Evidence of meeting #43 for Industry, Science and Technology in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was shareholders.
A recording is available from Parliament.
4:40 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
Thank you, Mr. Chair.
My first question is for Mr. Gray. You were talking about insider trading and describing how it would take place. It sounded like it was basically how it would happen on a provincial...or a security system that is already in place. How does the CBCA work in conjunction with provincial securities regulators? Are there any areas of duplication between federal and provincial that need to be addressed over and above that, just to avoid confusion more than anything else?
4:45 p.m.
Partner, McMillan LLP, As an Individual
That's a very good question. This was the subject matter of a case called McCutcheon and the Ontario Securities Commission, in 1982, where the Supreme Court of Canada recognized that there was some overlap between the CBCA and provincial securities legislation.
The two coexist. I think there is really no other answer: they coexist. Obviously, securities law can cover any type of reporting issue, whereas the CBCA will only cover corporations that are formed under the CBCA. There are some differences, for example, between the criminal element in terms of the options trading. Insiders having options over shares and things like this are a little different under the CBCA from what they are provincially.
But what I'm really talking about, and where I think the most important aspect of this is, is with respect to civil actions against insiders. This is something that's not, in my view, very prevalent in Canadian law. There is not a lot of civil litigation against insiders, and I think there ought to be, because it's clear there is insider trading going on. You can tell that by the fact that there is often a spike in prices before there is favourable news, or the reverse. So somebody is trading. There could be class actions, for example. Treble damages could be awarded. There are ways the civil law could be used.
The CBCA is largely self-enforcing. The genius of this act is that largely the enforcement of the act has been privatized to give private parties the incentive to pursue their remedies. And this is one area where I think that's failed. There has been no case since 1994 that I could find on insider trading liability. There has never been a case under the CBCA with respect to criminal liability, and very few cases at all under the civil liability regime, and none since the 2001 amendments.
4:45 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
Is that because there are portions missing in this act? Or is it because we as Canadians just don't have that litigious background?
I think the question is this. Is there something in the CBCA that could be added to make it more--
4:45 p.m.
Partner, McMillan LLP, As an Individual
What I'm saying is that I do think this is an area that could be studied. You could align the interests of litigants to try to recover illegal insider trading profits by insiders who are essentially getting more than their fair share at the expense of all other investors. It's not a neutral playing field.
I think you could create some incentives for people to go out and get those people and recover damages. I think corporations, because of the adverse publicity, would be much more careful about monitoring it internally. I'm not saying this is a law that ought to be adopted tomorrow; I'm just suggesting it should be considered.
The current problem with the CBCA is the requirement for privity.
4:45 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
On the term “incentives”, what would be an example of an incentive?
4:45 p.m.
Partner, McMillan LLP, As an Individual
An example of an incentive would be if you knew that an insider disposed of shares just before some negative information was released about the corporation and the share price therefore went down, there would be a way of calculating the difference. And it's right in the act already. It's a trading price--20 trading days after the trade--so you can benchmark the difference between what that insider traded for and what that market provides. You could provide for treble damages and you could provide for class action relief so that all of the proceeds or the profit, times three, goes to all of the class people who were traded opposite that insider. This is something they have in the U.S. It's mostly created by courts in the U.S., but it doesn't exist in Canada.
4:45 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
Thank you.
My next question is for Ms. O'Neill. You mentioned the necessity of having face-to-face meetings and how important they are. I come from northern Ontario, and I know what it's like to have foreign-owned companies come in and basically do what they have to do and then leave.
In 2001 the act reduced the residency requirements for the board of directors and eliminated the residency for the board. Have you seen anything detrimental or have you seen any major changes because of that?
4:50 p.m.
Director, Law and Policy, Shareholder Association for Research and Education
Residency is an interesting issue. It hasn't been a particularly hot topic for the investors we deal with. However, I would say this. At SHARE we certainly consider the impact of reduced residency, which definitely has its benefits. We sent a lot of companies--just before the CBCA amendments were done--up to the Yukon, where there were very low requirements, and suddenly there were all these Yukon-incorporating companies.
