Securities Law – Law is Cool http://lawiscool.com The law school blog and podcast from Canada Wed, 30 Sep 2015 13:10:01 +0000 en-US hourly 1 https://wordpress.org/?v=4.7.6 1338880 Federal Securities Regulation: The Saga Continues http://lawiscool.com/2011/04/18/federal-securities-regulation-the-saga-continues/ http://lawiscool.com/2011/04/18/federal-securities-regulation-the-saga-continues/#comments Mon, 18 Apr 2011 17:34:39 +0000 http://lawiscool.com/?p=3171 The concept of Federal Securities Regulation in Canada is perennial. It keeps on coming back, most recently via a reference to the Supreme Court of Canada. Pundits will talk, industry insiders will cross their fingers and hope for a favourable ruling, yet I doubt very much the story will end here.
It seems likely that securities regulation is permissible under various head of power in the Constitution. However federal regulation makes no sense if all of the provincial regulators remain in place. There is nothing to be gained gain by adding yet one more layer of regulation. The entire point of the exercise is to unify nationally so as to simplify. The real issue is whether the federal government can succeed in accomplishing this (whether through the Courts or through other channels).
Given the historical absence of federal legislation and the obvious connections with property and civil rights, it seems unlikely (in my opinion) that the SCC would declare, at the request of parliament, that suddenly all that was once provincial is now exclusively federal. This would be a massive restructuring of the federal-provincial power balance, something that the SCC would likely be very reluctant to “ordain” from the bench. Instead, the Court would likely hold that there is significant room for overlap. I wrote a research paper called “Constitutional Complexities Involved in the Implementation of a Federal Securities Regulation Regime in Canada: The View from 2009” that explores this topic in greater detail.

If this view is correct, then the real issue is political. It would be up to the Federal Government to negotiate with the provinces to ensure that regulation becomes unified and not multiplied. This would be difficult, to say the least. Arguably, with Ontario on-side the Feds could go “go it alone” and let the other provinces face the screams of protest from their local investment communities. Meanwhile, the possibility of the London Exchange buy-out adds yet another complicating factor to the politics. This might not be a “Canadian” industry for long.
My prediction: Regardless of the outcome of the reference to the SCC, this issue is far from settled.

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Ha-Redeye and Yap — Piedra v. Copper Mesa Mining Corp http://lawiscool.com/2010/09/07/ha-redeye-and-yap-piedra-v-copper-mesa-mining-corp/ http://lawiscool.com/2010/09/07/ha-redeye-and-yap-piedra-v-copper-mesa-mining-corp/#comments Tue, 07 Sep 2010 16:00:21 +0000 http://lawiscool.com/?p=2888 In the spirit of increased collegiality and collaboration within the Canadian legal blogging community, LawisCool.com and TheCourt.ca have set aside their heated rivalry to bring you their first ever joint posting. What follows is a commentary on the interesting case of Piedra v. Copper Mesa Mining Corporation, 2010 ONSC 2421.

Commentator for LawisCool.com: Omar Ha-Redeye, Juris Doctor, University of Western Ontario; founding contributor of LawisCool.com

Commetator for TheCourt.ca: James Yap, Juris Doctor, Osgoode Hall Law School, York University; former Senior Contributing Editor, TheCourt.ca.

The Facts

Copper Mesa Mining Corporation is a Canadian company based in British Columbia who planned through one of its subsidiaries to build an open pit copper mine in the Intag cloud forest just south-west of The Cotacachi Cayapas Ecological Reserve, an area of the Andes Mountains of Ecuador. The company is listed on the Toronto Stock Exchange (TSX), but it does not have significant assets or operations in the province of Ontario aside from two of its non-management directors residing in the province.

The Plaintiffs in the case are local activists in Ecuador who have opposed the mine, on the grounds that it will create major deforestation and desertification in the area and threaten more than a dozen animals with extinction. They allege that Copper Mesa through its agents used armed assaults and death threats to intimidate the local activists. Due to a perceived inability to hold Copper Mesa accountable in their country, the Plaintiffs brought a suit in Ontario against Copper Mesa, its directors, and the TSX.

The most novel aspect of the suit is the claim against the TSX for approving and listing Copper Mesa on the exchange, resulting in an influx of capital that would allegedly be used for further intimidation and violence against opponents. Local politicians in Ecuador and environmental supporters in Canada had brought the human rights allegations to the attention of the TSX before its listing. Further, the final prospectus filed by Copper Mesa’s subsidiary to the TSX acknowledge the existence of the conflict,

“[t]ensions surrounding potential exploration and mining work on the Junin property have risen, creating the potential of further escalating violence unless steps are taken to diffuse the situation,” and goes on to report a specific incident in which members of an “anti-mining group” felt “threatened”;

The liability, according to the Plaintiffs, flows from the failure to take any steps to avoid the violence, and that the Defendants knew or ought to have known that violence would ensue if the Copper Mesa subsidiary was financed through the TSX, and should have taken measures to ensure funds raised were not used for improper purposes.  The project was highly dependent on funding from the TSX, with over 80% of the US$26.7 million raised by the Copper Mesa subsidiary raised on the TSX alone. According to the Plaintiffs, it was a brokered private placement of shares approved by the TSX that raised US$4.5 million that allowed Copper Mesa to hire the private security forces allegedly responsible for the armed assaults that form the basis of the claim.

