The Ontario Securities Commission (“OSC”)
released its long awaited decision in the Baffinland insider trading
case. Hearings in the case began in January of 2013 and concluded
in September of that year. The decision was a disappointment to observers who have been clamouring for stiffer penalties for violation of securities regulations as the OSC dismissed all allegations of wrongdoing against the respondents.
In its statement of allegations, staff of the OSC (“Staff”)
made allegations of insider trading, tipping and conduct contrary to the public
interest in connection with the purchase of 20 million common shares and 5
million warrants of Baffinland Iron Mines Corporation by Nunavut Iron Ore
Acquisition Inc., a company owned and controlled by Jowdat Waheed and Bruce
Walter. Nunavut Iron Ore acquired a “toehold” purchase of Baffinland on September
9, 2010 and launched a hostile takeover bid for Baffinland on September 22,
2010.
At the time, Baffinland was a publicly-traded junior mining
company focused on developing iron ore deposits on its Mary River property
located on Baffin Island in Nunavut.
In February of 2010, Waheed entered into a consulting
agreement with Baffinland to provide strategic advice to its board of directors
and CEO with respect to potential partnerships, mergers and raising capital for
the Mary River project. Waheed ceased to provide those services in
April of 2010.
In July 2010, Waheed approached Walter about a potential
transaction involving Baffinland. Discussions between them progressed
over the summer and ultimately resulted in the launch of the takeover
bid. Waheed and Walter incorporated Nunavut Iron Ore in August of 2010.
Walter was the Chairman and Waheed was the President of Nunavut Iron Ore.
Staff alleged that:
a) both Waheed and Walter authorized,
permitted or acquiesced in the toehold purchase (i.e. the purchase of a
significant block of shares in Baffinland) while they were in a special
relationship with Baffinland and while they had knowledge of material facts
with respect to Baffinland that had not been generally disclosed;
b) Waheed, while in a special relationship
with Baffinland, informed third parties including Walter of material facts of
Baffinland before the material facts were generally disclosed and that both
Waheed and Walter had used material facts and confidential information
belonging to Baffinland to make the toehold purchase and launch the takeover
bid contrary to the public interest; and
c) Waheed had acted contrary to the
public interest by not always acting in Baffinland’s best interest while he was
a consultant and afterwards.
After over 40 days of evidence and submissions in which over
2,600 documents were filed, the OSC dismissed Staff’s allegations finding that
the respondents did not trade or tip in respect of undisclosed material
facts. The OSC held that at the time of the toehold purchase, Waheed did
not have knowledge of material facts about Baffinland that were not generally
disclosed. In addition, the OSC concluded that there was no other conduct
by Waheed and Walter that warranted the exercise the OSC’s public interest
jurisdiction.
The statutory framework for insider trading is found in
subsection 76(1) of the Ontario Securities Act (“Act”).
That subsection provides that no person or company in a special relationship
with a "reporting issuer" shall purchase or sell securities of the reporting
issuer with the knowledge of a material fact or material change with respect
to the reporting issuer that has not been generally disclosed.
Baffinland’s only mining asset was the Mary River property on
which high grade iron ore deposits are located. The property is
approximately 100 km south of the northern coast of Baffin Island which is
north of the Arctic Circle. Two individuals gained a controlling
interest in Baffinland Iron Mines Ltd., the private company that held the Mary
River Project in 2002 and took it public through a reverse takeover in
2004. Baffinland reactivated exploration work on the project that had
been dormant for some time and by January 2008 had spent over $150 million.
In March 2008, Baffinland completed a $193 million public
equity offering for the stated purpose of further exploration and development
activities and for general corporate purposes. In 2008, Baffinland
initiated a process to identify a strategic partner (or partners) that would
assist in financing the Mary River project. It engaged CIBC and CitiGroup
Global Markets Inc. to act as its co-financial advisors. Baffinland
entered into a number of confidentiality agreements with companies in 2008.
In 2009, it appointed a strategic committee to oversee its strategic partnering
activities . It entered into the consulting agreement with Waheed
subsequently.
The commission found that as a consultant, Waheed had access
to information about a potential transaction between Baffinland and
ArcelorMittal, a large steel and mining company. However, given the status of negotiations between
Baffinland and ArcelorMittal, the information that Waheed had was stale
and was not material by the time the toehold purchase was made. Therefore,
the insider trader and tipping allegations failed.
Because at the time of the toehold purchase, Waheed did not have knowledge of material facts about Baffinland that were not generally disclosed, it followed that he did not convey any such material, non-disclosed facts to Walter.
The commission held that an assessment of materiality is fact-specific and will vary with every issuer according to multiple facts. The test to be applied when determining whether any fact is a material fact is an objective market impact test set out in the definition of material fact in subsection 1(1) of the Act. In this case, that would require that the OSC determine if any of the alleged material facts would reasonably be expected to significantly affect the market price or value of Baffinland’s securities.
With respect to its public interest jurisdiction, the
OSC held that two aspects of the public interest jurisdiction
are of particular importance as found in the purposes of the Act, i.e. to provide
protection to investors from unfair, improper or fraudulent practices and to
foster fair and efficient capital markets and confidence in capital
markets.
The OSC concluded that its public interest jurisdiction was
not invoked by the respondents’ conduct. Although Waheed was in a special
relationship with Baffinland as a result of his consultancy, he was not a
director or officer of Baffinland or a registrant. Consequently, the OSC
was not required to exercise its public interest jurisdiction to ensure
honest and responsible conduct by market participants.
The OSC found that
toehold purchases are excluded from the prohibition against insider trading and
acknowledged that the acquisition of toeholds is a permitted strategy for
bidders. Absent insider trading or tipping, there was nothing in the
respondents’ toehold purchaser takeover bid that was contrary to the public
interest.
Regards,
Blair
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