Epiq Systems, Inc.
Civil Litigation, Securities

Ontario law applies, regardless of business culture: OSC

Regardless of any business cultural differences that exist in other global markets in which an issuer operates, a recent Ontario Securities Commission (OSC) decision confirms that Ontario securities law is paramount for reporting issuers in the province, Toronto civil litigators Janice Wright and Greg Temelini write in The Lawyer’s Daily.

As Wright and Temelini, partners with Wright Temelini LLP, explain in the article, the decision concerned a TSX-listed company, operating in the People’s Republic of China. In March 2011, its shares were trading at $25.30 on the exchange and it had a market capitalization of $6 billion. Later that year, an analyst holding a short position in the company issued a report alleging that it was a Ponzi scheme. The value of the company’s shares plummeted and OSC staff began an investigation

The OSC’s hearing lasted 188 days from 2014 to 2016, and the company and five members of its senior management were accused of a number of breaches of the Securities Act, note Wright and Temelini. The company and the senior management respondents were each found to have engaged in deceitful or dishonest conduct that they knew constituted a fraud.

A significant amount of evidence in the case concerned the nature of doing business in China, Wright and Temelini say, and the OSC’s decision explored Chinese regulations concerning dealing with foreign currency, holding bank accounts and maintaining property rights in great detail.

“The respondents also put forward extensive expert evidence regarding a concept called ‘guanxi’ in the Chinese cultural and business context. Guanxi is described in the decision as a level of co-operation that is essential to personal and business relationships. Guanxi involves drawing on connections to secure favours and reciprocal obligations based on intricate and pervasive relational networks. It is distinct from the Western notion of networking,” Wright and Temelini write.

The concept of guanxi was an important element of the respondents’ defence, they say, as the respondents argued that it explained the close connections that the company had with suppliers and customers. However, OSC staff alleged and the panel agreed that the company actually controlled a number of their suppliers and customers.

“The level of control and inadequate disclosure about the nature of the relationships with suppliers and customers called into question whether transactions were carried out at arm’s length or were recorded at fair value,” Wright and Temelini write in the article.

Although Wright and Temelini say the OSC recognized that there are cultural differences that global companies encounter in conducting business abroad, it concluded that the firm had to abide by Ontario law, given that it was listed on the TSX and was an Ontario reporting issuer that raised US$3 billion in capital through debt and equity instruments.

“In a key passage, the OSC held, ‘Ontario securities law is paramount and overrides any explanations for illegal conduct being excusable in the name of guanxi, however it is defined,’” they write.

“In theory, it is difficult to argue that differences in business culture can ever justify breaching Ontario securities law. However, in practice, and given the global reach of businesses, there will no doubt be other cases in which the impact of the business culture in other countries is relevant to the question of whether a breach of the Securities Act has occurred,” say Wright and Temelini.

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