In Autorité des marchés financiers (AMF) c. Gauthier,[1] Quebec’s Financial Markets Administrative Tribunal (TMF) ruled that Philippe Gauthier (Gauthier) and Frédéric Racine (Racine) committed insider trading violations on the basis of privileged information related to the acquisition of Napec Inc. (Napec) in 2017.
In this decision, the TMF reiterated that it is essential for all market actors to understand the importance of complying with the rules prohibiting the use of privileged information, and reminded that it is illegal to exchange “tips” based on privileged information, or to trade in securities based on such information.
The sanctions imposed in this case were exemplary, as the Tribunal felt that a strong message needed to be sent that tipping is not a game to be played in a marketplace where everyone is supposed to be on an equal footing. “Such practices continue to this day and cannot be tolerated,” concluded the TMF.
I. Factual Background
On November 3, 2017, Gauthier was informed on a conference call held in the course of his employment with a financial institution that a private investment fund was to imminently acquire all the issued and outstanding common shares of one of its clients, Napec (the Transaction). At the time, the Transaction was strictly confidential and unknown to the public.
Following the conference call with the members of the Napec lending syndicate, Gauthier called one of his friends, Vincent Pouliot (Pouliot) to inform him of the Transaction. Within minutes of the call with Gauthier, Pouliot purchased for the first time six thousand (6,000) Napec shares for $5,169.
In the weeks that followed, Gauthier also discussed the market and several stocks with one of his friends in a restaurant, including Napec, which he described as a “good stock” to the point of arousing his friend’s interest in it and leading him to purchase Napec shares for the first time for $4,664.95.
On November 6, 2017, a few minutes after receiving an e-mail containing the details of the Transaction, such as the name of the acquirer and the purchase price of the Napec shares, Gauthier sent a text message to another individual, Racine, to arrange lunch for the next day.
Within an hour of the lunch with Gauthier, Racine placed four buy orders worth $35,691.30 in Napec shares, even though he had never traded in the company before. Then, between November 7 and 29, 2017, Racine completed some twenty transactions to purchase additional Napec shares for a total value of $172,508 in his TFSA account. The Napec shares in this account represented 99% of his portfolio. He also purchased Napec shares in his RRSP account for $113,398, representing 100% of his portfolio in this account. The day after the Transaction was publicly announced, on December 5, 2017, Racine sold all his Napec shares and realized a profit of $88,398.
During the month of November 2017, Racine in turn disclosed privileged information and recommended trading in Napec securities to his father. Between November 13 and 28, 2017, his father purchased, through his own brokerage accounts, 70,000 Napec shares for $94,675 and another 5,700 Napec shares through his spouse’s brokerage account for $7,724.90. Napec was the only security in which Racine’s father traded in November 2017.
On November 23, 2017, Racine recommended the purchase of Napec shares to a second individual in the course of a dinner, which led to this individual buying 6,100 Napec shares between November 24 and 27, 2017.
II. Decision
- Prohibitions on the use of “privileged information”
The prohibitions on the use of privileged information are set out in sections 187 and 188 of the Quebec Securities Act (the QSA).[2]
Section 187 of the QSAprohibits the insider of a reporting issuer having privileged information relating to securities of the issuer to trade in such securities or change an economic interest in a related financial instrument, except in certain circumstances provided by the law.
Section 188 of the QSA prohibits the insider of a reporting issuer having privileged information relating to securities of the issuer to disclose that information or recommend that another party trade in the securities of the issuer, except if he is justified in believing that the information is generally known or known to the other party, or if he must disclose the information in the course of business, having no ground to believe it will be used or disclosed illegally following its disclosure.
- The privileged information criterion
In Quebec, privileged information is defined as “any information not yet known to the public that could affect the decision of a reasonable investor.”[3] Thus, two elements must be proven to qualify information as “privileged” within the meaning of the law: (1) that the information is unknown to the public and (2) that this information is likely to affect the decision of a reasonable investor.
The TMF refers to section 3.5 (2) of National Policy 51-201 on Disclosure Standards (the National Policy 51-201) which states that information will be considered to have been communicated to the public if: a) it has been disseminated in such a way as to reach market participants and b) investors have had a reasonable time to analyze it.
In this case, Racine presented a defence based on the fact that the information had been disclosed to the public through blogs and/or analyst reports, thereby disqualifying it as privileged information.
The TMF rejected this defence and concluded that it was not until December 4, 2017, that the information relating to the Transaction became known to the public, i.e., once Napec’s press release and material change report were disclosed to the market. In this respect, the TMF recalled that rumours of acquisitions do not constitute an “information communicated to the public, but rather simple speculation” [our translation].
On this subject, the TMF emphasized that “the immediate publication of a press release followed by the filing of a material change report is the method dictated by securities regulations to ensure the proper dissemination of information when there is a material change in the affairs of a reporting issuer [our translation].” While it is clear that information becomes public once it is disclosed through an issuer’s official press release, we note that the case law and the regulators have recognized that there are other ways in which material information can be disseminated to the public outside of the issuer’s traditional communication channels, including some that emanate from the issuer itself, such as press conferences, webcasts, conference calls and interviews, and some that originate from sources independent of the issuer, such as analysts or news reports.[4] In today’s fast-paced and increasingly dynamic marketplace, the assessment of the public nature of material information must consider all sources of information available to investors and should not be limited to issuers’ press releases and material change notices.
