Present: Lamer C.J. and La Forest, Sopinka, Gonthier, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for british columbia
Administrative law ‑‑ Judicial review ‑‑ Securities Commission ‑‑ Commission part of larger regulatory framework ‑‑ No privative clause and right of appeal ‑‑ Appropriate standard of review of Commission's decisions ‑‑ Whether standard properly applied -- Securities Act, S.B.C. 1985, c. 83, ss. 1(1) "material change", "material fact", 14(1), (2), 44(1), 45(2), 49(1), 50(1), 67, 68, 144(1)(a), (b), (c), (d), 149(a), (b), (c), 154.2.
Securities ‑‑ Securities Commission ‑‑ Statutory duty on issuers of stock to disclose nature and substance of material change ‑‑ Prohibition against insider trading ‑‑ Series of transactions allegedly breaching duty to disclose ‑‑ Whether transactions breaching duty to disclose and/or prohibition against insider trading.
Respondents were, respectively, the chair of the board, the vice president responsible for internal administration and the president of Prime, a company holding several wholly owned subsidiaries and controlling or managing about 50 public junior resource companies. Respondents were also directors of Calpine, a company controlled and managed by Prime. Both companies were reporting issuers listed on the Vancouver Stock Exchange and subject to the VSE's rules and policies concerning public disclosure of information and pricing of options. Both were subject to the continuing and timely disclosure requirements under s. 67 of the Securities Act and to the insider trading provisions under s. 68. The British Columbia Securities Commission administers the Act and ensures compliance with its requirements. It also regulates the VSE.
In the spring of 1990, the Superintendent of Brokers (the Commission's chief administrative officer) instituted proceedings against the respondents in connection with various types of transactions which occurred between July and October, 1989. The Superintendent alleged that the respondents had violated the timely disclosure provisions and insider trading provisions in three categories of impugned transactions: the drilling results and share options transactions, the private placement, and the ALC withdrawal. Respondents were prevented from having information relative to assay results by a "Chinese Wall".
In the first category, Prime or Calpine allegedly failed to disclose all material changes in four transactions in that assay results were publicly disclosed after the company had granted or repriced options. The fifth option transaction, although made after a detailed news release of assay results, allegedly violated a pricing formula under the VSE options policy.
The second series of impugned transactions involved the private placement of Calpine units. Calpine allegedly failed to disclose, contrary to s. 67, that Prime was the purchaser and that the sale significantly increased Prime's interest in Calpine. It was also alleged that Calpine had misled the VSE as to the firm brokering the private placement.
The third impugned transaction occurred when a broker disputed its contractual obligation either to find a purchaser or to buy a set number of Prime units on offer following the withdrawal of a firm (ALC) from a deal to purchase them. Prime was alleged to have violated s. 67 by not making timely and adequate disclosure of the dispute following ALC's withdrawal.
The Commission concluded that the respondents contravened s. 67 of the Act by failing to disclose material changes in their affairs. No insider trading contrary to s. 68 of the Act was found, however. The respondents were found responsible for these breaches as senior managers of the companies, were suspended from trading in shares for one year and were required to pay part of the costs incurred by the Commission and Superintendent. Respondents' appeal was limited to whether the Commission had erred as a matter of law in its conclusions on s. 67 (disclosure of material change), s. 144 (power of Commission to make orders) and s. 154.2 (power of Commission to make orders regarding costs) of the Act. The Court of Appeal allowed the appeal and set aside the Commission's orders. The Superintendent and the Commission now appeal from that decision.
These appeals dealt mainly with the appropriate standard of review for an appellate court reviewing a decision of a securities commission which is not protected by a privative clause when there exists a statutory right of appeal and where the case turns on a question of statutory interpretation. The appeals also raised issues of compliance with the timely disclosure requirements under applicable securities legislation.
Held: The appeals should be allowed.
The Securities Act is part of a much larger framework which regulates the securities industry throughout Canada primarily for the protection of the investor but also for capital market efficiency and ensuring public confidence in the system.
The central question in ascertaining the standard of review is to determine the legislative intent in conferring jurisdiction on the administrative tribunal. The analysis must consider the tribunal's role or function, whether the agency's decisions are protected by a privative clause, and whether the question goes to the tribunal's jurisdiction. The courts have developed a spectrum that ranges from the standard of patent unreasonableness (where deference is at its highest, for example, where a tribunal is protected by a privative clause in deciding a matter within its jurisdiction) to that of correctness (where deference is at its lowest, for example, where there is a statutory right of appeal or where the issue concerns the interpretation of a provision limiting the tribunal's jurisdiction). The case at bar falls between these two extremes. On one hand lies a statutory right of appeal pursuant to s. 149 of the Securities Act. On the other lies an appeal from a highly specialized tribunal on an issue which arguably goes to the core of its regulatory mandate and expertise. Even where there is no privative clause and where there is a statutory right of appeal, the concept of the specialization of duties requires that deference be shown to decisions of specialized tribunals on matters which fall squarely within the tribunal's expertise.
The breadth of the Commission's expertise and specialisation is reflected in the provisions of the Securities Act. The Commission is responsible for the administration of the Act, has broad powers with respect to investigations, audits, hearings and orders, and any decision, when filed in the Supreme Court of British Columbia Registry, has the force and effect of a decision of that court. The Commission has the power to revoke or vary any of its decisions. It also has a very broad discretion to determine what is in the public's interest. The definitions in the Act exist in a factual or regulatory context and must be analysed in context, not in isolation. This is yet another basis for curial deference. A higher degree of judicial deference is also warranted with respect to a tribunal's interpretation of the law where it plays a role in policy development. Here, the Commission's primary role is to administer and apply the Act. It also plays a policy development role but its policies are not to be treated as legal pronouncements absent statutory authority mandating such treatment. Thus, on precedent, principle and policy, those decisions of the Commission falling within its expertise generally warrant judicial deference.
Sections 67, 144 and 154.2 of Act were specifically considered with an eye to the tribunal's expertise and its need for deference. The decision to make an order and the precise nature of that order, under s. 144, as well as any decision obliging a person to pay the costs of a hearing necessitated by his or her conduct, pursuant to s. 154.2, are clearly within the jurisdiction and expertise of the Commission. The other provision at issue was s. 67 which involves an interpretation of the words "material change" and "as soon as practicable".
Both "material change" and "material fact" are defined in s. 1 of the Act. They are defined in terms of the significance of their impact on the market price or value of the securities of an issuer. The definition of "material fact" is broader than that of "material change"; it encompasses any fact that can "reasonably be expected to significantly affect" the market price or value of the securities of an issuer, and not only changes "in the business, operations, assets or ownership of the issuer" that would reasonably be expected to have such an effect.
This case turned partly on the definition of "material change". Three elements emerge from that definition: the change must be (a) "in relation to the affairs of an issuer", (b) "in the business, operations, assets or ownership of the issuer" and (c) material, i.e., would reasonably be expected to have a significant effect on the market price or value of the securities of the issuer. Not all changes are material changes; the latter are set in the context of making sure that issuers keep investors up to date. The determination of what information should be disclosed is an issue which goes to the heart of the regulatory expertise and mandate of the Commission, i.e., regulating the securities markets in the public's interest.
This case also turns on the meaning of the words "as soon as practicable", in s. 67 of the Act, as to when a material change should be disclosed to the public. The timeliness of disclosure also falls within the Commission's regulatory jurisdiction.
Given the nature of the securities industry, the Commission's specialization of duties and policy development role, and the nature of the problem before the court, considerable deference was warranted in the present case notwithstanding the facts that there was a statutory right of appeal and that there was no privative clause.
The determination of what constitutes a material change for the purposes of general disclosure under s. 67 of the Act falls squarely within the regulatory mandate and expertise of the Commission. New information relating to a mining property (which is an asset) bears significantly on the question of that property's value. A change in assay and drilling results can amount to a material change as was the case here.
The obligation to disclose "as soon as practicable" takes on a different meaning when an issuer is about to engage in a securities transaction. Although a duty to inquire is not expressly stated in s. 67, such an interpretation contextualizes the general obligation to disclose material changes and guarantees the fairness of the market, which is the underlying goal of the Act. The Commission had jurisdiction to interpret s. 67 in this manner and was entitled to the court's deference.
A duty to inquire under s. 67 is not incompatible with the Act's insider trading provision (s. 68). If an issuer wishes to engage in a securities transaction, its directors must inquire about all material changes in the issuer's affairs. Consequently, the directors will have, at one point in time, knowledge of undisclosed material facts and material changes which constitute inside information. As long as the material facts and material changes are adequately disclosed prior to the transaction, there will be no possibility of insider trading. The directors' duty to inquire about material changes is not erased by the erection of a Chinese Wall because the disclosure requirements under s. 67 are on the issuer.
Each of the Commission's findings were supported by overwhelming evidence and should not be disturbed. The Commission concluded that information contained in drilling results can constitute a material change in a reporting issuer's affairs and that s. 67 imposes a duty on senior management to inquire as to the existence of material changes before causing a reporting issuer to engage in a securities transaction. It found that the respondents breached s. 67 by failing to disclose various material changes in the affairs of Prime and Calpine before causing these two companies to engage in securities transactions. The Commission also concluded that the non‑disclosure of information concerning the private placement issue and the withdrawal of ALC constituted a failure to disclose a material change. Although the material change arising from the controversy surrounding the withdrawal of ALC was self-evident, not all material changes are self-evident.