When the residency requirements are higher, it's certainly true that companies have to widen their pool of candidates and consider people they didn't go to school with, perhaps, and there is an impetus on people who are promising and who think they could do a good job of that. They know a bunch of Americans aren't going to come in and beat them out, so why not get educated and try to become someone who can serve in that capacity? So the upside of flexibility is matched by the downside of “we won't grow our own”. It's really a tough call, and people's decisions tend to rely on the experience they've had with it.
4:50 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
Mr. Draimin, I would like a little clarification on the new hybrid model in the CICs. Usually when you're investing in something you're looking for a profit to come back. Where do they see that profit coming back, or do they in fact see a profit or gain of some sort? Is it strictly a donation that goes into these corporations?
4:50 p.m.
Executive Director, Social Innovation Generation
In the case of a community interest company in the U.K., if its purpose is charitable as well as being public benefit, foundations can make contributions or donations to it because it's achieving its mission. The investor is putting money into an organization that definitely has a business model. It's selling services or products, or something, and through the sale of those products and services it's going to be able to service the dividend needs of the shares they've sold.
In fact to ensure there wouldn't be some kind of undue private benefit, in the U.K. the shares aren't allowed to appreciate. The shares are issued at a price, and they can never increase beyond that price. They can drop, but they can't go above their issuing price.
We're talking about a very specialized hybrid instrument that's trying to meet the needs of the social mission together with using the business model. There are about 3,200 such corporations in the U.K. Several hundred a month are being registered right now. There's been a bit of a flurry of them in the wake of the recession. One example might be a company that is partnering with co-ops. West Africa produces cocoa and they're creating fairly traded chocolate products. They create a community interest company as the corporate entity to house that activity inside of the U.K.
4:50 p.m.
Conservative
The Chair Conservative Michael Chong
Thank you very much, Mr. Draimin and Mr. Rota.
We'll now go to Mr. Lake.
4:50 p.m.
Conservative
November 16th, 2009 / 4:50 p.m.
Conservative
Chris Warkentin Conservative Peace River, AB
Thank you very much.
I appreciate your being here this afternoon to answer many of our questions.
Mr. Gray, I'll start with you. With all the talk of insider trading, how do you assess the problem in Canada? Do you have numbers or stats? How big is the concern of insider trading in Canada? Is the type of problem or how large it is even determinable at this point?
4:50 p.m.
Partner, McMillan LLP, As an Individual
Mr. Warkentin, I can't answer your question. I'm a lawyer. I don't have the stats at hand, so I can't give you that.
4:50 p.m.
Conservative
Chris Warkentin Conservative Peace River, AB
Maybe to all of you, because I think this is something our committee may want to pursue, are there people you would suggest we speak to in terms of how we might be able to quantify the problem and address the problem?
4:50 p.m.
General Counsel and Director, Policy Development, Canadian Coalition for Good Governance
I will take a shot at that.
Insider trading is largely prosecuted through the securities commissions. I think the securities commissions would probably be best to speak to the quantum of the problem and the things being done to address it. We did urge consultation with securities commissions in any event, because there are areas where there is significant overlap between securities law and the CBCA regime. They would probably have some useful insight for you.
4:55 p.m.
Conservative
Chris Warkentin Conservative Peace River, AB
That comes to the next question. Do you believe that securities regulators are addressing this appropriately? Is there additional support? What is the appropriate place to address this? Obvious securities regulators are taking up most of it at this point, but if we change this legislation, is this the better place to address it?
Perhaps all of you could comment on that.
4:55 p.m.
General Counsel and Director, Policy Development, Canadian Coalition for Good Governance
I'll start. We think that securities regulators do a fairly good job in obtaining administrative penalities for insider trading. Where we think the Canadian system is woefully inadequate is in the criminal prosecution of insider trading.
