THIS EXAMINATION CONSISTS OF 7 PAGES PLEASE ENSURE THAT YOU HAVE A COMPLETE PAPER THE PETER A. ALLARD SCHOOL OF LAW FINAL EXAMINATION - DECEMBER 2015 LAW 463, SECTION 001: SECURITIES REGULATION PROFESSOR CRISTIE L. FOR]) MARKS: 80 or 100 (see below) TIME ALLOWED: 2.5 or 3.0 HOURS (see below) NOTES: 1. This is an open book examination. 2. You should assume that British Columbia law in effect as of December 1, 2015 applies. 3. If you completed the optional participation component in the course, this examination is worth 80% of your final grade and you should answer only the three questions that are connected to the Fact Pattern. Your exam will be 2.5 hours long. Each sub-question is weighted, and given an approximate time, as set out below. Students are cautioned to allocate their time accordingly. EXAM PART MARKS SUGGESTED TIME 1: Fact Pattern 24 marks + 46 minutes + 20 marks + 40 minutes + 32 marks 64 minutes (all approx.) TOTAL 76 marks 150 minutes (2.5 hours) 4. If you did not complete the optional participation component in the course, this examination is worth 100% of your fmal grade and you must answer all questions. Your exam will be 3.0 hours long. Each question and sub-question is weighted, and given an approximate time, as set out below. Students are cautioned to allocate their time accordingly. EXAM PART MARKS SUGGESTED TIME 1: Fact Pattern 24 marks + 46 minutes + 20 marks + 40 minutes + 32 marks = 64 minutes (all approx.) = 76 marks 150 minutes 2: Short Answer 8 marks + 15 minutes + 8 marks = 15 minutes (all approx.) = 16 marks total 30 minutes total TOTAL 92 marks 180 minutes (3.0 hours)
PART 1: FACT PATTERN (76 marks, 150 minutes) Regulatory Background: Drug Approval Health Canada s Health Products and Food Branch (the HPFB ) is the national authority that regulates, evaluates and monitors the safety, efficacy, and quality of therapeutic and diagnostic products available to Canadians. These products include drugs and medical devices. Drugs are authorized for sale in Canada once they have successfully gone through the HPFB s drug approval process, which works as follows: In its application for approval of a new drug, a drug manufacturer will submit its own supporting scientific studies of the drug s safety and effectiveness, generally performed in university scientific laboratories. HPFB scientists review these studies and, on occasion, also engage outside experts to assess a drug s safety, efficacy and quality. After the first round of review, the HPFB will usually convene a meeting of an expert Advisory Committee. The HPFB provides this Advisory Committee with two packages of briefing materials before the meeting: (1) information prepared by the HPFB, and (2) information prepared by the drug manufacturer. The HPFB s package includes a background introductory memorandum (the Background Memo ) that sets out the crucial considerations associated with the application, and sets out questions the HPFB would like its Advisory Committee to specifically consider. Both briefing packages are typically made public on the HPFB website a few days before the Advisory Committee meeting. Based on the briefing packages, an Advisory Committee may decide to recommend that a new drug application be approved, or denied. The HPFB generally follows the advice of the Advisory Committee, but is not bound to do so. Yew Healthcare Inc. and the Tesa Drug Approval Process Yew Healthcare Inc. ( Yew ) is a specialty pharmaceutical company with its head offices in Delta, British Columbia. Yew has developed a new drug, tesamorelin ( Tesa ), to reduce nausea and morning sickness in pregnant women. George Park is Yew s Chief Executive Officer ( CEO ). His sister, Charlotte Park ( Charlotte ), is a renowned pharmacologist and UBC faculty member. She developed Tesa. She now chairs Yew s Board of Directors. However, she is not actively involved in Page 2 of 7
the day-to-day management of the company. She far prefers being a scientist to being a business person. George and Charlotte are very close. Yew held an IPO in 2009 and has been a reporting issuer ever since. It has one class of common voting securities, which are listed on the TSX and trade across Canada. The company has 100,000 common shares outstanding, which are trading at $10 each on May 1, 2015. As of that date, each of George and Charlotte owns 15,000 shares. Between 2010 and the end of 2013, Yew undertook a series of phase-three clinical trials (large-scale, randomized tests on humans) of Tesa. Because the hormonal response that Tesa triggers is known to be associated with an increased risk of diabetes, the clinical trials measured the blood sugar levels of participating patients to evaluate potential side effects of the drug. The clinical trials indicated that any increased diabetes risk was minor and easily managed, and that Tesa was successful in reducing nausea in pregnant women. On June 1, 2014, Yew files a new drug application for Tesa with the HPFB. As its application proceeds, Yew regularly updates its shareholders about developments in the HPFB process and about the results of its ongoing clinical trials. An HPFB Advisory Committee meeting is scheduled for late May 2015. In April 2015, Yew provides the HPFB with a Briefmg Package that contains a description of Tesa and a summary of the results from its clinical studies, which Yew has already disclosed to its investors. In its Briefmg Package, Yew describes the positive results of its clinical trials, specifically including its results concerning what it considers to be clinically insignificant increased diabetes risk. On May 11, 2015, the HPFB produces the briefing document it has prepared for the Advisory Committee meeting, including a copy of a Background Memo, which contains questions about Tesa s side effects. As usual, the HPFB publishes all the briefing package materials on its website. The HPFB s Background Memo attracts