The TSX is considered a specialized exchange for mining, and over 60% of the world’s mining companies are listed on the TSX and related exchanges.

The Decision

This comment will only deal with the claim against the TSX, which is the more novel aspect of this litigation. Campbell J. began by enunciating the governing test, which is that laid out in Anns v. Merton London Borough Council, [1978] A.C. 728. Under that well-established test, the requirements for a duty of care owed by the defendant are the twin criteria of proximity and foreseeability. With respect to the former, Campbell J. concluded that there is simply “no connection between the Plaintiffs and the TSX Defendants.” Likening the TSX to a “voluntary regulator,” he reasoned that such an entity could not be found liable in tort for the adequacy of its regulatory activities. As for foreseeability, Campbell J. reasoned that “[i]n order to foresee [the alleged] harm, the TSX Defendants would have had to foresee political and business events in Ecuador which allegedly led to unlawful conduct by agents of Copper Mesa. Such a chain of events was not foreseeable or reasonably foreseeable.”

LawisCool.com (Omar Ha-Redeye):

I agree with the decision rendered by Campell J. in striking the action on a Rule 21 motion. To be clear, the grievances of the Plaintiffs are real and decidedly unfortunate. But sympathies alone cannot guide the actions of a court.

Rule 21 of the Ontario Rules of Civil Procedure, R.R.O. 1990, Reg. 194, states,

RULE 21 DETERMINATION OF AN ISSUE BEFORE TRIAL

WHERE AVAILABLE
To Any Party on a Question of Law
21.01 (1)  A party may move before a judge,
(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs; or
(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence, and the judge may make an order or grant judgment accordingly.
[emphasis added]

The Plaintiffs have based their opposition to the motion largely on the basis of R. 21.01(1)(b), that there is no reasonable cause of action. They correctly invoke Hunt v. Carey Canada Inc. in para. 27 of their Responding Factum, and state that the novelty of a cause of action should not by itself result in it being struck.

But it’s not just the question of novelty of the cause against the TSX that provides a basis for striking the cause. There are significant questions of proximity that can be put to question here, and the Plaintiffs assertion of an existing duty of care to individuals from an entirely different jurisdiction where the TSX has very limited direct influence is suspect. As noted in the facts, it was the inability of the Plaintiffs to hold Copper Mesa accountable in their country that resulted in the proceedings being issued in Ontario. Although corruption, intimidation, violence and environmental harm are all regrettable, again, the courts cannot be led by sympathies alone.

As Campell J. indicates in para. 38, the TSX is governed by the Securities Act, R.S.O. 1990, c. S.5. There is no ambiguity about the purpose of the Act,

Purposes of Act
1.1 The purposes of this Act are,
(a) to provide protection to investors from unfair, improper or fraudulent practices; and
(b) to foster fair and efficient capital markets and confidence in capital markets.
[emphasis added]

The main functioning role of the TSX then is to protect investors, and not those that might be affected by enterprises that those investors engage in. The TSX also plays the role of maintaining the function of the exchange, of which confidence in the market is a significant aspect. Neither of these roles provides a duty of care to the Plaintiffs, and in fact, creating a duty of care could arguably undermine confidence in the markets by exposing capital to litigation from functions remotely distant from the regulatory function of the exchange. I know of no other statute in the jurisdiction of Ontario that would provide a statutory cause of action of this type.

For this reason, the Plaintiffs are incorrect when they say in para. 38 of their Responding Factum that, “There are no negative policy implications sufficient to negate a duty of care.” The policy reasons above would also be sufficient to negate the second branch of the Cooper-Anns test, thereby preventing the creation of a new duty of care by the courts. There are even additional policy considerations in R. 21.01(1)(a) that emphasize the role of the courts in conserving costs and avoiding unnecessary litigation that could burden the judicial system. Creating a new cause of action of this type without any restrictions or constraints could potentially open the floodgates to all sorts of litigation related to ancillary actions of multinational conglomerates with only tenuous connections to Ontario, thereby overwhelming our court system even further.