Section 144 of the Act gives the Commission a broad discretion to make orders that it considers to be in the public interest. Thus, a reviewing court should not disturb an order of the Commission unless the Commission has made some error in principle in exercising its discretion or has exercised its discretion in a capricious or vexatious manner.
The Commission exercised its discretion in a judicial manner. Further, it could make the orders it did with respect to the respondents even though the duty to make timely disclosure under s. 67 of the Act applies to a "reporting issuer". Although responsibility for timely disclosure is vested in the reporting issuer, effective responsibility rests with the senior officers and the directors of the reporting issuer. In addition, s. 144 of the Act not only gives the Commission a broad power to make orders it considers to be in the public interest but also confers upon the Commission the authority to make orders with respect to "a person". The Commission's order with respect to costs was well within its jurisdiction; considerable deference was in order.
Cases Cited
Referred to: Canadian Union of Public Employees, Local 963 v. New Brunswick Liquor Corp., [1979] 2 S.C.R. 227; U.E.S., Local 298 v. Bibeault, [1988] 2 S.C.R. 1048; Domtar Inc. v. Quebec (Commission d'appel en matière de lésions professionnelles), [1993] 2 S.C.R. 756; Zurich Insurance Co. v. Ontario (Human Rights Commission), [1992] 2 S.C.R. 321; Canada (Attorney General) v. Mossop, [1993] 1 S.C.R. 554; University of British Columbia v. Berg, [1993] 2 S.C.R. 353; Bell Canada v. Canada (Canadian Radio‑Television and Telecommunications Commission), [1989] 1 S.C.R. 1722; United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316; Brosseau v. Alberta Securities Commission, [1989] 1 S.C.R. 301; National Corn Growers Assn. v. Canada (Import Tribunal), [1990] 2 S.C.R. 1324; Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 S.C.R. 112; Four Star Mgmt. Ltd. v. B.C. Securities Comm. (1990), 46 B.C.L.R. (2d) 195, leave to appeal refused sub nom. Williams (Byron Leslie) v. British Columbia Securities Comm., [1991] 1 S.C.R. xv; Gordon Capital Corp. v. Ontario Securities Commission (1991), 14 O.S.C.B. 2713; Re the Securities Commission and Mitchell, [1957] O.W.N. 595; Bay Street West Securities (1983) Inc. v. Alberta Securities Commission (1984), 56 A.R. 19.
Statutes and Regulations Cited
Company Act, R.S.B.C. 1979, c. 59, ss. 1, 255, 267, 272.
Securities Act, S.B.C. 1985, c. 83, ss. 1(1) "material change", "material fact", 14(1), (2), 44(1) [am. 1989, c. 78, s. 16], 45(2) [am. 1989, c. 78, s. 16], 47(1), (2), 48(1) [am. 1989, c. 58, s. 12], 49(1) [am. 1989, c. 78, s. 20], 50(1), 67, 68 [rep. & sub. 1989, c. 78, s. 25], 144(1)(a) [rep. & sub. 1989, c. 78, s. 39], (b) [rep. & sub. 1989, c. 78, s. 39], (c) [rep. & sub. 1989, c. 78, s. 39, am. 1990, c. 25, s. 49], (d) [rep. & sub. 1989, c. 78, s. 39], 149(a) [rep. & sub. 1989, c. 78, s. 43, am. 1992, c. 52, s. 27], (b) [rep. & sub. 1989, c. 78, s. 43], (c) [ad. 1992, c. 52, s. 27], 154.2 [ad. 1988, c. 58, s. 25].
Authors Cited
. Alboini, Victor P. Securities Law and Practice, 2nd ed., vol. 2 (loose‑leaf). Toronto: Carswell, 1984.
Johnston, David L. Canadian Securities Regulation. Toronto: Butterworths, 1977.
Stevens, George C. and Stephen D. Wortley. "Murray Pezim in the Court of Appeal: Draining the Lifeblood from Securities Regulation" (1992), 26 U.B.C. L. Rev. 331.
APPEALS from a judgment of the British Columbia Court of Appeal (1992), 66 B.C.L.R. (2d) 257, 96 D.L.R. (4th) 137, 24 W.A.C. 1, allowing an appeal from an order of the British Columbia Securities Commission. Appeals allowed.
M. J. Gregory Walsh and Catharine M. Esson, for the appellant the Superintendent of Brokers.
John L. Finlay and Susan E. Ross, for the appellant the British Columbia Securities Commission.
Alan J. Lenczner, Q.C., and Winton K. Derby, Q.C., for the respondents.
Deborah K. Lovett, for the intervener the Attorney General of British Columbia.
Stephen T. Goudge, Q.C., and Sandra Forbes, for the intervener the Ontario Securities Commission.
Frances L. Zinger and Glenda A. Campbell, for the intervener the Alberta Securities Commission.
Bryan Finlay, Q.C., and Philip Anisman, for the intervener the Securities Dealers Society of Ontario.
The judgment of the Court was delivered by
Iacobucci J. -- These appeals (hereinafter referred to in the singular) deal mainly with the appropriate standard of review for an appellate court reviewing a decision of a securities commission which is not protected by a privative clause when there exists a statutory right of appeal and where the case turns on a question of statutory interpretation. The appeal also raises issues of compliance with the timely disclosure requirements under applicable securities legislation.
I.Facts
At the relevant time, the respondents were directors and senior managers of Prime Resources Corporation ("Prime"), a company which headed a large corporate network which consisted of Prime, various wholly owned subsidiaries, and Prime's "managed companies", a group of about 50 public junior resource companies controlled and managed by Prime. Murray Pezim was the chairperson of Prime's board of directors and was responsible for promoting and arranging financing for Prime and the managed companies. Lawrence Page was Prime's vice president and was responsible for administration within Prime and for liaison with Prime's outside legal counsel. Finally, John Ivany was president and chief executive officer of Prime. He was also responsible for the overall direction of Prime and played a role in raising financing for the corporation.
One of Prime's managed companies was Calpine Resources Inc. ("Calpine"), which was involved in mineral exploration and development in northern British Columbia. Prime held 23 percent of Calpine's common shares. The respondents were also directors of Calpine.
Both Prime and Calpine were incorporated under the Company Act, R.S.B.C. 1979, c. 59 (as amended), and were reporting issuers whose common shares were listed for trading on the Vancouver Stock Exchange ("VSE"). As such, they were subject to the VSE's rules and policies concerning such matters as public disclosure of information and pricing of options. They were also subject to the continuing and timely disclosure requirements under s. 67 of the Securities Act, S.B.C. 1985, c. 83 (as amended) (the "Act"), which required disclosure of "material changes" in the affairs of a reporting issuer as soon as practicable, as well as the insider trading provisions under s. 68 of the Act. The British Columbia Securities Commission ("the Commission"), which is established by the Act, is charged with administering the Act and ensuring compliance with the requirements of the Act, as well as regulating the VSE.
In the spring of 1990, the Superintendent of Brokers ("Superintendent"), the chief administrative officer of the Commission, instituted proceedings against the respondents in connection with various types of transactions which occurred between July and October, 1989. The Superintendent alleged that the respondents had violated the timely disclosure provisions found in s. 67 of the Act, as well as the insider trading provisions found in s. 68. As a matter of convenience, the impugned transactions have been divided into three categories: the drilling results and share options transactions, the private placement, and the so-called ALC withdrawal. Each of these will be discussed in turn.
A.The Drilling Results and Share Options Transactions
In September 1988, Calpine announced the commencement of drilling on a property known as "Eskay Creek". On May 18, 1989, Calpine announced another drilling program on the same property for the summer of 1989.
Prime Explorations Ltd., one of Prime's wholly owned subsidiaries, was engaged to provide consulting and management services for the project. David Mallo, a staff geologist employed by Prime Explorations, was appointed manager of the Eskay Creek project and prepared regular written reports on the progress of the project. These reports, which contained information on the activity at the camp, as well as visual descriptions and ratings of the holes drilled since the last report, were sent to the president of Prime Explorations, Chet Idziszek, an experienced geologist. Idziszek was responsible for implementing and carrying out a system to compile the drilling and assay results, to ensure the confidentiality of the results, and to determine the time when public disclosure of the results was required. Idziszek also erected a "Chinese Wall" to prevent the non-geological officers of Prime Explorations, including the respondents, from having actual knowledge of the drilling results before they were released to the public.
Early in the first program, that is in the fall of 1988, news releases had been issued to disclose the drilling results from a single hole or even a partial hole. However, by the summer of 1989, the practice was to release results about every two weeks covering several holes.
During the summer program, the drilling concentrated on two zones of mineralization, known as the 21A zone and the 21B zone. Several holes were drilled including holes 71, 93, 101 and 109. During this period, share options were granted and news releases were issued.
The first disclosure on the summer program occurred in a news release, dated June 20, 1989, to announce the commencement of the drilling activity. Five subsequent news releases were issued on July 13, 19, August 2, 15 and 22. The first four of these five news releases were issued after, rather than before, Calpine and Prime granted new share options or reduced the price of previously issued options in favour of directors (including the respondents) and employees. The fifth news release was issued before the fifth impugned share options transaction. As a matter of convenience, I set out the following chronology of events which relate to the five share options transactions and news releases:
DateEvent
July 11/12, 1989Idziszek and Mallo visit the drill camp and are very impressed with their visual observations. A new zone of mineralization is identified and Mallo states that there is a very good chance that the reserves are doubling.