the attention of stock quotation enterprises including Dow Jones which, on the basis of the questions that the HPFB had asked its Advisory Committee, expresses concern that Tesa could increase the risk of diabetes. At about 9 a.m. on May 25, Dow Jones issues a press release that says, HPFB: Yew Drug Reduces Pregnancy-Related Nausea. A minute later, it issues a second press release: HPFB: Proposed Yew Drug May Increase Diabetes Risk. At 9:30 a.m., it releases a short article that mentions Tesa s effectiveness, but also draws attention to the risks to mother and child associated with diabetes during pregnancy. George consults with in-house counsel and considers the matter. Ultimately he decides that Yew does not need to react publicly to the Dow Jones press releases because the briefing documents it has already provided to the HPFB, and the clinical results it has already made public to its investors, offer a comprehensive response to the specific questions the HPFB had posed. For the two days following the Dow Jones press releases, Yew s shares are traded extensively and their price drops by 60% (to $6 per share). On May 27, 2015, the Page 3 of 7
Advisory Committee unanimously votes in favour of approving Yew s new drug application for Tesa. Yew announces this news by press release late that afternoon. On May 28, Yew s share price recovers. The HPFB ultimately approves the Tesa application on November 10, 2015. Many Yew shareholders sold their shares at a loss in the two days after the Dow Jones press releases and before the Advisory Committee approval. Those shareholders seek to launch an action for damages, claiming that the HPFB s questions in its Background Memo about Tesa s potential side effects amounts to a material change, and that Yew was required to issue a reassuring press release to manage the adverse impact on its share price. Nova After Charlotte and George, Yew s next largest shareholder is a Canadian pharmaceutical company called Nova. As of spring 2015, Nova holds 8,000 Yew shares. No other single shareholder owns more than 1,000 shares. Beginning in June 2015, Nova starts purchasing Yew shares on the open market. The acquisitions attract George s attention and so he telephones Ruby Grewal ( Ruby ), Nova s CEO, to inquire about the company s intentions. Several phone calls and emails pass between George and Ruby, and then between George and Charlotte. Ruby says very little about her company s intentions. Nevertheless, by the end of July, Nova has acquired an additional 10,000 Yew shares. On August 10, on one of her rare forays into the City of Vancouver, Charlotte attends a pharmaceutical industry luncheon. One of the attendees is her good friend and fellow scientist Carlos, who works at UBC. At one point during the lunch, Carlos jokes with Charlotte about rumours that have been circulating in the industry that Yew would soon be the subject of a takeover bid. Charlotte smiles tightly and says, isn t it amazing, what everybody seems to know. Cabs notices that when Ruby, who is also attending the luncheon, saunters by their table, Charlotte hurries off to speak to another colleague elsewhere in the room. That afternoon, when Carlos returns to his office, he buys 1000 Yew shares. That evening, his spouse buys 1000 more shares. A few days later, Charlotte goes to see George to discuss Nova s share purchases and the industry rumours. George, seeking to reassure his sister, responds that he has consulted with counsel and developed plans for a shareholders rights plan ( SRP ). The SRP will be triggered if any Acquiring Person acquires 20% of more of Yew s outstanding common shares. If triggered, the SRP would attach two additional rights (worth one share each) to each outstanding Yew common share, not including any common shares owned by the Acquiring Person. George tells Charlotte that he plans to take the SRP to the Board for approval at its next meeting, on September 4. Yew s quarter end is on August 31, and it files its continuous disclosure materials on September 1. The documents make no mention of an SRP, which the Board has not yet Page 4 of 7
approved. The disclosure documents identify multiple risk factors, including the possibility that Yew, like any small, innovative specialty pharmaceutical company, could face hostile or friendly takeover bids. Neither the financial statements nor any other disclosure documents discuss Nova s share acquisitions or any potential changes to Yew s market capitalization. The documents contain forward-looking information, set off with the usual cautionary language, anticipating further share price gains to Yew s existing outstanding common share base once Tesa is ultimately approved by the HPFB. (As noted above, final HPFB approval is obtained on November 10). On September 4, Yew s Board of Directors meets and votes to approve the SRP. At the meeting, Charlotte expresses concerns about the wisdom of diluting Yew share value so heavily. The recent drama around the Tesa approval process and the potential shareholder lawsuit also makes her realize what a one trick pony their company is, and she wonders if being part of a larger pharmaceutical company might not be prudent. In his presentation to the Board George disagrees, citing his own success as CEO and the support he has on the Board and among employees. The Board votes to seek shareholder approval for the SRP at Yew s annual general meeting, set for December 15, 2015. On October 1, 2015, Nova launches an unsolicited bid for Yew shares, and files and distributes a takeover bid circular. Although Nova is a larger and more established company than Yew, it faced several large patent-related lawsuits several years earlier, which cut into its operating funds. Nova has not maintained much research and development capacity since then, and its most profitable patents will soon expire. It seems likely that Nova launched the Yew takeover