Decisions
KEYWEST RESOURCES LTD., et. al. [Decision]
|
BCSECCOM #:
|
Document Type:
Decision
|
|
Published Date:
1999-02-26
|
Effective Date:
1999-02-17
|
|
Details:
|
|
COR#99/032
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF KEYWEST RESOURCES LTD.
AND
IN THE MATTER OF BRUCE CARSON, JOHN MACKAY
AND JEFF SUTHERLAND
HEARING
| PANEL | ADRIENNE R. WANSTALL | MEMBER |
 | BRENT W. AITKEN | MEMBER |
| JOAN L. BROCKMAN | MEMBER |
| DATES OF HEARING: | SEPTEMBER 15, 17 AND 18, NOVEMBER 24 AND |
| DECEMBER 15, 1998 |
| DATE OF DECISION: | FEBRUARY 17, 1999 |
| APPEARING: | ROBERT S. FLEMING | FOR COMMISSION STAFF |
| RITCHIE H.C. CLARK, Q.C. | FOR THE RESPONDENTS |
DECISION OF THE COMMISSION
1. INTRODUCTION
This is a hearing under section 161(1) of the Securities Act, R.S.B.C. 1996, c.418. A notice of hearing was issued on September 3, 1997. The staff of the Commission alleges that the individual respondents Bruce Carson, John MacKay and Jeff Sutherland
(a) have failed to cause Keywest Resources Ltd. to enforce an escrow agreement and cancel escrow shares held by John Walter Scott Roeder, and
(b) have failed to act honestly and in good faith and in the best interests of Keywest and failed to exercise the care, diligence and skill of a reasonably prudent person, contrary to section 118 of the Company Act, R.S.B.C. 1996, c. 62.
2. BACKGROUND
- The relevant facts giving rise to these proceedings are not in dispute.
Keywest filed a prospectus in January 1992 and completed an initial public offering in May, listing on the Vancouver Stock Exchange on May 4, 1992. Its principal assets were oil and natural gas properties and related equipment sold to Keywest by Roeder, a director of Keywest, in exchange for shares.
Prior to filing its prospectus, Keywest entered into an escrow agreement dated December 13, 1991 with Roeder, under which Roeder agreed to place 750,000 Keywest shares into escrow. This escrow agreement was in the standard form of agreement in use by the Superintendent of Brokers (now the Executive Director) at that time. The escrow agreement was a condition precedent to the issuance of a receipt for Keywest’s prospectus. The sections of the escrow agreement relevant to these proceedings read as follows:
- 3. VOTING OF SHARES IN ESCROW
- Except as provided by section 4(a), the Shareholder may exercise all voting rights attached to the Shares.
4. WAIVER OF SHAREHOLDER’S RIGHTS
- The Shareholder waives the rights attached to the Shares
(a) to vote the Shares on a resolution to cancel any of the Shares,
(b) to receive dividends, and
(c) to participate in the assets and property of the Issuer on a winding up or dissolution of the Issuer.
5. ABSTENTION FROM VOTING AS A DIRECTOR
A Shareholder that is or becomes a director of the Issuer shall abstain from voting on a directors’ resolution to cancel any of the shares.
6. TRANSFER WITHIN ESCROW
(1) The Shareholder shall not transfer any of the shares except in accordance with Local Policy Statement 3-07 and with the consent of the Superintendent or the Exchange.
- 7. RELEASE FROM ESCROW
(1) The Shareholder irrevocably directs the Escrow Agent to retain the shares until the Shares are released from escrow pursuant to subsection (2) or surrendered for cancellation pursuant to section 8.
(2) The Escrow Agent shall not release the Shares from escrow unless the Escrow Agent has received a letter from the Superintendent or the exchange consenting to the release.
- 8. SURRENDER FOR CANCELLATION
- The Shareholder shall surrender the Shares for cancellation and the Escrow Agent shall deliver the certificates representing the Shares to the Issuer
- . . .
(b) where the Issuer’s shares have been subject to a cease trade order issued under the Act for a period of 2 consecutive years,
- (c) 10 years from the later of the date of issue of the Shares and the date of the receipt for the Issuer’s prospectus on its IPO,
- . . .
