COR #93/075

	Heard:	March 26, 1992 and March 27, 1992
		Released:  May 13, 1993

Mary Beck for Commission Staff;

James Morris Durward on his own behalf;

Sean Francis Kehoe on his own behalf.

These proceedings were commenced by notice of hearing issued by the Superintendent of Brokers on February 4, 1992.

The notice stated that the Commission would be asked to consider whether it is in the public interest to make orders under sections 144(1)(c) and (d), 144.1 and 154.2 of the Securities Act S.B.C. 1985, c. 83, against Sean Francis Kehoe and James Morris Durward, based on the allegation that they were responsible for preparing and filing a take over bid circular which did not comply with the Act.

BACKGROUND

Durward is a resident of British Columbia and was a registered representative under the Act in 1981.  In 1983, he was a director of two companies whose shares traded on the Vancouver Stock Exchange.  For the last five years, he has been a self - employed consultant involved in trading in securities and real estate development.

In 1989, Durward's statutory trading exemptions were withdrawn for one year by the Commission based on the finding that he was a director of a company which contravened the cold calling provisions in the Act.  See:  In the Matter of Morgan-Taylor International Inc., Paul Groat and James Durward (1989) 89 B.C.S.C.Weekly Summary 107.

Kehoe is a resident of Ontario.  Following a professional football career, he was registered, from June 1989 to November 1990, under the Ontario Securities Act as the principal of Beringer Properties Inc.  Beringer Properties was registered under the Ontario Securities Act as a limited market dealer which permitted it to act as a market intermediary solely for the purpose of trading in respect of which registration was not required under the Ontario Act.

In 1990, Durward and Kehoe, through Beringer Acquisitions Ltd. ("Beringer"), were working together to acquire public companies which were undervalued.

By September, 1990, Durward had targeted Trian Equities Ltd. for a take over bid by Beringer.  According to Durward, Trian was just the kind of company Beringer was seeking to acquire. It was a holding company with approximately 7.8 million issued and outstanding shares, the market trading price of which did not accurately reflect their underlying value.  In particular, Durward pointed to the fact that Trian owned, among other investments, over 800,000 shares of Quadralogic Technologies Inc., which were trading at approximately $14 a share.  Trian by comparison was trading at approximately $0.60 to $0.65 a share on the Vancouver Stock Exchange.

Beringer, an Ontario company, was a wholly owned subsidiary of Beringer Properties and had no operating history, no assets and no liabilities.  Kehoe was President and sole director of record.  Durward was a de facto director of Beringer.  In September, 1990, it was Durward who was primarily managing the business and affairs of Beringer. He structured Beringer's take over bid for Trian and prepared the take over bid circular. Kehoe arranged for Durward to receive an option to acquire 50% of Beringer if the take over bid was successful.

On September 10, 1990, Beringer made a take over bid to acquire all the voting shares of Trian.  The take over bid circular was filed under the Act and delivered to Trian shareholders.

The sole purpose of the take over bid was to acquire voting control of Trian and to cause the liquidation and distribution of its assets, which included its investments, to the shareholders of Beringer.

Under the take over bid, Beringer proposed to issue for each Trian share deposited and accepted, a .25 common B Beringer share and a debenture in the amount of $1.05, having a 30 day term, an annual interest rate of 20% and secured against the assets held by a depository.  Beringer securities were not going to be listed on a stock exchange.  Beringer Properties was the designated depository for the take over bid, the promoter, the registrar and transfer agent, and the soliciting dealer.

In response to the take over bid circular, the directors of Trian issued a news release dated September 13, 1990.  They noted numerous issues which posed a danger to shareholders and which could be in contravention of applicable securities laws. They urged all shareholders to refrain from responding to the take over bid until their review and that of the British Columbia Securities Commission was complete.

On September 25, 1990, the directors of Trian filed a directors' circular under the Act and delivered it to Trian shareholders.  It particularized how the take over bid circular was in error and misleading and contained the directors' recommendation that the shareholders reject the take over bid.

Trian applied to the Ontario and British Columbia Securities Commissions for orders to prohibit further dissemination of the take over bid circular and to stop the take over bid from proceeding.

On September 28, 1990, the Superintendent of Brokers ordered, among other things, that the take over bid be ceased traded.

On October 1, 1990, Beringer withdrew the take over bid.

Commission staff produced a litany of deficiencies in the take over bid circular, similar to, but more extensive than, those in the directors' circular.  It is necessary only to mention a few of the more significant deficiencies here.

The take over bid circular did not adequately disclose the risk factors relating to liquidity of the Beringer securities, management's experience, background and compensation, the likelihood of default under the debenture and the difficulties associated with realizing on the security.