bid as part of a strategy to re-establish itself in the market. Under the bid, Nova offers to acquire an additional 25,000 outstanding common shares from Yew shareholders, in a one-to-one exchange for Nova shares. As of the bid dates, Yew shares are trading at $10 per share. Nova shares are trading at $12 per share. The bid price thus represents a 20% premium for Yew shareholders. The bid is to remain open until November 1, 2015. Within a few hours of the bid, Yew shares rise to $11.50 per share on the TSX. Cabs and his spouse sell their shares. On October 2, Ruby contacts Charlotte by telephone to discuss her 15,000 shares, which Ruby hopes Charlotte will tender to the bid. Ruby offers Charlotte a position as director of R&D at Nova if she agrees to tender her shares to the bid. The Nova R&D position comes with significant Nova stock option compensation and other benefits, including a company car and a large expense account. More importantly in Charlotte s mind, it is a pure research position that would allow her to focus on her research, leaving business aspects to others. After some thought Charlotte agrees to tender her shares to the bid. She does not tell George or her fellow Yew Board members, because she feels certain that they would be upset, and hers has been the only dissenting voice on the subject of the Nova bid. Page 5 of 7
On October 3, Yew s Board issues a press release and Directors Circular advising shareholders to reject Nova s bid, which it calls coercive and offensive. It announces in a press release that it has initiated an SRP, and describes the terms of that SRP. At a meeting to approve the Directors Circular, Charlotte again disagrees with her fellow board members and thinks that Yew should give the Nova bid serious consideration. The board members are unmoved, and Charlotte gives up trying to convince them. On October 20, Nova applies to the BC Securities Commission to cease trade Yew s SRP. A week later, Charlotte receives a postcard from Carlos, who is vacationing in the Napa Valley with his spouse. The postcard says only, Thanks for the tip! Charlotte, somewhat appalled, puts the postcard in a drawer in her lab at UBC. Denouement On October 25, Charlotte and the Yew Board receive couriered letters from Securities Commission Staff, saying that Staff has opened an investigation under BCSA s. 142 into the affairs of Yew. The letter requests that Yew and Charlotte produce records and give evidence as described in the letter. On October 30 around dinnertime, a person who says she is an investigator from the Commission knocks on the door of Charlotte s office door at UBC, which is adjacent to her lab. Charlotte is working late. The investigator asks Charlotte what she knows about trading in Yew securities over the past few months. Charlotte panics, says, I don t know what you re talking about, and slams the door. She turns her music up and ignores subsequent knocks, and after a few moments the investigator goes away. Questions: 24 marks Consider the events that took place in April and May 2015, as described above. Please provide your professional opinion on potential civil liability actions, including defences and damages, facing: Yew, and George. 20 marks Consider the events that took place between June and November 2015, specifically around Nova s conduct in seeking to acquire Yew shares, and Yew s response to that conduct. Discuss any regulatory issues that arise as a result of those events, and discuss Nova s likely success in its application to cease trade Yew s SRP. 32 marks Consider again the events that took place between June and November 2015, this time identifying any other potential regulatory issues (including potential defences and relevant sanctions) facing: Page 6 of 7
George, and Charlotte, both in her personal capacity and as Chair of the Yew Board. In your answers, do not address any TSX listing requirements that may apply. Do not duplicate information from one question to another, but feel free to refer back to prior information as necessary. If the same concept applies in different ways to different subquestions, be sure to set out the ways in which it is specifically relevant to each sub question. If you are missing facts that you consider necessary to your analysis, identify the facts you are missing and state how those facts would affect your answer. Short Answer Questions (16 marks, 30 minutes) * Only answer the questions below if you have completed a participation component in the course and you are writing a three hour exam * 8 marks 1. We have discussed the terms control person, influential person, eligible institutional investor, and accredited investor. What does each of these terms mean, and from what context does each of these terms come? (8 points) 8 marks 2. Over the past few years you have become friendly with your yoga instructor, Igor. One day he describes a great new investment opportunity to you. He tells you that you can get in on the ground floor of a new company. He seems a little vague on the details, but tells you that some entrepreneurs in the fitness space are trying to raise funds to develop a new line of yoga / cross training gear. Igor says that he can provide you with a short document that describes the opportunity. He tells you that the minimum investment amount is $12,000, but he presumes that you have spare funds since you are on your way to becoming a wealthy lawyer. He is personally excited about this new line of work, since yoga instructing itself does not pay well. He says, I know these guys and they re solid. I m only talking to a few dozen of my favourite clients about this. There s a form you have to sign and then I ll set you up. Assume that the investment units are securities. Based on your knowledge from this course, what is Igor most likely selling? Identify any regulatory requirements that apply to this scenario. END OF EXAM Page 7 of 7