Settlement Agreement: In the Matter of Primenet Communications Inc.
R.S.O. 1990, c. S.5, AS AMENDED
AND
IN THE MATTER OF
PRIMENET COMMUNICATIONS INC., RAYMOND J.HOMER,
ROBERT F. BLEASBY AND JAMES LAKS
SETTLEMENT AGREEMENT
I INTRODUCTION
1. By Notice of Hearing dated November 28, 1997, (the "Notice of Hearing"), the Ontario Securities Commission (the "Commission") announced that itproposed to hold a hearing to consider whether, in the opinion of the Commission, it is in the public interest for the Commission to make an Order:
a) pursuant to clause 1 of section 127 of the Securities Act, R.S.O. 1990, c. S.5, (the "Act") that trading in any securities of PrimeNet Communications Inc.("PrimeNet") cease permanently or for such other period as is specified in the Order;
b) pursuant to clause 3 of section 127(1) of the Act, that any of the exemptions contained under Ontario securities law do not apply to Raymond Homer("Homer"), Robert Bleasby ("Bleasby") and/or James Laks ("Laks") permanently or for such period of time as is specified in the Order;
c) pursuant to clause 6 of section 127(l) of the Act that PrimeNet be reprimanded; and
d) such further and other Order as the Commission considers appropriate.
II SETTLEMENT AGREEMENT
2. Staff of the Commission ("Staff") and each of PrimeNet, Homer, Bleasby and Laks (the "Respondents") agree to recommend settlement of the proceedingsagainst the Respondents commenced by the Notice of Hearing in accordance with the facts, terms and conditions set out hereinafter (the "SettlementAgreement").
III STATEMENT OF FACTS
3. Staff and the Respondents agree that only if, as and when the settlement is approved by the Commission may this settlement be released to the public.
The Respondents
4. PrimeNet has been a reporting issuer under the Act since August 30, 1983.
5. David Austin ("Austin") was the President, Chief Executive Officer, and a director of PrimeNet until October 15, 1996. Austin became the Vice-President,Special Projects for PrimeNet on January 6, 1997. Austin was also the President and a director of Linstok Capital Corp. ("Linstok"). Austin died on July 12,1997.
6. Homer has been the President and Chief Executive Officer of PrimeNet since October 15, 1996 and is and has been a director of PrimeNet since August 14,1995. Homer has been the Chief Financial Officer of PrimeNet since August 14, 1995.
7. Bleasby was a director of PrimeNet from August 14, 1995 until July 29, 1997.
8. Laks is and has been a director of PrimeNet since June 10, 1994.
9. Linstok is a company which had a consulting agreement with PrimeNet to provide the services of Austin to PrimeNet. Austin was at all material times thepresident and a director of Linstok.
Special Warrant Financing Transaction
10. In or about April, 1996, PrimeNet contacted Yorkton Securities Inc. ("Yorkton") to raise approximately $2 million through a special warrant financingtransaction (the "Special Warrant Financing"). Yorkton agreed to underwrite the Special Warrant Financing and advised PrimeNet that it would be possible toraise $6 million as opposed to $2 million.
11. After negotiations, it was agreed that the Special Warrant Financing would proceed in such a manner as would provide PrimeNet with 40% of monies raisedpayable on closing (or $2.4 million of the $6 million to be raised) and the balance payable upon a satellite transponder being reserved by January 31, 1997.
12. Yorkton identified certain issues which it wanted to be addressed if it was to proceed with the Special Warrant Financing. These issues included: (a) the largenumber of PrimeNet shares which were owned by Austin but not escrowed; (b) several marketing and consulting agreements that Austin, through Linstok, hadwith PrimeNet, and (c) Austin's annual salary of $250,000 which Yorkton deemed as too high for a start-up company.
13. At a meeting between Yorkton and PrimeNet on June 17, 1996, Austin, on behalf of himself and PrimeNet agreed to address Yorkton's concerns by: (a)placing Austin's shares in escrow for three years; (b) cancelling Linstok's marketing agreement dated August 1, 1995 with PrimeNet by the closing date of July11, 1996: and (c) cancelling Linstok's consulting agreement dated August 1, 1995 with PrimeNet and replacing it with a new consulting agreement (therebyreducing Austin's annual salary from $250,000 to $175,000). Linstok's consulting agreement with PrimeNet dated August 1, 1995 provided that Austin'sconsulting fees would be increased to $300,000 annually if PrimeNet successfully concluded a financing. The annual discretionary bonus contained in the Linstokconsulting agreement dated August 1, 1995 provided that a further bonus of fifteen percent (15%) of all funds raised, loaned or advanced to PrimeNet be paid toAustin. The Linstok consulting agreement dated July 11, 1996 provided for a discretionary bonus payment to Austin no less than once per year.