However, the Plaintiffs also invoke in para. 38 what they call an “overwhelming policy reasons to recognize such a duty.” If the nature of Canadian investments is such that they are overwhelmingly affecting the indigenous peoples of other nations adversely in a manner that compromises our values and human rights, this could potentially affect confidence in the market, especially given the specialized nature of the TSX for mining and exploration companies. The Plaintiffs cite Justice Ian Binnie in para. 88 of the Responding Factum, indicating that governance gaps make it difficult to redress human rights abuses committed by private enterprise,

The root cause of the business and human rights predicament lies in the governance gaps created by globalization—between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences. These governance gaps provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation.

The proper venue to address this governance gap is the body responsible for governance, namely the legislature. It is the legislature that determines appropriate sanctions and reparations, especially when dealing with the highly politicized nature of globalization. Committees can analyze the economic repercussions of such sanctions, the appropriate scope, and maintain the proper balance between various interests. As Campell J. states in his decision,

[53] If there were policy considerations that would favour extending liability as sought by the Plaintiffs, such policy would be appropriately be a matter for the legislatures and not the courts, at least on these facts.

Fortunately, Parliament is undergoing this exact endeavour right now. Bill C-300, An Act respecting Corporate Accountability for the Activities of Mining, Oil or Gas in Developing Countries, goes into its Third Reading this Fall Session, and is scheduled for its first hour of debate on the very first day that MPs return to session, September 20, 2010. The Standing Committee on Foreign Affairs and International Development (FAAE) has already heard evidence on this Private-Member’s Bill. And rather than create a statutory cause of action as sought by the Plaintiffs in this case, the Act would provide the Minister of Foreign Affairs and the Minister of International Trade the responsibility of holding corporations accountable by submitting annual reports to the House and Senate. For now, this is the appropriate balance that the elected representatives of Canadians have identified. If through their reports they identify a pressing and compelling problem, a carefully-tailored Canadian version of the American Alien Tort Claims Act might be appropriate, but until then foreign citizens lack standing to issue such claim, and Ontario courts lack jurisdiction to hear them.

Consequently, my opinion is that even if the Plaintiffs were successful above under R. 21.01(1), they would subsequently fail at R. 21.01(3), which provides the Defendants specific grounds for dismissing a motion,


To Defendant

(3)  A defendant may move before a judge to have an action stayed or dismissed on the ground that,
Jurisdiction
(a) the court has no jurisdiction over the subject matter of the action;
Capacity
(b) the plaintiff is without legal capacity to commence or continue the action or the defendant does not have the legal capacity to be sued;

Although Campbell J. did not discuss this element of the claim, it’s my opinion that the claim would also fail on jurisdictional and capacity grounds. This would provide an additional basis for dismissing the action under R. 21.01(1)(a) by disposing the action in its entirety.

The test used in Ontario for determining the proper jurisdiction is the real and substantial connection test. A jurisdiction does not have to present the most or strongest connection, just a real and substantial connection. There is a rather tenuous connection between the Defendants and the province of Ontario, and the TSX seems to almost be a fortuitous factor rather than a direct party causing the alleged harm. The connection to the Plaintiffs is even more remote, and it’s difficult to see what connection, if any, they have to the Province of Ontario. After the Court of Appeal’s decision in Van Breda v. Village Resorts Limited, the primary focus for determining a real and substantial connection is the first two factors of the “Muscutt test,” namely the respective connections of the Plaintiff and the Defendant to the proposed jurisdiction. Applying the test to this case would likely result in the court finding that a strong connection does not exist. Also, a motion by Defendants for forum non conveniens would likely have followed a successful ruling on this motion, as all the witnesses and evidence of the alleged harm are more properly located in Ecuador, especially if the TSX was struck as a Defendant.

Despite supporting the decision by Campbell J., I do think the case of Piedra v. Copper Mesa Mining Corporation has been a success. If the proper venue for recourse is in the legislature, it requires supporters of Ecuadorian activists to raise awareness here in Canada. This case has done just that by bringing to light the very serious nature of Canadian complicity in human rights violations abroad. Ideally this case, and others like it, will be vigorously discussed in Committee, the House and the Senate. It will require members of the Canadian public to support the passing of Bill C-300. And ultimately it might fall upon the conscience of Canadians to allow our courts to adjudicate human rights issues abroad against corporations with ties to our society. But until then the cause of action brought in Piedra against the TSX is not likely to successful, and in my opinion it should not be and is properly struck on a Rule 21 motion.