The take over bid circular did not disclose the non arms length relationship between Beringer and Beringer Properties and the compensation Beringer Properties was to receive for its role in the take over bid.  Further there was no disclosure of Durward's role as a director of Beringer or that Kehoe and Durward were promoters of Beringer.

Included in the take over bid circular was an auditor's report purportedly signed by the auditor, but which in fact had not been signed by the auditor.  Durward and Kehoe admitted that the auditor's report included in the take over bid circular was not the one eventually prepared and signed by the auditor, but only a draft they had prepared.  The written consent of the auditor to the use of his report in the take over bid circular was not filed concurrently with the filing of the circular as required under section 162(2) of the Securities Regulation, B.C. Reg. 270/86.

A trading history for Trian on the Vancouver Stock Exchange for the period August l, 1990, to November 30, 1990, showed that the shares were thinly traded with the trading price gradually decreasing over the period from approximately $0.70 to $0.55 a share.  There appeared to be no affect on the market as a result of the take over bid.  During the period from the date of the take over bid to the date it was cease traded, only 115,000 shares of Trian traded on five of the fifteen trading days.

DECISION AND REASONS

Part II of the Act provides for a comprehensive code of conduct for all parties involved in a take over bid.  The purpose of the take over legislation is to ensure the protection of the bona fide interests of the shareholders of target companies.  One of the ways this purpose is achieved is by establishing regulatory requirements so that shareholders of a target company receive any information which would reasonably be expected to affect their decision to accept or reject the take over bid.

The regulatory requirements for a take over bid circular are specific.  Section 90(7) of the Act requires that the circular be prepared in the required form.  Form 32 "Take Over Bid Circular" is the required form and itemizes the information that must be disclosed in the circular.

As Beringer's take over bid involved an exchange of securities, Item 15 of Form 32 required disclosure relating to the securities proposed to be issued according to Form 12 "Information Required in Prospectus of Industrial Issuer". These requirements are to ensure that Trian shareholders would receive full, true and plain disclosure of all material facts relating to the securities of Beringer proposed to be issued.

In our view, the deficiencies in the take over bid circular were significant and, as a consequence, the disclosure in the take over bid circular fell far short of meeting the regulatory requirements in section 90(7) of the Act and Forms 32 and 12.

Trian shareholders were alerted to refrain from responding to the take over bid by the directors' news release and many of the deficiencies were brought to the attention of Trian shareholders by the directors' circular.  Notwithstanding the news release and directors' circular, there was trading in Trian's shares.  Consequently, investors could have been prejudiced.

Beringer's failure to meet the regulatory requirements for disclosure resulted in the take over bid being cease traded and withdrawn.  It is not in the public interest for a take over bid to be made and then cease traded.  In our view, this erodes investor confidence in the integrity of our capital markets.

It is the responsibility of the management of a company to ensure that the company's take over bid complies with the regulatory requirements.  We find that Durward and Kehoe as directors of Beringer were responsible for Beringer's failure to comply with section 90(7) of the Act and Forms 32 and 12.

While Commission staff agreed that neither Durward nor Kehoe in preparing the take over bid circular intended to make any misrepresentations, they argued that because the deficiencies were so significant, orders withdrawing Kehoe and Durward's trading exemptions and prohibiting them from being officers or directors of reporting issuers are necessary to protect the public interest.

Kehoe and Durward argued that such orders are not necessary and not in the public interest as there was no intent on their part to mislead when they prepared the take over bid circular, and they immediately sought to make the appropriate amendments to the circular when the deficiencies were brought to their attention.

We accept that Durward and Kehoe in preparing the take over bid circular had no intention to mislead.

However, Durward had been a registrant under the Act and was a past director of reporting issuers under the Act whose shares were listed on the Vancouver Stock Exchange.  Kehoe was a registrant in Ontario.  Both became directors of a reporting issuer under the Act when Beringer filed the take over bid circular.  Consequently, Durward and Kehoe ought to have known that take over bids are regulated under the Act and ought to have ensured that the take over bid circular complied with the Act.  In addition, in the past Durward has failed to meet regulatory requirements.

We are of the view that the circumstances of this case warrant the following orders in the public interest.

We order:

1.		under section 144(1)(c) of the Act that the exemptions described in sections 30 to 32, 55, 58, 80 or 81 do not apply to Durward for a period of 30 days commencing from the date of this order; and
2.		under section 144.1 of the Act that Durward and Kehoe each pay forthwith an administrative penalty of $5000.

J.C. MAYKUT, Q.C.
H.D. BROWNE
D. DEVINE