisdiction
- Deterrence to foreign investors who may simply not want to deal with such a circuitous system when they could simply go elsewhere
Change is in the Air
There have been calls to modernize the regulation scheme.
In 2005 a panel was created, headed by prominent Toronto lawyer Purdy Crawford, to review the current regulation scheme.
The result reached by the panel was that a unified Canadian Securities Commission should be created whereby each jurisdiction would have equal say in the new regulator to ensure that the larger provinces do not dominate the agenda of such a commission.
Recently, Canadian Finance Minister Jim Flaherty called for the creation of a national securities regulator stating that Canadian companies currently have to jump through too many hurdles and that the development of a unified watchdog would foster business in Canada.
Flaherty warned that the current framework could delay financing and impede businesses that are trying to grow and could cause these enterprises to turn to private investment or choose markets outside of Canada.
Provincial Initiatives
All this is not to say that these issues are not being addressed by the current provincial regulators.
Commissions in 9 of the provinces and all 3 territories are proposing a system, whereby a company or investment dealer can register securities in one jurisdiction that will be recognized by the other jurisdictions in the country once approved.
This would allow a party to register with only one jurisdiction and deal with one set of regulations.
The only opposition to the planned scheme is the Ontario Securities Commission who contends that the system, although adding efficiency to the current regime, does not fully address all the shortcomings of the current patchwork of organizations. The OSC feels the only solution is a unified, national commission.
Previous Attempts
This is not a new issue; there have been calls for a national regulatory commission for years. Any attempt at the creation of such a body has been plagued with disputes between existing jurisdictions.
Amidst the current turbulence caused in international markets resulting from exposure to the sub-prime mortgage market in the United States, greater attention should be brought to our securities regulation.
Although a unified commission in Canada would not have changed the current financial landscape in this country, it should, however, highlight the importance of providing the most efficient and effective regulatory body possible for the benefit of both companies and investors.
A single commission could arguably more aptly and expediently reform its provisions to prevent a similar situation from occurring in the future.
See the Crawford Panel for more information.
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