The affairs of Keywest and the activities of its then directors, including Roeder, were later the subject of a hearing before this Commission, In the Matter of Keywest Resources Ltd. and In the Matter of John Walter Scott Roeder et al, [1995] 14 BCSC Weekly Summary
- 9. The Roeder decision was issued April 4, 1995. On March 4, 1994 the shares of Keywest had been delisted from the Exchange.
- In the Roeder decision, the Commission found that Roeder had breached his duties as a director to act honestly and in good faith and in the best interests of Keywest and to exercise the care, diligence and skill of a reasonably prudent person. In particular, the Commission found that Roeder caused Keywest to lose the property that was described in the prospectus to be the primary focus of its business.
- The Commission made orders against Roeder removing his exemptions and prohibiting him from acting as a director or officer of a reporting issuer for 17 years. The Commission also extended the temporary order issued July 19, 1993 that trading in shares of Keywest cease, which order is still outstanding.
- The other directors of Keywest were also removed by the terms of the Roeder decision and the individual respondents in these proceedings were appointed to Keywest's board of directors in June of 1995.
- In a letter dated March 12, 1997, Commission staff asked Keywest to confirm by March 26, 1997 that Roeder’s escrow shares had been surrendered and cancelled, on the basis that the shares had been the subject of a cease trade order for more than two years and therefore ought to be cancelled under section 8 (b) of the escrow agreement. As a result of correspondence from Keywest, Commission staff extended the deadline.
- The directors of Keywest retained counsel to advise them on their legal obligations. Roeder said that he would fight any attempt by Keywest to force cancellation of his shares. The directors reached the conclusion that the costs and risks of the litigation would outweigh any potential benefit to the company. Having considered its position, in subsequent correspondence with Commission staff, Keywest refused to confirm that it would seek to enforce the escrow agreement by forcing Roeder to surrender his escrow shares for cancellation. Commission staff issued the notice of this hearing in September 1997.
3. ARGUMENTS OF THE PARTIES
The Position of Staff
Commission staff acknowledges that neither Keywest nor any of the individual respondents have breached the Act, the Regulations, the Rules or any policies of the Commission.
However, Commission staff argues that there is a significant public interest in enforcing the escrow regime associated with initial public offerings. In cases where company principals have received shares at prices substantially below that paid by the public, escrow agreements allow the principals to maintain some control over the issuer while protecting the investing public from dilution. The regime also provides an incentive to principals to achieve success for the company. If the company is successful, the principals will be able to sell their shares. On the other hand, if success is not achieved within 10 years or the company is ceased traded for more than 2 years, their escrow shares are cancelled.
This case is seen by staff as particularly egregious because Roeder has been found by this Commission to have been the primary author of the company's misfortune. Staff believes this makes it all the more imperative that his escrow shares be cancelled. Staff takes the position that it is the responsibility of Keywest to take legal action to enforce Roeder’s obligation under the escrow agreement to surrender his shares for cancellation.
Central to the staff's argument is the idea that the execution of an escrow agreement by an issuer such as Keywest implies a promise by the issuer to the Executive Director that it will be enforced. Staff says that when the Executive Director requires an issuer such as Keywest to enter into an escrow agreement as part of the requirements it must meet before the issuance of a receipt for its prospectus, the Executive Director relies on the promises of the parties set out in the escrow agreement.
The promises of the issuer, staff argues, include an implied promise that the issuer will take reasonable steps to enforce the obligations of the other parties to the escrow agreement.
Staff acknowledges that it is not within the power of Keywest simply to cancel the escrow shares by virtue of section 232(1)(c) of the Company Act, which states:
- 232 (1) Every company may alter its memorandum by resolution of its directors or by ordinary resolution
. . .
(c) cancelling shares of a reporting company that have been held in escrow under an escrow agreement required by the executive director, and that are surrendered for cancellation under that agreement
. . .
and diminishing the authorized capital accordingly.