July 12, 1989Calpine grants options on 100,000 of its common shares to the Calpine Employee Plan at a price of $1.44 per share, the previous close being $1.63 per share.
July 13, 1989A news release is issued describing the location of the drilling. The assay results for the first hole, hole 71, are ready but they are not disclosed in the news release.
July 19, 1989Calpine issues a news release disclosing the first assay results from the summer drilling program.
July 26, 1989While reviewing the daily fax sent from the drill camp, Mallo finds out that hole 109 is out of the ordinary. Mallo receives chip samples from hole 109 and has assays done on them. At least one of the samples shows very high gold and silver values.
July 28, 1989While on vacation, Idziszek is advised that visible gold has been discovered in hole 109. He immediately phones the respondent Ivany to advise him of the discovery. He then calls Mallo who informs him of the results of the chip sample assays for hole 109.
July 31, 1989In the morning, Calpine grants options on 100,000 of its common shares to Leslie MacConnell, a long-time associate of Pezim's, at a price of $2.32 per share, the previous close being $2.55. Idziszek and Mallo visit the drill camp, arriving about noon. After viewing the drill core and confirming the finding of visible gold, Idziszek phones Pezim at about 1:30 p.m. and informs him of the visible gold. In the late afternoon, Pezim signs and files a declaration in which he certifies that there are no undisclosed material changes in the affairs of Calpine.
August 1, 1989Idziszek and Mallo begin to prepare a news release and correlate the assay results that are in the office.
August 2, 1989At Pezim's request, trading in Calpine's shares is halted from 9:40 a.m. until 9:30 a.m. the following day. A news release is issued announcing the assay results for several more holes as well as the discovery of visible gold in hole 109.
August 14, 1989The final gold and silver assays for holes 93 and 101 arrive. They included "very good numbers".
August 15, 1989Prime reduces, to $2.13 per share, the exercise price of options on 3,351,383 of its common shares already granted, the previous close being $2.47. Most of these options are held by Senior Management of Prime, including the respondents. In the afternoon, Calpine issues a news release disclosing the assay results for holes 93 and 101.
August 16, 1989The final total gold assays for hole 109 arrive at Prime Explorations in the afternoon.
August 17, 1989Prime grants options on 125,000 of its common shares to Richard Warke and Murray Garrison, two Prime employees, at an exercise price of $2.28 per share, the previous close being $2.50. In the afternoon, Pezim signs and files a declaration in which he certifies that there are no undisclosed material changes in the affairs of Prime.
August 22, 1989Calpine issues a news release (dated August 21) disclosing a detailed description of the assay results for hole 109, as well as information on visual observations of nearby holes that had been subsequently drilled.
August 24, 1989Calpine grants options on 100,000 of its common shares to the Calpine Employee Plan and to Norman Pezim, Murray Pezim's brother, at an exercise price of $4.78 per share, the previous close being $6.
B.The Private Placement
On July 14, 1989, Calpine issued a news release announcing a private placement for two million units; each unit was to consist of one Calpine common share and one Calpine share purchase warrant, which entitles the holder to purchase one Calpine common share. The fact that the purchaser or placee was Prime was not disclosed in the news release even though the sale would increase Prime's interest in Calpine from 23 to 36 percent of the outstanding Calpine common shares.
On July 17, 1989, the respondent Ivany sent a notice letter to the VSE concerning the private placement. Prime Equities Inc., a wholly owned subsidiary of Prime, was named as agent for the private placement, but the notice did not indicate the name of the placee.
During the period from July 14 to August 10, 1989, the respondent Pezim told certain brokers and investors who asked him that it was Prime, directly or indirectly, that was purchasing the private placement.
On August 10, 1989, the VSE was advised that the private placement would be taken down by an entity related to Prime and that Prime Equities would not be involved in the transaction. Prime issued a news release on that same day identifying Prime as the placee and announcing that it would close the private placement by August 18, 1989.
On August 18, 1989, Calpine filed the required declaration with the VSE in which the respondent Page certified that there were no undisclosed material changes in Calpine's affairs.
Although the private placement purportedly closed on August 18, 1989, the money was not paid or the shares issued until December of that year. On December 11, 1989, Prime issued a news release announcing that it had completed, on December 7, 1989, the purchase of four million shares of Calpine by way of a private placement.
C.The ALC Withdrawal
In September 1989, Prime made a public offering of five million units, at $4.25 per unit, under a guaranteed agency agreement ("GAA") with three brokerage firms. Each unit was to consist of one Prime common share and one Prime share purchase warrant. Under the GAA, one of the brokerage firms, Canarim Investment Corporation Ltd. ("Canarim") guaranteed either to find purchasers or purchase itself four million units. An English company, Alexanders, Laing and Cruickshank Ltd. ("ALC"), entered into a deal with Canarim to buy one million Prime units. The deadline for payment under the GAA was September 29, 1989.
On September 25, 1989, Tim Hoare, a principal of ALC and a director of Prime, advised Canarim that ALC was withdrawing its purchase because it had not been adequately consulted on the price of the offering. Peter Brown, Canarim's chairperson and a director of Prime, called Pezim and told him there was a problem. Pezim told Brown to give ALC a delayed delivery contract and said he would talk to Hoare personally to convince him to take the units. Pezim also told Brown that Canarim would have to pay for the units, but indicated that Prime would try to help Canarim offset any loss through other business. On September 29, 1989, neither ALC nor Canarim paid for the unwanted one million units.
On October 16, 1989, Brown formally notified Prime that Canarim would not take down or pay for the one million Prime units. The withdrawal of Canarim was disclosed on October 19, 1989 in a planned news release intended to disclose a share swap between Prime and another company. Following this news release, Canarim came under pressure from the brokerage community to take down the units. Accordingly, Canarim agreed to honour its obligation and advised Prime. This was disclosed by Prime in a news release on October 23, 1989.
Following a rather lengthy hearing relating to the three groups of impugned transactions described above, the Commission concluded that the respondents had contravened s. 67 of the Act by failing to disclose material changes in their affairs. However, no contravention of s. 68 of the Act, relating to improper insider trading, was found. The respondents were responsible for these breaches as senior managers of the companies and were suspended from trading in shares for a period of one year through the removal of their trading exemptions under the Act. Further, they were ordered to pay two-thirds of the costs incurred by the Commission and the Superintendent.
Pursuant to s. 149 of the Act, the respondents appealed to the British Columbia Court of Appeal. The order granting leave to appeal limited the appeal to the question of whether the Commission had erred as a matter of law in its conclusions on s. 67 (disclosure of material change), s. 144 (power of Commission to make orders) and s. 154.2 (power of Commission to make orders regarding costs) of the Act. The Court of Appeal allowed their appeal and set aside the orders of the Commission, Locke J.A. dissenting. The respondents were ordered to pay one tenth of the costs incurred by the Commission and the Superintendent. The Superintendent and the Commission now appeal from that decision.
II.Relevant Statutory Provisions
Securities Act, S.B.C. 1985, c. 83 (am. S.B.C. 1988, c. 58, S.B.C. 1989, c. 78, S.B.C. 1990, c. 25 and S.B.C. 1992, c. 52):
1. (1) In this Act
. . .
"material change" means, where used in relation to the affairs of an issuer, a change in the business, operations, assets or ownership of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer and includes a decision to implement that change made by
(a)senior management of the issuer who believe that confirmation of the decision by the directors is probable, or
(b) the directors of the issuer;
"material fact" means, where used in relation to securities issued or proposed to be issued, a fact that significantly affects, or could reasonably be expected to significantly affect, the market price or value of those securities;
67. (1) Where a material change occurs in the affairs of a reporting issuer, the reporting issuer shall
(a)as soon as practicable issue and file a press release that is authorized by a senior officer and that discloses the nature and substance of the change, and
(b)file a required report, as soon as practicable, but in any event no later than 10 days after the date on which the change occurs.
(2) Subsection (1) does not apply to a reporting issuer which immediately files the report required under subsection (1) (b) marked "confidential" together with written reasons why there should not be a press release under subsection (1) (a) so long as
(a)in the opinion of the reporting issuer, the disclosure required by subsection (1) would be unduly detrimental to its interests, or
(b)the material change in the affairs of the reporting issuer
(i)consists of a decision to implement a change made by senior management of the issuer who believe that confirmation of the decision by the directors is probable, and
(ii)senior management of the issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the issuer.
(3) Where a report has been filed under subsection (2), the reporting issuer shall advise the commission in writing, within 10 days of the date of filing the initial report and every 10 days after that, that it believes the report should continue to remain confidential until
(a)the material change is generally disclosed in the manner referred to in subsection (1) (a), or
(b)if the material change consists of a decision of the type referred to in subsection (2) (b), that decision has been rejected by the directors of the issuer.
68. (1) No person that
(a)is in a special relationship with a reporting issuer, and
(b)knows of a material fact or material change with respect to that reporting issuer, which material fact or material change has not been generally disclosed,
shall purchase or sell
(c)securities of that reporting issuer,
(d)a put, a call, an option or another right or obligation to purchase or sell securities of the reporting issuer, or
(e)a security, the market price of which varies materially with the market price of any securities of the reporting issuer.
(2) No reporting issuer and no person in a special relationship with a reporting issuer shall inform another person of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed, unless giving the information is necessary in the course of business of the reporting issuer or of the person in the special relationship with the reporting issuer.