TheCourt.ca (James Yap):

I am not quite so convinced. It seems to me that Campbell J. is a step too hasty to characterize the TSX as a mere “voluntary regulator.” Such language seems to imply that the TSX has a merely regulatory function, akin to any state regulatory body. However, this is not strictly so – in reality, the TSX’s activities go much deeper than this. As Campbell J. in fact acknowledges, the TSX is not a state body but a private for-profit corporation. A duty of care thus need not derive from statute, the TSX may be subject to the same duties as other private actors. On the face of things it appears equally plausible, as the plaintiffs argued, to characterize the TSX as a private for-profit entity which holds out a service to the paying public – a service which, in the Copper Mesa case, may have led to the commission of a tort. Framed in such terms, the suggestion that the TSX may be liable in tort becomes much more palatable – akin, for instance, to a firearms dealer who sells a weapon to a customer in the knowledge that the customer intends to use it for an unlawful purpose. It is regrettable that Campbell J.’s analysis does not contain more thorough and deliberate reasoning as to why one characterization describes the TSX’s role more accurately than the other. Hopefully the Court of Appeal’s analysis will delve into greater depth.

Further, I am not sure that Campbell J. is asking the right question when he reasons that “[i]n order to foresee [the alleged] harm, the TSX Defendants would have had to foresee political and business events in Ecuador which allegedly led to unlawful conduct by agents of Copper Mesa. Such a chain of events was not foreseeable or reasonably foreseeable.” The question of foreseeability should not focus on whether the precise events that led to the harm were foreseeable, but on whether harm itself – regardless of the specifics of how it may have come about – was generally foreseeable (see e.g. Hughes v. Lord Advocate, [1963] UKHL 8 – although admittedly this case discusses foreseeability in the context of remoteness and not duty of care). As such, the question should not be whether the TSX should have foreseen the precise “political and business events” that allegedly led to the harm, but whether the TSX, given what it knew about the situation, should have foreseen that allowing Copper Mesa to raise funds on the exchange would have led to greater violence.

In light of all this, I am not so convinced that it is “plain and obvious,” as is the standard on a Rule 21 motion, that the plaintiffs do not have a reasonable cause of action. The plaintiffs’ claim is certainly novel and has its more tenuous aspects. However, this is not a sufficient basis to deny them their day in court altogether.

As my colleague suggests, however, even if the plaintiffs are successful on appeal they will face many difficult legal hurdles later on (although unlike my colleague, I am not convinced that jurisdiction is one – particularly with respect to forum non conveniens, where the joinder of the TSX would make it difficult to establish that another forum is clearly more appropriate. Tellingly, the defendants never filed a forum non conveniens motion – although it is still open for them to do so in future.). Ultimately, Campbell J. may have done little more than save the plaintiffs several years’ worth of expensive litigation costs.

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Federal Securities Regulation http://lawiscool.com/2009/11/05/federal-securities-regulation/ Fri, 06 Nov 2009 01:30:58 +0000 http://lawiscool.com/?p=2210 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.

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Canada’s own version of SEC to be vetted by Supreme Court http://lawiscool.com/2009/10/22/canadas-own-version-of-sec-to-be-vetted-by-supreme-court/ Thu, 22 Oct 2009 23:49:45 +0000 http://lawiscool.com/?p=2149 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.

AdviceScene

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The RIM vs. Ericsson Beef http://lawiscool.com/2009/09/22/the-rim-vs-ericsson-beef/ http://lawiscool.com/2009/09/22/the-rim-vs-ericsson-beef/#comments Wed, 23 Sep 2009 00:02:02 +0000 http://lawiscool.com/?p=2053 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.

More Spice in your life

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.

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The New Poster Child for Shareholders’ Remedies http://lawiscool.com/2009/09/01/the-new-posterchild-for-shareholders-remedies/ Tue, 01 Sep 2009 13:38:14 +0000 http://lawiscool.com/?p=1976 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.

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Australian Securities Regulators In Policy Quandary http://lawiscool.com/2009/07/13/australian-securities-regulators-in-policy-quandary/ Mon, 13 Jul 2009 14:46:58 +0000 http://lawiscool.com/?p=1754 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.

1064543_the_road_aheadYou 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.

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Legitimate-Content Bay? http://lawiscool.com/2009/07/03/legitimate-content-bay/ http://lawiscool.com/2009/07/03/legitimate-content-bay/#comments Fri, 03 Jul 2009 18:02:27 +0000 http://lawiscool.com/?p=1735 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.

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The Cozy Bank-Law Firm Relationship May Not Be So Cozy After All…These days Anyway, Part II. http://lawiscool.com/2009/06/18/the-cozy-bank-law-firm-relationship-may-not-be-so-cozy-after-all%e2%80%a6these-days-anyway-part-ii/ Thu, 18 Jun 2009 15:35:30 +0000 http://lawiscool.com/?p=1668 First posted on Commercial Law International on June 17, 2009.

McKenna v. Gammon Gold Inc.

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?

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The Cozy Bank-Law Firm Relationship May Not Be So Cozy After All…These Days Anyway, Part I http://lawiscool.com/2009/06/17/the-cozy-bank-law-firm-relationship-may-not-be-so-cozy-after-allthese-days-anyway-part-i/ Wed, 17 Jun 2009 12:25:28 +0000 http://lawiscool.com/?p=1661 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.

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