Recent Development in Insider Trading

The prohibition against insider trading, a cornerstone of Canadian securities law, remains one of the few areas of such law not completely harmonized among all Canadian jurisdictions; i.e., unlike the rules governing insider reporting, continuous disclosure, take-over bids, distributions by prospectus and exempt distributions, there is no one single national instrument governing insider trading that each Canadian jurisdiction has adopted as a rule or regulation.

In Québec, the fundamental rules in respect of insider trading are set out in Sections 187 and 188 of the Québec Securities Act (QSA): the former provision prohibits insider trading where the insider (and certain other persons) are in possession of non-public "privileged information," while the latter prohibits "tipping," i.e., disclosure by insiders (and certain other persons) of non-public privileged information to others. Recently, both of these provisions have been amended:

Disclosure of privileged information ("tipping")

Pursuant to Bill 74, the relevant provision of which came into force on December 4, 2009, Section 188 has been amended to clarify that not only is an insider prohibited from disclosing non-public privileged information to others, but neither can the insider recommend trading in securities of the issuer in question.

Insider trading: where the reporting issuer is itself a party to the trade

A fundamental exception to the prohibition against insider trading can be called the "equal information" exception, i.e., where both sides of the trade are in possession of the same non-public material information. So where, for example, an officer of an issuer is granted options or is issued securities under an option or other compensation plan while in possession of non-public material information, normally such officer would not be in violation of insider trading rules since the other side of the trade (i.e., the issuer itself), would be in possession of the same information. However, pursuant to Bill 8, the relevant provision that came into force on June 17, 2009, Section 187 has been amended to remove this "equal information" exception where the other party to the trade is the reporting issuer itself and the transaction is "not necessary in the course of the issuer’s business."

On the basis of this amendment, it follows that an officer who receives an option grant or other securities under an option or other compensation plan, or for that matter who exercises an option or other right to acquire securities of the issuer, while in possession of non-public material information, will now be in violation of the insider trading rules under the QSA, unless it was the case that the trade in question was "necessary in the course of the issuer’s business." It is hard to see how this would ever be the case when options are exercised, though it arguably be the case where, for example, options are being granted in the normal course in accordance with past practice (for example, at the beginning of a fiscal year in respect of and based on performance during the previous year).

There have been a few rather high-profile instances in the recent past of options having been granted by an issuer not too long before the issuer publicly announced that it had entered into a merger agreement to be acquired at a premium to market. The amendment to Section 187 of the QSA was likely motivated by a concern on the part of Québec’s Autorité des marchés financiers (AMF) that options granted in such circumstances might be conferring an unwarranted benefit on the recipient, as the value of the options would increase substantially the moment the merger was publicly announced. That said, merger negotiations can continue for many months until finalized, and issuers cannot be expected to forego normal business during all of such time. Although Section 613(k) of the TSX Company Manual generally prohibits listed companies from granting options or otherwise issuing securities on the basis of market prices that do not reflect undisclosed material information, it does not impose the severe sanctions now available under the QSA against an insider who is granted or issued options or other securities in breach of amended Section 187 QSA.

The insider trading rules in Sections 187 and 188 of the QSA apply on their terms to insiders of any issuer that is a reporting issuer in Québec, and therefore apply, in principle, to trades that take place entirely outside of Québec. It is unlikely, however, that the AMF will impose its own insider trading rules on such trades, or for that matter on a trade involving a reporting issuer in respect of which the AMF is not the principal regulator (i.e., a reporting issuer that does not have its head office in Québec).


1 Note that under the QSA, "privileged information" is not based per se on the concept of "material change" or "material fact", but is defined as non-public information "that could affect the decision of a reasonable investor."

2 See, for example, the decision of the Alberta Securities Commission in re Seto dated February 19, 2003.