(3) No person that proposes to
(a)make a take over bid, as defined in section 74, for the securities of a reporting issuer,
(b)become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with a reporting issuer, or
(c)acquire a substantial portion of the property of a reporting issuer
shall inform another person of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed, unless giving the information is necessary to effect the take over bid, business combination or acquisition, as the case may be.
(4) A person does not contravene subsection (1), (2) or (3) if the person proves on the balance of probabilities that at the time of the purchase or sale referred to in subsection (1) or at the time of giving the information under subsection (2) or (3), as the case may be, the person reasonably believed that the material fact or material change had been generally disclosed.
144. (1) Where the commission or the superintendent considers it to be in the public interest, the commission or the superintendent, after a hearing, may order
...
(c)that any or all of the exemptions described in any of sections 30 to 32, 55, 58, 80 or 81 do not apply to a person,
(d)that a person
(i)resign any position that the person holds as a director or officer of an issuer, and
(ii)is prohibited from becoming or acting as a director or officer of any issuer,
. . .
149. (1) A person directly affected by a decision of the commission, other than
(a)a decision under section 33 or 59,
(b)a decision under section 147 in connection with the review of a decision of the superintendent under section 33 or 59, or
(c)a decision by a person acting under authority delegated by the commission under section 6,
may appeal to the Court of Appeal with leave of a justice of that court.
154.2 The person presiding at a hearing required or permitted under this Act or the regulations may order a person whose affairs are the subject of the hearing to pay prescribed fees or charges for the costs of or related to the hearing that are incurred by or on behalf of the commission or the superintendent including, without limiting this,
(a)costs of matters preliminary to the hearing,
(b)costs for time spent by the commission or the superintendent or the staff of either of them,
(c)fees paid to an expert or witness, and
(d)costs of legal services.
III.Judgments Below
1. British Columbia Securities Commission
The Commission's reasons for judgment were handed down in two parts: the findings of the Commission and the decision of the Commission.
In its findings, released on November 16, 1990, the Commission began by commenting on its jurisdiction. It held that, because it was vested with the responsibility of regulating the financial markets, it had broad powers. More specifically, the Commission stated that its jurisdiction was not limited to breaches of the Act, but extended to "circumstances where no provision of any law has been violated...since, no matter how extensive the specific provisions are, there will be fertile and unscrupulous minds to invent schemes that will skirt the words of all published pronouncements". The Commission concluded its discussion of jurisdiction as follows:
The Commission may from time to time judge the conduct of directors against a standard found in the Company Act. In other instances it may, through policy statements, impose a higher standard or one more specific in its terms. The Commission may exercise its jurisdiction even when there is no published policy. The focus of the Commission's inquiry remains constant: the conduct of market participants and its impact on the efficiency and fairness of the market. Where the public interest requires its intervention, the Commission's response is a proper exercise of its jurisdiction and a fulfilment of its mandate.
Following these comments, the Commission examined the various impugned transactions in order to determine whether or not ss. 67 and 68 of the Act had been breached. It divided its findings according to the three types of transactions identified above in the recital of the facts.
A. The Drilling Results and Share Options Transactions
The Commission found that Prime or Calpine had, on four occasions in July and August 1989, contravened s. 67 of the Act in failing to disclose all material changes in their affairs prior to granting or repricing options. The Commission's key holding was that the "Chinese Wall", an internal company stratagem, did not relieve the senior managers from their obligations under s. 67 of the Act, which mandates disclosure of material change "as soon as practicable". The Commission stated:
The accumulation of drilling results for release at periodic intervals is, in most circumstances, a reasonable approach to the disclosure of such information. Where an issuer proposes to engage in a securities transaction, however, it must ensure that any undisclosed material change is disclosed before proceeding with the transaction. The words "as soon as practicable" have a different meaning in this context than they might in the absence of the securities transaction.
In the view of the Commission, there was a positive obligation on the managers to make inquiries to determine whether there had been a material change prior to engaging in any securities transactions. The "Chinese Wall", though effective in shielding the managers from knowledge, did not release them from this obligation.
With respect to the fifth options transaction, the Commission found that Calpine had abused the ten day average pricing formula under the VSE's options policy, in failing to set the price of the options at a level reflecting the dissemination of recently disclosed material changes.
The Commission also found that, in two filings with the VSE for approval of options transactions, Pezim falsely certified that there were no material changes in the affairs of Calpine and Prime, respectively, that had not been publicly disclosed.
Finally, with respect to s. 68 of the Act, the Commission found, as noted above, that the "Chinese Wall" was effective in shielding the respondents from having knowledge of undisclosed material facts or material changes. Accordingly, the respondents had no knowledge of the drilling results when Prime and Calpine granted and repriced the options. Consequently, there was no breach of s. 68 of the Act.
B.The Private Placement
The Commission found that Calpine's disclosure of the private placement on July 14, 1989 was not in compliance with s. 67 of the Act because it failed to disclose that Prime was the placee and what effect the private placement would have on the control of Calpine. The Commission stated the following:
The fact that Calpine's major shareholder would, through the private placement, raise its interest from 23 per cent to 36 per cent, assuming exercise of the warrants, represented a change in the ownership of Calpine that, by significantly reducing the possibility of a challenge for control, would reasonably be expected to cause a significant effect on the market price or value of Calpine's shares. It was therefore a material change in Calpine's affairs and was required to be disclosed, under section 67 of the Act.
The Commission also found that Calpine misled the VSE on July 17, 1989 by representing that the private placement was to be brokered by Prime Equities, and that Page falsely certified to the VSE on August 18, 1989 that there were no material changes in the affairs of Calpine that had not been publicly disclosed. With respect to the private placement, the Commission found no contravention of s. 68 of the Act.
C.The ALC Withdrawal
The Commission could not accept the respondents' argument that, with respect to the ALC withdrawal, there was nothing to disclose. In its view, the situation Prime found itself in on September 25, 1989 "would reasonably have been expected to have a significant effect on the market price of Prime's shares". Consequently, the Commission found that, in failing to make timely and adequate disclosure of the dispute with Canarim following ALC's withdrawal, Prime contravened s. 67 of the Act.
D.The Orders
In its findings, the Commission did not make any orders and preferred instead to hear submissions from the parties, following the release of its findings, with respect to the terms of the orders to be made under ss. 144 and 154.2 of the Act.
In its decision, released December 17, 1990, the Commission reviewed the parties submissions relating to orders and concluded that the respondents' improper conduct was related to distributions of securities under the exemptions in the Act. Consequently, in order to indicate the seriousness with which it viewed the contraventions, the Commission considered it to be in the public interest to remove the respondents' right to rely on the exemptions. Since the respondents were directors and senior management of Prime and Calpine, and had responsibility for ensuring compliance with securities regulatory requirements, the Commission decided not to differentiate among them in making its orders.
With respect to costs, the Commission rejected the respondents' argument that the length of the investigation and the hearing related mostly to the allegations of insider trading, which were not established. Rather, it found that most of the hearing related to evidence concerning those matters in respect of which it did find contravention. It held further that the suspicions which led to the other allegations were aroused by the respondents' own conduct in failing to make required disclosure and in filing misleading documents with the VSE.
The Commission concluded by making the following orders:
.under section 144(1)(c) of the Act, that the exemptions described in sections 30 to 32, 55, 58, 80 and 81 do not apply to Pezim, Page and Ivany for a period of one year, beginning January 1, 1991; and
.under section 154.2 of the Act, that Pezim, Page and Ivany pay prescribed fees or charges for two thirds of the costs of or related to the hearing that have been incurred by the Commission and the Superintendent, with the amount to be determined on further application to the Commission if the parties are unable to agree on the amount.
2.British Columbia Court of Appeal (1992), 66 B.C.L.R. (2d) 257
Lambert J.A., Carrothers J.A. concurring
The majority did not expressly consider the appropriate standard of review in the circumstances. Lambert J.A. merely stated the following at the outset of his reasons, at pp. 262-63:
I think we may consider alleged errors of law in relation to both the interpretation and the application of those three specified sections of the Act. Alleged errors in interpretation are, of course, errors of law. Alleged errors of application may be errors of law or errors of fact or errors of mixed law and fact. We are required and permitted to consider only alleged errors of application that are errors of law.
The majority went on to examine the three types of impugned transactions in order to determine whether or not the Commission had erred in finding a breach of s. 67 of the Act and no breach of s. 68.
A.The Drilling Results and Share Options Transactions
Lambert J.A. determined that the Commission's findings were predicated on a finding that drilling results could be a "material change" within the meaning of s. 67 of the Act. He distinguished between s. 67, a reporting provision dealing with a material change and s. 68, a prohibitory provision dealing with material facts. Drilling reports, he said, are capable of being material facts. However, information obtained from those reports does not constitute a material change as that term is defined in the Act. Lambert J.A. explained this conclusion as follows, at p. 268:
In my opinion, geological information of the nature obtained on a continuing basis as a result of a planned drilling program does not constitute a change in the business, the operations, the assets, or the ownership of the issuer, no matter what information is obtained from the drilling results. Such information may constitute a basis for a perception that there has been a change in the value of an asset. But that is a far different thing than a change in an asset.
Having determined that the Commission erred in its interpretation of "material change", the majority of the Court of Appeal held that all the conclusions of the Commission with respect to the drilling results and options transactions were flawed and could not stand.