The TMF also considered that the information related to the Transaction was likely to affect the decision of a reasonable investor.
The TMF ruled that the acquisition of a reporting issuer, “if seriously likely to occur” [our translation of “sérieusement susceptible de se réaliser”], is in itself considered material information, since such a transaction typically involves a significant premium over the then prevailing share price, in order to encourage shareholders to approve the offer made to them. However, the TMF stated that the proposed acquisition must have reached a certain degree of transactional certainty for it to qualify as privileged information under sections 187 and 188 of the QSA. This is to say that the proposed transaction must not be at a preliminary stage, nor “random” [our translation of “aléatoire”].
On this element, the TMF upheld the reasoning adopted by the Ontario Securities Commission in Hutchinson (Re) from 2019 regarding the materiality of the information relating to a proposed merger or acquisition of an issuer, the relevant excerpt of which is as follows :
[119] Materiality is to be determined objectively, taking into account all the relevant circumstances. Several facts may be material when considered together, even when one or more of the facts do not appear to be material when considered alone.
[120] I agree with the statement of the Alberta Securities Commission in Holtby (Re), that information that an entity is seriously considering the acquisition of a publicly-traded issuer would generally have a significant effect on the target issuer’s securities. [5]
Accordingly, the TMF stated that the discussions concerning a proposed merger or acquisition of a company must be serious and advanced to constitute insider information.
In the present case, the TMF judged that, on November 3, 2017, the Transaction was confidential, it was material to Napec and it was imminent. According to the Tribunal, the Transaction thus constituted privileged information at the time when Gauthier and Racine tipped, recommended and/or traded on Napec shares.
- Sanctions
In light of the foregoing, the TMF ruled that Gauthier disclosed privileged information about Napec to Pouliot and Racine and recommended that a total of three individuals trade in the Napec shares, in violation of sections 187 and 188 of the QSA.
The TMF also found that Racine had purchased Napec shares while in possession of privileged information illegally disclosed by Gauthier, and that he had in turn recommended to two individuals that they trade in these securities and had disclosed said privileged information to one of these two.
As a result, the TMF imposed administrative penalties of $350,000 and $250,000 on Gauthier and Racine, respectively. The TMF also ordered Racine to remit to the AMF the amount of $88,398 obtained as a result of the insider trading. Finally, the TMF prohibited both Gauthier and Racine from trading in securities, except for their own account under certain conditions, for a period of five years, and from acting as directors and officers of reporting issuers, consultants and investment fund managers, also for the same period.
III. Key takeaways for market actors
- This case is relevant in that it outlines how the AMF and the TMF approach insider trading violations and interpret the notion of privileged information in the context of M&A activities.
- All parties made aware of confidential discussions concerning a potential transaction must ask themselves whether the discussions concerning said transaction are sufficiently material taking into account all the relevant circumstances to constitute privileged information.
- Several factors will be considered by the AMF and the TMF in assessing the materiality of a contingent or speculative information or event that may constitute privileged information in the context of potential M&A transactions. In particular, securities regulators and the tribunals will consider: (1) the importance of the transaction that is being contemplated for the reporting issuer, and (2) the likelihood of said transaction occurring in light of the seriousness and progress of the negotiations.
- It is therefore paramount that all parties to a potential M&A transaction, including the directors and officers of a reporting issuer involved in a contemplated transaction, take the necessary steps to refrain from directly or indirectly tipping, recommending or trading in the shares of the involved issuers. This includes authorizing the grant and issuance of stock or options by the directors and officers of a reporting issuer which may take the form of equity compensation, such as restricted stock units (RSU) or performance stock units (PSU), while engaged in serious transaction-related discussions.
- On this subject, it is important to take heed of the cautionary words of the TMF in Autorité des marchés financiers v Filiatreault, also known as the Nstein matter :
[121] […] [S]ince if there is any group of persons that must take great care to comply with the [QSA], particularly its provisions on the use of privileged information, it is the directors and officers of reporting issuers, who, because of the strategic nature of their positions, are at the centre of the operations of such companies and have access to a considerable amount of information of this nature.
[123] Given their leadership role in a market economy, company directors and officers – when in doubt about the legality or even the ethics of a financial transaction – should always err on the side of caution and compliance with the fundamental principles of fairness championed by the law, since the consequences of an offence – including under the [QSA] – are often very serious in many respects, both for them and the company that employs them and for the investing public, which – from hearing about repeated abuse in the contemporary media, which is very effective at relaying the news – ends up questioning the very integrity of the financial system as a whole.[6]
- Finally, it is also important to note that the TMF ruled that section 187 of the QSA applies even if the transaction is carried out by the reporting issuer and irrespective of the fact that the insider in question may not have benefited from it.[7]
[1] 2024 QCTMF 26. We note that the decision has been appealed by the respondents.
[3] QSA, s. 5.
[4] National Policy 51-201, sec. 3.5 (3); R. v. Landen, 2008 ONCJ 561.
[5] Hutchinson (Re), 2019 ONSEC 36.
[7] Ibid, par. 100.