As you well know, there's movement to create a national securities regulator in Canada. We made a submission to the expert panel looking at that issue, and we advocated that as part of a national securities regulator that a new agency be created that has an administrative branch and a criminal branch. The criminal side could develop the right people with the right expertise who are properly incentivized to pursue these kinds of cases. The problem right now is that prosecution of insider trading under the Criminal Code is left to provincial crowns, who have maybe ten murders ahead of an insider trading case. They have neither the time nor necessarily the expertise to pursue the cases.
4:55 p.m.
Partner, McMillan LLP, As an Individual
What I was really addressing was not the criminal side of the equation. Criminal enforcement doesn't really take place under the CBCA. It could be there, or it is there, but I don't know of any case ever being prosecuted under the CBCA provision.
We're really talking about the civil enforcement of a cause of action. These are the insiders, the opposite party of the insider trade, being able to go after the insiders or whomever is culpable, the tippers, the tippees, etc. This, I think, is also woefully inadequate, and nothing is being done about it. I don't think the securities commissions have done anything about it either.
4:55 p.m.
Conservative
Chris Warkentin Conservative Peace River, AB
Mr. Draimin, I'll have you comment on the submission you brought forward today. I'm trying to get my head wrapped around the suggestions you're making.
Obviously here in Canada many of our non-profits have tried to innovate and create ways to sustain themselves. Mr. Wallace alluded to his local art gallery having set up a boutique store. Many organizations have done that, and they just flow the profits to their non-profit side. We also know of non-profits or organizations that have allowed some type of investment to be created out of their property; people can buy into their schools or their properties, and then they're paid out a dividend over time. People who believe in their causes can buy in, and they're able to finance capital that way. Maybe that's a little bit different from what you're suggesting.
Specifically, what do you assess the needs to be in the Canadian non-profit context? People or organizations, you suggest, are selling off their properties. There may be many reasons for doing that; I would look for more information and maybe some submissions to be left with us, as well, regarding this aspect, but your assessment is that people are selling off for financial reasons. Do you believe that creating this new type of CIC, or something like a CIC, gives any evidence that it would actually increase access to capital here in the Canadian context?
4:55 p.m.
Executive Director, Social Innovation Generation
Thank you very much for your question.
First, I should just clarify that when I said non-profits were eating away at their core assets, I meant that instead of investing in themselves, they stopped doing things that mainstream companies do because they were so hard pressed by the lack of access to capital or donations.
In terms of the needs, right now we know the profile of non-profit income is that at least one-third is already earned in some way or another, but the ways in which that is happening are very complicated.
I'll give you an example. I can't talk about it because they don't want to be talked about publicly, but there's a major charity that has a really successful social enterprise inside the charity. It basically recycles things, generates income for them, and keeps stuff that would go to landfill from going to the landfill. However, in order to do that, they violate the CRA rule, which was created at some time by somebody for some reason, that 90% of the labour going into the social enterprise has to be volunteer labour. There's an arbitrary rule that is basically undermining an organization that has a great social enterprise that seems to be working okay within the existing charity. They would need something like a CIC to have an alternative. If you're located in Ontario, there's an arcane rule that states you can't hold more than 10% of the shares of a business for a long period of time, so you couldn't even set it up as a subsidiary.
We have a patchwork quilt of charity and non-profit rules that were created a long time ago and don't really serve the modern needs of charities, and those charities are finding new ways to meet their missions. As a matter of fact, our rules for charities are based on the idea that they don't deal with root causes of things but with the symptoms of things, so what we're trying to do is empower charities to be able to move toward working on the root causes of things, such as training people so they can get jobs or whatever it is.
The innovative capacity of the sector is growing really quickly. I don't have a statistical way of telling you how big the market is, just that it's growing a lot. This week in Toronto the third national congress of social enterprises takes place. The first one had 200 people. The second one had 550 people. Going back now, it's six years, so the movement is growing a lot. Between that fact and what we know about the general numbers--a third of the income is earned--there would be a huge opportunity here.
How do I know they could raise capital? Well, that's basically the test that we see in the U.K. They have been able to raise capital. We see a growth in these companies. It basically opens the door to them to escape that zero-sum universe of the existing restricted pool of donations or government funding and be able to go out to mainstream capital and gain that.