Having made the distinction between material facts and material changes, the majority of the Court of Appeal further held that s. 67 does not impose a duty to inquire into material facts prior to engaging in securities transactions. Lambert J.A. stated the following at p. 279:
There is a duty to disclose material facts that are known. There is a duty to disclose material changes in the business, operations, assets or ownership of the issuer, and perhaps to make enquiries about whether there are such material changes if it should happen that they are not known. But there is no duty to enquire about material facts, and to find them out, and not to engage in securities transactions if there are any material facts that could have been found out. Section 68(2) [since repealed] specifically contemplates that there is no such duty.
B.The Private Placement
For reasons of convenience, I reproduce below the Commission's two findings with respect to the private placement:
[The Commission]... found that Calpine's disclosure of the private placement on July 14 was not in compliance with section 67 of the Act because it failed to disclose that Prime was the placee and what effect the private placement would have on the control of Calpine.
[The Commission]... also found that Calpine misled the Exchange [VSE] on July 17 by representing that the private placement was to be brokered by Prime Equities, and that Page falsely certified to the Exchange on August 18 that there were no material changes in the affairs of Calpine that had not been publicly disclosed.
With respect to the first finding, the majority found no error of law on the part of the Commission, holding that the effect of the private placement constituted a material change in the affairs of Calpine in the form of a change of ownership which could reasonably be expected to have a significant effect on the market price or on the value of the common shares of Calpine.
The majority also held that the Commission did not err in law in its conclusion in the first part of the second finding that Calpine ought to have disclosed that Prime was to be the placee, although Lambert J.A. at p. 273 thought that to say that Calpine "misled the [VSE]" was a "somewhat harsh way of describing the filing".
The majority did, however, overturn the second part of the second finding. According to Lambert J.A., the Commission's conclusion was flawed by the error in law encompassed by regarding the undisclosed assays as constituting material changes in the affairs of Calpine.
C.The ALC Withdrawal
Once again, the majority held that the Commission's finding was flawed by the error of law in misinterpreting the definition of "material change". According to Lambert J.A., the oral statements by Brown, Canarim's chairperson, that his company did not consider itself bound to take four million units but only three million units, did not amount to a default of the GAA, and thus it could not be said that there was a change in the "business, operations, assets or ownership of the issuer" under s. 67 of the Act. He was also of the view that the telephone calls and meetings relating to the negotiations did not amount to a material change. Lambert J.A. stated that it may well have been counterproductive for the respondents to issue a press release during the difficult and delicate negotiations and thus may not have been in the public interest.
D.The Orders
With respect to s. 144 of the Act, the majority of the Court of Appeal held that the words "in the public interest" limit the range of orders that may be made by the Commission under that provision. It continued as follows at p. 281:
If there is no rational link between the conduct of the person in question and the order made by the commission, or if that rational link is not a rational link for which the justification rests on the public interest, then such an order of the commission would be outside the commission's powers under s. 144(1).
Lambert J.A. then seemed to hold that there was no link between the order made in this case and the respondents' conduct since the order that was chosen was made in respect of personal trading. Lambert J.A. did not pursue this argument given his findings that the Commission had erred in law in finding a breach of the Act. Accordingly, the majority held that the Commission's orders under s. 144 could not stand.
On the issue of costs, the respondents argued that, because the Act requires the Commission to fund its own activities, there was a reasonable apprehension of bias with respect to the order that they pay two-thirds of the costs of the hearing. The majority rejected this argument stating that it was not the appropriate time in the proceedings to raise such an argument. The fact that the Commission was required to be self-funding did not impact on the legality of its order. Nevertheless, the majority ordered that the order of the Commission be set aside and that the respondents pay one tenth of the Commission's costs of the investigation. Disputes relating to costs were to be brought back to the Court of Appeal.
Locke J.A., dissenting
In most comprehensive reasons, Locke J.A. began by stating that the appeal was being heard under a general appellate provision and not as an application for judicial review under a particular statute. He then reviewed several cases dealing with the purpose and characteristics of securities commissions and concluded at p. 300 that "[i]n the case of appeals from specialized tribunals...an appellate court should be slow to interfere unless the tribunal is shown to be clearly wrong either on fact or law".
Locke J.A went on to examine the three types of impugned transactions as identified in the facts.
A.The Drilling Results and Share Options Transactions
In interpreting the disclosure requirements of s. 67 of the Act, Locke J.A. rejected the narrow approach advocated by the respondents. He held, at p. 308, that "information per se is capable of being an `asset' within the meaning of the Act". This interpretation of the Act, according to Locke J.A. at p. 309, is consistent with its aims, which include "prevent[ing] high-pressure sales tactics, seeing that disclosure is complete, and ensuring that all individuals are informed before actually entering into a securities transaction". Locke J.A. then reviewed the drilling results as well as their potential effect. He held that the information found in these results could indeed be interpreted as a material change in the assets of the company within the meaning of the Act.
Noting that the Act is not penal legislation but rather is regulatory in scope, Locke J.A. would have interpreted its provisions as advocated by the appellants. He concluded at p. 315 that there was "overwhelming evidence to support each finding of the commission" and would not tamper with them.
B.The Private Placement
After reviewing the facts surrounding the private placement, Locke J.A again concluded that there was ample evidence to support the Commission's findings and that there was no basis for interfering with them.
C.The ALC Withdrawal
Locke J.A. reviewed the facts and the findings relating to the ALC matter, and concluded, at p. 329, that there was "no justifiable reason" for the respondents' delay in informing the public of the default. He added, at p. 329, that Ivany's natural reluctance to inform the public as well as his hopes to remedy the situation "constitute[d] no legal excuse for withholding the information".
D.The Orders
With respect to the orders handed down by the Commission, Locke J.A. stated, at p. 339, that the appropriateness of a penalty is a matter for a commission to decide and that a court should not interfere unless it is clear that "there is such an injustice as indicates a legal error". Locke J.A. found no such error.
On the issue of costs, Locke J.A. rejected the respondents' argument that there was an apprehension of bias. He also did not disturb the proportion of the costs (two thirds) which the respondents were ordered to pay. Locke J.A. did have concerns, however, regarding the compilation of the "expenses" charged as costs to the appellants under s. 154.2. However, as he pointed out at p. 344, his concerns relate to a matter "for legislators and not judges".
IV.Issues
Although the parties to this appeal have made specific allegations of error on the part of the Commission and of the Court of Appeal, the issues can be reduced to the following two questions:
1.What is the appropriate standard of review for an appellate court reviewing a decision of a securities commission not protected by a privative clause when there exists a statutory right of appeal and where the case turns on a question of interpretation?
2.In the case at bar, did the British Columbia Court of Appeal exercise the appropriate standard of review?
V.Analysis
1.What is the appropriate standard of review for an appellate court reviewing a decision of a securities commission not protected by a privative clause when there exists a statutory right of appeal and where the case turns on a question of interpretation?
In order to answer this first question, I should like to discuss a number of factors and principles which come into play.
A.The Nature of the Statute
It is important to note from the outset that the Act is regulatory in nature. In fact, it is part of a much larger framework which regulates the securities industry throughout Canada. Its primary goal is the protection of the investor but other goals include capital market efficiency and ensuring public confidence in the system: David L. Johnston, Canadian Securities Regulation (1977), at p. 1.
Within this large framework of securities regulation, there are various government administrative agencies which are responsible for the securities legislation within their respective jurisdictions. The Commission is one such agency. Also within this large framework are self-regulatory organizations which possess the power to admit and discipline members and issuers. The VSE falls under this head. Having regard to this rather elaborate framework, it is not surprising that securities regulation is a highly specialized activity which requires specific knowledge and expertise in what have become complex and essential capital and financial markets.
B.Principles of Judicial Review
From the outset, it is important to set forth certain principles of judicial review. There exist various standards of review with respect to the myriad of administrative agencies that exist in our country. The central question in ascertaining the standard of review is to determine the legislative intent in conferring jurisdiction on the administrative tribunal. In answering this question, the courts have looked at various factors. Included in the analysis is an examination of the tribunal's role or function. Also crucial is whether or not the agency's decisions are protected by a privative clause. Finally, of fundamental importance, is whether or not the question goes to the jurisdiction of the tribunal involved.
Having regard to the large number of factors relevant in determining the applicable standard of review, the courts have developed a spectrum that ranges from the standard of reasonableness to that of correctness. Courts have also enunciated a principle of deference that applies not just to the facts as found by the tribunal, but also to the legal questions before the tribunal in the light of its role and expertise. At the reasonableness end of the spectrum, where deference is at its highest, are those cases where a tribunal protected by a true privative clause, is deciding a matter within its jurisdiction and where there is no statutory right of appeal. See Canadian Union of Public Employees, Local 963 v. New Brunswick Liquor Corp., [1979] 2 S.C.R. 227; U.E.S., Local 298 v. Bibeault, [1988] 2 S.C.R. 1048, at p. 1089 (Bibeault), and Domtar Inc. v. Quebec (Commission d'appel en matière de lésions professionnelles), [1993] 2 S.C.R. 756.
At the correctness end of the spectrum, where deference in terms of legal questions is at its lowest, are those cases where the issues concern the interpretation of a provision limiting the tribunal's jurisdiction (jurisdictional error) or where there is a statutory right of appeal which allows the reviewing court to substitute its opinion for that of the tribunal and where the tribunal has no greater expertise than the court on the issue in question, as for example in the area of human rights. See for example Zurich Insurance Co. v. Ontario (Human Rights Commission), [1992] 2 S.C.R. 321; Canada (Attorney General) v. Mossop, [1993] 1 S.C.R. 554, and University of British Columbia v. Berg, [1993] 2 S.C.R. 353.