Staff argues that it is in the public interest to make orders under section 161(1) with respect to the individual respondents because they, as directors of Keywest
(a) failed to cause Keywest to enforce the terms of the escrow agreement and therefore flouted a basic element of securities regulation, and
(b) breached their duties under section 118 of the Company Act, by failing to ensure that Keywest comply with its implied promise to the Executive Director to enforce the terms of the escrow agreement. Section 118 states:
- 118 (1) Every director of a company, in exercising the director’s power, and performing the director’s functions, must
(a) act honestly and in good faith and in the best interests of the company, and
(b) exercise the care, diligence and skill of a reasonably prudent person.
(2) The provisions of this section are in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of directors of a company.
The Position of the Respondents
The Respondents say that there is no public interest basis for making orders against persons who have breached no statute, regulation, rule, by-law or policy relating to securities regulation. They point out that the provisions of section 118 of the Company Act are a codification of the common law obligations of directors.
The Respondents argue that there is no evidence to suggest that commencing legal proceedings to force the cancellation of the escrow shares would be in the best interests of the company, having regard to the costs and risks of doing so.
The Respondents also say that to the extent there is any implied promise to the Executive Director by the parties to an escrow agreement, it is solely that each of them will comply with the terms of the agreement. They take exception to the suggestion that filing an escrow agreement with the Executive Director obligates an issuer to enforce the obligations of the other parties to that agreement regardless of the circumstances.
4. ANALYSIS
The Commission's obligation to act in the public interest is very broad. It is not necessary that a violation of securities law or policy occur before the Commission can make orders in the public interest under section 161(1) of the Act.
In Pezim v. B.C. (Superintendent of Brokers) [1994] 24 BCSC Weekly Summary 23 (S.C.C.), the Commission imposed sanctions on individuals whose conduct was not a breach of the Act. The Supreme Court of Canada refused to overturn the Commission’s order, saying, at page 86:
- 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 [now s. 85]of the Act applies to a “reporting issuer”. This argument must be rejected for two reasons. First, as Alboini points out, supra, at pp. 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 [now s. 161] 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”.
It is clearly in the public interest that the escrow regime associated with initial public offerings be enforced. Certainly the Executive Director is entitled to expect that the parties to escrow agreements will meet their respective obligations under those agreements. It goes somewhat too far, however, to suggest that an issuer is obligated to take steps to enforce the obligations of the other parties thereto without due consideration of the circumstances prevailing at the time such steps would have to be taken, including what is then in the best interests of the company.
The public interest requires that we consider the consequences to Keywest and its shareholders if Keywest were to commence legal action to force Roeder to surrender his escrow shares for cancellation, compared to the consequences of leaving the shares outstanding.
If Roeder’s escrow shares are left outstanding, they are still subject to the terms of the escrow agreement. This means that they can be voted by Roeder (subject to the restrictions in section 4(a) of the agreement), but they cannot be transferred or released from escrow without the consent of the Executive Director by virtue of sections 6 and 8 of the agreement. Further, under section 4 of the agreement, Roeder has waived the right
to receive dividends on his shares, or to share in the assets of Keywest on a winding up or dissolution of the company. In addition, the shares of Keywest are unlisted and subject to a cease trade order.
The combined effect of these circumstances is that Roeder is unable to derive any economic benefit from his shares unless he can convince the Executive Director that the shares ought to be released or transferred.
On the other hand, commencing legal action against Roeder to force him to surrender his escrow shares for cancellation will involve cost and risk to Keywest, including the risk that the litigation may not be successful. Even if it is successful, the benefits to Keywest and the remaining shareholders are not clear.
In any event, the weighing of these costs and benefits is properly the role of the directors of Keywest and not of Commission staff. The directors have come to the conclusion that the assets of Keywest can be put to better use than the pursuit of litigation against Roeder. They do not believe it to be in the best interests of Keywest and its shareholders to commence legal proceedings to enforce the escrow agreement. There was no evidence to suggest that the directors considered any inappropriate factors in making this decision. We do not find that the individual respondents breached their obligations under section 118 of the Company Act.
In these circumstances we do not find that it would be in the public interest to have the escrow regime enforced in the manner proposed by Commission staff.
5. DECISION
We do not find it in the public interest to make any orders against the Respondents.
DATED at Vancouver, British Columbia, on February 17, 1999.
FOR THE COMMISSION
| Adrienne R. Wanstall | Brent W. Aitken |
| Member | Member |
| Joan L. Brockman Member |
|
|