Water Cannot Be Turned Into Wine: Cormark And The Legality Of Triangular Hedging Transactions

The Ontario Capital Markets Tribunal's (the Tribunal's) much-anticipated decision in Cormark Securities Inc. (Re)[PDF] provides important guidance to market participants that enter hedging transactions in connection with private placements. The Tribunal definitively confirmed that certain "swap" transactions — such as where the private placement investor borrows freely tradeable shares to sell short while pledging to the lender as collateral the restricted shares subscribed for by the investor — are legal under Ontario securities law. The decision also addresses and provides some clarification regarding what constitutes a "distribution" of securities and who is an "underwriter". In addition, it highlights some important differences between Canadian and U.S. law on these issues.