The case at bar falls between these two extremes. On one hand, we are dealing with a statutory right of appeal pursuant to s. 149 of the Act. On the other hand, we are dealing with an appeal from a highly specialized tribunal on an issue which arguably goes to the core of its regulatory mandate and expertise.
This Court's decision in Bell Canada v. Canada (Canadian Radio-Television and Telecommunications Commission), [1989] 1 S.C.R. 1722 (Bell Canada), is particularly helpful in deciding the present case as it dealt with a statutory right of appeal rather than an application for judicial review. Gonthier J., writing for this Court, stated the following at pp. 1745-46:
It is trite to say that the jurisdiction of a court on appeal is much broader than the jurisdiction of a court on judicial review. In principle, a court is entitled, on appeal, to disagree with the reasoning of the lower tribunal.
However, within the context of a statutory appeal from an administrative tribunal, additional consideration must be given to the principle of specialization of duties. Although an appeal tribunal has the right to disagree with the lower tribunal on issues which fall within the scope of the statutory appeal, curial deference should be given to the opinion of the lower tribunal on issues which fall squarely within its area of expertise. [Emphasis added.]
Consequently, even where there is no privative clause and where there is a statutory right of appeal, the concept of the specialization of duties requires that deference be shown to decisions of specialized tribunals on matters which fall squarely within the tribunal's expertise. This point was reaffirmed in United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316 (Bradco), where Sopinka J., writing for the majority, stated the following at p. 335:
. . . the expertise of the tribunal is of the utmost importance in determining the intention of the legislator with respect to the degree of deference to be shown to a tribunal's decision in the absence of a full privative clause. Even where the tribunal's enabling statute provides explicitly for appellate review, as was the case in Bell Canada, supra, it has been stressed that deference should be shown by the appellate tribunal to the opinions of the specialized lower tribunal on matters squarely within its jurisdiction.
On the other side of the coin, a lack of relative expertise on the part of the tribunal vis-à-vis the particular issue before it as compared with the reviewing court is a ground for a refusal of deference.
In my view, the pragmatic or functional approach articulated in Bibeault is also helpful in determining the standard of review applicable in this case. At page 1088 of that decision, Beetz J., writing for the Court, stated the following:
. . . the Court examines not only the wording of the enactment conferring jurisdiction on the administrative tribunal, but the purpose of the statute creating the tribunal, the reason for its existence, the area of expertise of its members and the nature of the problem before the tribunal.
As already mentioned, the primary goal of securities legislation is the protection of the investing public. The importance of that goal in assessing the decisions of securities commissions has been recognized by this Court in Brosseau v. Alberta Securities Commission, [1989] 1 S.C.R. 301 (Brosseau), where L'Heureux-Dubé J., writing for the Court, stated the following at p. 314:
Securities acts in general can be said to be aimed at regulating the market and protecting the general public. This role was recognized by this Court in Gregory & Co. v. Quebec Securities Commission, [1961] S.C.R. 584, where Fauteux J. observed at p. 588:
The paramount object of the Act is to ensure that persons who, in the province, carry on the business of trading in securities or acting as investment counsel, shall be honest and of good repute and, in this way, to protect the public, in the province or elsewhere, from being defrauded as a result of certain activities initiated in the province by persons therein carrying on such a business.
This protective role, common to all securities commissions, gives a special character to such bodies which must be recognized when assessing the way in which their functions are carried out under their Acts.
In National Corn Growers Assn. v. Canada (Import Tribunal), [1990] 2 S.C.R. 1324, Wilson J., in a concurring judgment, referred at p. 1336 to financial markets as a field where specialized tribunals have an important role to play:
Canadian courts have struggled over time to move away from the picture that Dicey painted toward a more sophisticated understanding of the role of administrative tribunals in the modern Canadian state. Part of this process has involved a growing recognition on the part of courts that they may simply not be as well equipped as administrative tribunals or agencies to deal with issues which Parliament has chosen to regulate through bodies exercising delegated power, e.g., labour relations, telecommunications, financial markets and international economic relations. Careful management of these sectors often requires the use of experts who have accumulated years of experience and a specialized understanding of the activities they supervise.
Courts have also come to accept that they may not be as well qualified as a given agency to provide interpretations of that agency's constitutive statute that make sense given the broad policy context within which that agency must work. [Emphasis added.]
The breadth of the Commission's expertise and specialisation is reflected in the provisions of the Act. Section 4 of the Act identifies the Commission as being responsible for the administration of the Act. The Commission also has broad powers with respect to investigations, audits, hearings and orders. Section 144.2 provides that any decision of the Commission filed in the Registry of the Supreme Court of British Columbia has the force and effect of a decision of that court. Finally, pursuant to s. 153 of the Act, the Commission has the power to revoke or vary any of its decisions. Sections 14 and 144 are of particular importance as they reveal the breadth of the Commission's public interest mandate:
14. (1) The commission may, where it considers it to be in the public interest, make any decision respecting
(a)a bylaw, rule or other regulatory instrument or policy, or a direction, decision, order or ruling made under a bylaw, rule or other regulatory instrument or policy, of a self regulatory body or stock exchange.
(b) the procedures or practices of a self regulatory body or stock exchange,
(c) the manner in which a stock exchange carries on business,
(d) the trading of securities on or through the facilities of a stock exchange,
(e) a security listed and posted for trading on a stock exchange, and
(f) issuers, whose securities are listed and posted for trading on a stock exchange, to ensure that they comply with this Act and the regulations.
(2) A person affected by a decision made by the commission under subsection (1) shall act in accordance with it.
144. (1) Where the commission or the superintendent considers it to be in the public interest, the commission or the superintendent, after a hearing, may order
(a)that a person comply with or cease contravening, and that the directors and senior officers of the person cause the person to comply with or cease contravening,
(i)a provision of this Act or the regulations,
(ii)a decision, whether or not the decision has been filed under section 144.2, or
(iii)a bylaw, rule, or other regulatory instrument or policy or a direction, decision, order or ruling made under a bylaw, rule or other regulatory instrument or policy of a self regulatory body or stock exchange, as the case may be, which has been recognized by the commission under section 11,
(b) that
(i)all persons
(ii)the person or persons named in the order, or
(iii)one or more classes of persons
cease trading in a specified security or in a class of security,
(c)that any or all of the exemptions described in any of sections 30 to 32, 55, 58, 80 or 81 do not apply to a person,
(d)that a person
(i)resign any position that the person holds as a director or officer of an issuer, and
(ii)is prohibited from becoming or acting as a director or officer of any issuer,
....
In reading these powerful provisions, it is clear that it was the legislature's intention to give the Commission a very broad discretion to determine what is in the public's interest. To me, this is an additional basis for judicial deference.
It must also be noted that the definitions in the Act exist in a factual or regulatory context. They are part of the larger regulatory framework discussed above. They are not to be analyzed in isolation but rather in their regulatory context. This is something that requires expertise and thus falls within the jurisdiction of the Commission. This is yet another basis for curial deference.
Finally, it is noteworthy that various courts, including this Court, have shown deference towards the decisions of securities commission: Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 S.C.R. 112; Brosseau, supra; Four Star Mgmt. Ltd. v. B.C. Securities Comm. (1990), 46 B.C.L.R. (2d) 195 (C.A.), leave to appeal refused, sub nom. Williams (Byron Leslie) v. British Columbia Securities Comm., [1991] 1 S.C.R. xv; and Gordon Capital Corp. v. Ontario Securities Commission (1991), 14 O.S.C.B. 2713 (Div. Ct.).
C.The Role of the Commission
Where a tribunal plays a role in policy development, a higher degree of judicial deference is warranted with respect to its interpretation of the law. This was stated by the majority of this Court in Bradco at pp. 336-37:
. . . a distinction can be drawn between arbitrators, appointed on an ad hoc basis to decide a particular dispute arising under a collective agreement, and labour relations boards responsible for overseeing the ongoing interpretation of legislation and development of labour relations policy and precedent within a given labour jurisdiction. To the latter, and other similar specialized tribunals responsible for the regulation of a specific industrial or technological sphere, a greater degree of deference is due their interpretation of the law notwithstanding the absence of a privative clause. [Emphasis added.]
In the case at bar, the Commission's primary role is to administer and apply the Act. It also plays a policy development role. Thus, this is an additional basis for deference. However, it is important to note that the Commission's policy-making role is limited. By that I mean that their policies cannot be elevated to the status of law; they are not to be treated as legal pronouncements absent legal authority mandating such treatment.
Thus on precedent, principle and policy, I conclude as a general proposition that the decisions of the Commission, falling within its expertise, warrant judicial deference.
D.The Questions of Law at Issue
As mentioned above, it is also necessary to focus on the specific question of law at issue to determine whether it falls within the tribunal's expertise and whether deference is warranted. The specific sections at issue in this case are ss. 67, 144 and 154.2 of the Act.
The decision to make an order and the precise nature of that order, under s. 144, as well as any decision obliging a person to pay the costs of a hearing necessitated by his or her conduct, pursuant to s. 154.2, are clearly within the jurisdiction and expertise of the Commission. The other provision at issue is s. 67 which involves an interpretation of the words "material change" and "as soon as practicable".
Both "material change" and "material fact" are defined in s. 1 of the Act. They are defined in terms of the significance of their impact on the market price or value of the securities of an issuer. The definition of "material fact" is broader than that of "material change"; it encompasses any fact that can "reasonably be expected to significantly affect" the market price or value of the securities of an issuer, and not only changes in the "business, operations, assets or ownership of the issuer" that would reasonably be expected to have such an effect.
The use of these two terms in the Act also reflects the differences in their scope. For example, a prospectus relating to a public distribution of securities must disclose all material facts relating to the issuer: ss. 44(1), 45(2), 49(1) and 50(1). However, the prospectus need be amended only when a material change occurs: ss. 47(1), (2) and 48(1).
Sections 67 and 68 of the Act also reflect the differences between a material change and a material fact. As Victor P. Alboini points out in Securities Law and Practice, 2nd ed., vol. 2 (1984), at p. 18-13, "[t]he concept of `material change' should be distinguished from that of `material fact'. Undisclosed material facts concerning a reporting issuer may not require timely disclosure...although they do restrict trading". Under the timely disclosure provision of the Act, s. 67, only material changes require that a press release be issued and that a report be filed. In contrast, under the insider trading provision, s. 68, a person who is in a special relationship with a reporting issuer is prohibited from buying or selling securities of the issuer when the person knows of either a material change or a material fact which has not been publicly disclosed.
As already mentioned, the present case turns partly on the definition of "material change". Three elements emerge from that definition: the change must be (a) "in relation to the affairs of an issuer", (b) "in the business, operations, assets or ownership of the issuer" and (c) material, i.e., would reasonably be expected to have a significant effect on the market price or value of the securities of the issuer. Thus, not all changes are material changes; the latter are set in the context of making sure that issuers keep investors up to date. Consequently, it would seem wholly uncontroversial that the determination of what information should be disclosed is an issue which goes to the heart of the regulatory expertise and mandate of the Commission, i.e, regulating the securities markets in the public's interest.
This case also turns on the meaning of the words "as soon as practicable" in s. 67 of the Act which reveal when a material change should be disclosed to the public. In my view, the timeliness of disclosure also falls within the Commission's regulatory jurisdiction.
In summary, having regard to the nature of the securities industry, the Commission's specialization of duties and policy development role as well as the nature of the problem before the court, considerable deference is warranted in the present case notwithstanding the fact that there is a statutory right of appeal and there is no privative clause.
2.In the case at bar, did the British Columbia Court of Appeal exercise the appropriate standard of review?
A.The Drilling Results and Share Options Transactions
The Commission's conclusion that s. 67 was violated in the context of the share options transactions can be subdivided into two parts. The first element of the conclusion is that undisclosed drilling results can constitute a material change in the affairs of a reporting issuer. Locke J.A. of the Court of Appeal agreed. Lambert J.A., however, writing for the majority of the Court of Appeal, was of a different view. He held at p. 268 that information obtained from assay results cannot constitute a material change:
In my opinion, geological information obtained from observations of visible matter and geological information from drill cores in the form of assay results, or in the form of a properly plotted plan prepared from the results of a number of assays, are all capable of being material facts. Let us assume that the geological information relied upon by the commission constituted material facts in this case. That does not mean that the same geological information constituted material changes. In my opinion, geological information of the nature obtained on a continuing basis as a result of a planned drilling program does not constitute a change in the business, the operations, the assets or the ownership of the issuer, no matter what information is obtained from the drilling results. Such information may constitute a basis for a perception that there has been a change in the value of an asset. But that is a far different thing than a change in an asset. [Emphasis added.]
As already mentioned, the determination of what constitutes a material change for the purposes of general disclosure under s. 67 of the Act is a matter which falls squarely within the regulatory mandate and expertise of the Commission. Consequently, when the majority of the Court of Appeal rejected the Commission's findings on this matter, it fell into error. Furthermore, the majority's view on this point is, in my opinion, clearly wrong and is inconsistent with the economic and regulatory realities the Act sets out to address. Counsel for the respondents conceded this point, during the hearing of this appeal, and stated that "information from a drilling program can be tantamount to a material change".
In the mining industry, mineral properties are constantly being assessed to determine whether there is a change in the characterization of the property. Thus, from the point of view of investors, new information relating to a mining property (which is an asset) bears significantly on the question of that property's value. Accordingly, I agree with the approach taken by the Commission, namely that a change in assay and drilling results can amount to a material change depending on the circumstances.
George C. Stevens and Stephen D. Wortley, authors of "Murray Pezim in the Court of Appeal: Draining the Lifeblood from Securities Regulation" (1992), 26 U.B.C. L. Rev. 331, are of the same view. In commenting on the above quoted passage, they stated the following at pp. 336-37:
To the geologist or the mining property valuator, Lambert J.A.'s statement is astonishing. Every mine starts from host rock. Every drill hole leads not merely to a change of perception of the asset: it is a piece in the puzzle that ultimately determines whether the asset is moose pasture or ore. Each new result may change the characterization of the asset from rock, to mineral deposit, to inferred ore, to probable ore and ultimately, with enough holes supported by a feasibility study, to proven ore.
Even more astonishing was the Court's conclusion, without receipt of any evidence, that drilling results would never constitute a change in the operations or assets of an issuer.
. . .
Can the Court really suggest that there has not been a change in a company's assets when, following adequate sampling, a discovery is made on a portion of its property that had been previously categorized as having no known mineralization? Surely, given the basic aim of the Act -─ to protect the investing public through full, true and plain disclosure of all material facts relating to securities -─ one could conclude (as did Mr. Justice Locke, the dissenting judge) that the Commission did not make a "plain and vital mistake" in the application of the words in s. 67 of the Act to the facts before it....
Consequently, I am of the view, as found by the Commission and Locke J.A., that the assay results constituted a change with respect to or in the companies' assets and is "material" for the purposes of the Act.
The second element of the Commission's conclusion that s. 67 was violated in the context of the share options transactions is that the obligation to disclose "as soon as practicable" takes on a different meaning when an issuer is about to engage in a securities transaction:
Where an issuer proposes to engage in a securities transaction...it must ensure that any undisclosed material change is disclosed before proceeding with the transaction. The words "as soon as practicable" have a different meaning in this context than they might in the absence of the securities transaction.
Senior Management were responsible for managing the affairs of Prime and Calpine and for ensuring that they complied with their obligations under the Act. In carrying out this responsibility, Senior Management ought to have made reasonable inquiries, before causing Prime and Calpine to engage in securities transactions, to ensure that all material changes in their affairs had been disclosed.
. . .
Considering the importance of the principles involved here, any securities transactions by Prime or Calpine in their own securities warranted inquiries and any reasonable inquiries would have led to any undisclosed material changes that may have existed. [Emphasis added.]
By stating the following at p. 279, the majority of the Court of Appeal appeared to disagree:
...the commission erred in law by interpreting and applying the defined phrase "material change" in s. 67 as if it were equivalent to the phrase "material fact"....
As a consequence of that error in law, the commission regarded Prime and Calpine and the senior officers of those issuers as having a duty, before Prime or Calpine engaged in any securities transaction, to make enquiries of the senior geologist who was responsible for releasing all geological information as soon as it was practicable to do so in comprehensible form, about whether there was any material geological information that had not been released.
There are sound arguments both for and against the imposition of such a duty. But in balancing those arguments the legislature has chosen against imposing that duty.
However, in this next passage at p. 279, the majority seems to say that, although there is no duty to inquire about material facts, there may be a duty to inquire about material changes:
There is a duty to disclose material facts that are known. There is a duty to disclose material changes in the business, operations, assets or ownership of the issuer, and perhaps to make inquiries about whether there are such material changes if it should happen that they are not known. But there is no duty to inquire about material facts, and to find them out, and not to engage in securities transactions if there [were] any material facts that could have been found out. Section 68(2) [since repealed] specifically contemplates that there is no such duty.
From this passage, it appears that the majority of the Court of Appeal is itself unclear as to whether or not there is a duty under s. 67 to inquire as to the existence of material changes before causing a reporting issuer to engage in securities transactions. In any event, I find that it was well within the Commission's jurisdiction to interpret s. 67 in the manner it did, and I fully agree with its position on this point. Although a duty to inquire is not expressly stated in s. 67, such an interpretation contextualizes the general obligation to disclose material changes and guarantees the fairness of the market, which is the underlying goal of the Act. Stevens and Wortley, supra, also support this position, at pp. 338-39:
Now the duty to disclose all material facts arises when a company enters the public market. Its prospectus must contain full, true and plain disclosure of all material facts. Compliance with that fundamental rule does indeed put a duty of inquiry on those who sign the prospectus, Lambert J.A.'s statement notwithstanding. Thereafter, the duty to disclose material facts is really a duty to disclose changes from the basket of facts disclosed originally and from time to time afterwards. That is why the Act uses "material facts" and "material changes" in different contexts.
Nowhere, however, in this underlying statutory scheme of continuous disclosure is there a principle that states the duty of inquiry imposed upon management when a company first enters the securities markets is in some way lessened thereafter. On this point the Court has made unhappy new law. [Emphasis in original.]
It must be noted that a duty to inquire under s. 67 is not incompatible with the insider trading provision of the Act, s. 68. If an issuer wishes to engage in a securities transaction, its directors must inquire about all material changes in the issuer's affairs. Consequently, the directors will have, at one point in time, knowledge of undisclosed material facts and material changes which constitute inside information. However, as long as the material facts and material changes are adequately disclosed prior to the transaction, there will be no possibility of insider trading. It must also be noted that the erecting of a Chinese Wall, which prevents directors of a company from having inside information, does not erase the duty imposed on directors to inquire about material changes, as the disclosure requirements under s. 67 are on the issuer.
Having concluded that information contained in drilling results can constitute a material change in the affairs of a reporting issuer and that s. 67 imposes on senior management a duty to inquire as to the existence of material changes before causing a reporting issuer to engage in a securities transaction, the Commission went on to review the circumstances surrounding the share options transactions of July 12 and 31, August 15 and 17, 1989. The Commission made the following findings: (1) The July 12 transaction was completed after a new zone of mineralization had been identified, as well as a possible doubling of the reserves, but before the news release of July 13 was issued. (2) The July 31 transaction was concluded after the discovery of visible gold and extensive other mineralization in hole 109, but before the news release of August 2. (3) The August 15 transaction was completed after Prime was in possession of the assay results for holes 93 and 101 but before the news release was issued that afternoon. (4) The August 17 transaction followed the arrival of the gold assays for hole 109; the news release relating to these assays was issued on August 22. Based on these findings, the Commission held that the respondents failed to disclose various material changes in the affairs of Prime and Calpine before causing these two companies to engage in securities transactions. Consequently, the respondents had contravened s. 67 of the Act.
Like Locke J.A., I find that there was overwhelming evidence to support each of the Commission's findings and I would not disturb any of them. Consequently, the majority of the Court of Appeal erred in interfering with the Commission's conclusion that, with respect to the share options transactions, the respondents breached their timely disclosure obligations under s. 67 of the Act.
As the majority of the Court of Appeal did not discuss the fifth impugned share options transaction, the Commission's finding with respect to this transaction will stand.
B.The Private Placement
The majority of the Court of Appeal agreed with the Commission that s. 67 of the Act was breached when Calpine failed to disclose the identity of the placee or the fact that Prime was to increase its control over Calpine from 23 to 36 percent, assuming exercise of the warrants. In this respect, it is worth noting that by obtaining a 36 percent holding in Calpine, Prime thereby could prevent the passing of a special resolution as defined in s. 1 of the Company Act, which in turn empowered Prime to prevent a number of important transactions for which a special resolution of shareholders is required under the Company Act (see, for example, ss. 255, 267 and 272).
The majority also agreed that Calpine misled the VSE on July 17, 1989 by representing that the private placement was to be brokered by Prime Equities. However, the majority overturned the Commission's finding that Page falsely certified to the VSE on August 18, 1989 that there were no material changes in the affairs of Calpine that had not been publicly disclosed. It predicated its conclusion on the fact that undisclosed assays cannot constitute a material change.
As already mentioned, the determination of what constitutes a material change goes to the heart of the expertise and mandate of the Commission. Furthermore, having regard to the realities of the mining industry, information from assay results can properly be characterized as a material change in the business, operations, assets or ownership of a reporting issuer. To conclude, I agree with Locke J.A. that the findings of the Commission on the private placement issue reveal no error.
C.The ALC Withdrawal
The majority of the Court of Appeal overturned the Commission's finding that s. 67 had been breached by not disclosing the ALC withdrawal. The majority viewed the ALC withdrawal in contractual terms and stated that it did not have to be disclosed until there was repudiation of the contract and such repudiation was accepted by Prime.
In my view, this narrow approach is wrong and is inconsistent with the purpose of the Act, i.e., to protect the investing public. Again, like Locke J.A., I find there is little basis for disagreeing with the Commission's conclusions. ALC's withdrawal represented a $4.25 million contractual dispute. It would seem wholly uncontroversial to consider such a dispute a change in the business, operations, ownership or affairs of a reporting issuer. As Stevens and Wortley point out, supra, at p. 338, "an account receivable that was to be transformed into cash on September 29 became instead nothing more than a disputed claim for breach of contract". Accordingly, non-disclosure of this dispute constituted a failure to disclose a material change. Thus, the majority of the Court of Appeal erred in rejecting the Commission's findings on this point.
In stating the above, I do not wish to imply that it is always self-evident as to what constitutes a material change. In this respect, it is interesting to note that the Chair of the Ontario Securities Commission has encouraged in that province an early warning system which allows informal disclosure to the Commission of a proposed transaction on a confidential basis. According to Alboini, supra, at pp. 18-14 and 18-15, such a system "allows for appropriate steps to be taken by the Commission to permit stock watches, while also creating an opportunity to discuss with Commission members or staff possible orders or applications that may be required in order to facilitate the transaction from a regulatory point of view".
D.The Orders
The respondents' argument that there must be a rational link between the conduct of the person in question and the order made by the Commission must be rejected. As we have seen, s. 144 of the Act gives the Commission a broad discretion to make orders that it considers to be in the public interest. Thus, a reviewing court should not disturb a Commission's order unless the Commission has made some error in principle in exercising its discretion or has exercised its discretion in a capricious or vexatious manner.
The discretion given to Securities Commissions to determine what is in the public interest was discussed by the Ontario Court of Appeal in Re the Securities Commission and Mitchell, [1957] O.W.N. 595, at p. 599:
The Chairman and other members of the Commission are selected and appointed by the Lieutenant-Governor in Council for their high qualifications, ability and experience. It is the function and duty of the Commission under s. 8 of The Securities Act to form an opinion whether or not it is in the public interest to suspend or cancel the registration of any person. It is intended by the legislation that the Commission shall have extremely wide powers of discretion in forming its opinion.
The opinion of the Commission should not be set aside or altered upon an appeal unless the Commission has erred in some principle of law or unless it appears clearly that the Commission has not proceeded to form its opinion in a judicial manner or unless it appears that the opinion of the Commission is so clearly wrong as to amount to an injustice requiring a remedy on appeal.
These words were adopted with approval in Bay Street West Securities (1983) Inc. v. Alberta Securities Commission (1984), 56 A.R. 19 (C.A.).
In the present case, the Commission exercised its discretion in a judicial manner. Following the release of its findings, it held a supplementary hearing to receive submissions from both parties as to the appropriate sanctions to impose on the respondents. In its final decision, the Commission held that the respondents were responsible for Prime and Calpine's contravention of the timely disclosure requirements of the Act. It further held that the respondents' conduct was related to distributions of securities under the exemptions in the Act. Consequently, the Commission removed the respondents' trading exemptions under the Act for a period of one year.
Some may argue that the Commission could not make the orders it did with respect to the respondents because the duty to make timely disclosure under s. 67 of the Act applies to a "reporting issuer". This argument must be rejected for two reasons. First, as Alboini points out, supra, at p. 18-26, "[a]lthough responsibility for timely disclosure is vested in the reporting issuer... effective responsibility rests with the senior officers and the directors of the reporting issuer". Second, not only does s. 144 of the Act give the Commission a broad public interest to make orders it considers to be in the public interest, it also confers upon the Commission the authority to make orders with respect to "a person".
In summary, it was clearly within the Commission's jurisdiction to order that the trading exemptions not apply to the respondents for a period of one year. Furthermore, the Commission's orders were not vexatious or erroneous in law. Consequently, the order under s. 144 of the Act must stand.
The Commission's order with respect to costs was also well within its jurisdiction. Consequently, considerable deference is in order. Moreover, although the respondents argued that the length of the investigation and the hearing related mostly to the allegations of insider trading, which were not proven, this was not the case. The Commission specifically stated so:
The Respondents argued that we should make no order for payment of costs. They said that the length of the investigation and the hearing were made necessary only by the allegations related to insider trading and breach of directors' duties, which were not proven. However, most of the hearing related to evidence concerning those matters in respect of which we did find contraventions. Furthermore, the suspicions which led to the other allegations, about which the Respondents complained, were aroused, quite reasonably, by the Respondents' own conduct in failing to make required disclosure and in filing misleading documents with the [VSE]. [Emphasis added.]
Since no persuasive basis has been suggested for overturning the order relating to costs, I would not interfere with it.
VI.Conclusion and Disposition
The majority of the Court of Appeal erred in failing to appreciate the Commission's role in an area requiring special knowledge and sophistication. It also failed to recognize the Legislature's intent to confer a broad public interest mandate on the Commission to carry out its role. There was ample evidence to support each of the Commission's findings. There being no reviewable error of law, the majority of the Court of Appeal erred in interfering with the Commission's findings. Consequently, I would allow the appeal, set aside the judgment of the British Columbia Court of Appeal and substitute therefor the findings and orders of the Commission. The appellants shall have their costs here and in the court below.
Appeals allowed with costs.
Solicitors for the appellant the Superintendent of Brokers: Walsh & Company, Vancouver.
Solicitors for the appellant the British Columbia Securities Commission: Arvay, Finlay, Victoria.
Solicitors for the respondents: Lenczner, Slaght, Royce, Smith, Griffin, Toronto.
Solicitor for the intervener the Attorney General of British Columbia: The Attorney General of British Columbia, Victoria.
Solicitors for the intervener the Ontario Securities Commission: Davies, Ward & Beck, Toronto.
Solicitor for the intervener the Alberta Securities Commission: The Alberta Justice, Edmonton.
Solicitors for the intervener the Securities Dealers Society of Ontario: Weir & Foulds, Toronto.
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