14. Austin was the driving force behind PrimeNet. On or about June 20, 1996, Laks, Homer and Bleasby, as PrimeNet's board of directors, approved a one timepayment of $450,000 to Linstok as an inducement to maintain the ongoing guidance, goodwill and support of Mr. Austin.
15. The Respondent's have advised Staff that they did not specifically address the issue of whether the $450,000 payment was material. Rather, exercising theirbusiness judgment, they believed that the payment was appropriate consideration for the release of PrimeNet of its obligations under the marketing andconsulting agreements. In light of the anticipated financial position of PrimeNet after the offering and the changes to the arrangements with Linstok referred to inparagraph 13, it did not strike the Respondents that the $450,000 payment was a material change in the affairs of PrimeNet which required the issuance of a newsrelease and material change report.
16. Both the original Linstok consulting agreement and the replacement Linstok consulting agreement contemplated payment of an annual discretionary bonus.The Respondents have advised Staff that it was in the best interests of PrimeNet to allocate all of the year's bonuses to Austin through Linstok.
17. On or about June 20, 1996, PrimeNet filed a material change report with the Commission dealing with an unrelated matter. The material change report didnot disclose the $450,000 payment to Linstok for the reasons given above.
18. On July 4, 1996, PrimeNet issued a news release (the "July 4 News Release") announcing that PrimeNet intended to issue 4,038,000 special warrants at aprice of $1.50 per special warrant for aggregate gross proceeds of $6,057,000. The July 4 News Release indicated that Yorkton would be acting as PrimeNet'sagent in connection with the Special Warrant Financing. The July 4 News Release also indicated that 40% of the aggregate proceeds of the offering, net ofcommissions and offering expenses, would be released to PrimeNet on closing and the remaining proceeds would be held in escrow and released upon a satellitetransponder being reserved by January 31, 1997.
19. The closing of the Special Warrant Financing occurred on July 11, 1996. At closing, termination agreements for the marketing and consulting agreementswere provided. The termination agreements released Austin, Linstok, PrimeNet and their officers and directors from any and all obligations relating to themarketing and consulting agreements.
20. On or about July 15. 1996, Austin delivered his share certificates to the escrow agent as requested by Yorkton in connection with the Special WarrantFinancing.
21. On or about July 17, 1996, PrimeNet disbursed the $450,000 payment to Linstok.
22. On or about July 18, 1996, PrimeNet issued a news release (the "July 18 News Release"), announcing the completion of the issue of special warrants at $1.50per special warrant. The July 18 News Release also stated that PrimeNet received $2,422,800 on closing with the remaining proceeds being held in escrow untilPrimeNet satisfied certain conditions of the offering. The July 18 News Release did not disclose the $450,000 payment to Linstok.
23. On or about September 6, 1996, PrimeNet filed its preliminary prospectus (the "Preliminary Prospectus") with the Commission to qualify the distribution of4,038,000 common shares pursuant to the special warrants issued July 11, 1996. PrimeNet announced the filing of the Preliminary Prospectus in a news releasedated September 13, 1996. The Preliminary Prospectus did not disclose the $450,000 payment to Linstok.
24. On or about September 19, 1996, PrimeNet filed its interim financial statements for the three month period ended June 30, 1996 with the Commission. Theseinterim financial statements did not to disclose the liability to make the $450,000 payment to Linstok.
25. On or about October 3, 1996, during the review to update PrimeNet's interim financial statements, PrimeNet's auditors noted the $450,000 payment toLinstok and advised PrimeNet that the liability for this payment should have been accrued in the financial statements for the period ended June 30, 1996.
26. Laks, Bleasby and Homer have advised Staff that the auditors' comments caused them to question for the first time whether disclosure of the $450,000payment was required.
27. On or about October 4, 1996, PrimeNet informed Yorkton of the $450,000 payment to Linstok.
28. For the reasons given in paragraphs 14, 15 and 16, Laks, Bleasby and Homer did not believe that the payment was material. However, they believed that itwas appropriate to have the matter reviewed by director Larry Steinman ("Steinman") as an independent member of the board. Steinman had not been a directorof PrimeNet at the time the resolution authorizing the $450,000 payment had been made. On October 9, 1996, PrimeNet authorized Steinman to retainindependent counsel to assist him in his review of this matter.
29. On or about October 16, 1996, on the advice of counsel a confidential material change report was filed by PrimeNet addressed to the office of the GeneralCounsel for the Commission. The confidential material change report disclosed the $450,000 payment to Linstok. The confidential material change report statedthat the $450,000 payment had not been disclosed in: (1) PrimeNet's offering memorandum dated July 2, 1996; (2) PrimeNet's preliminary prospectus datedSeptember 6, 1996; or (3) in the materials mailed to shareholders in connection with the annual and special meeting of shareholders to be held on October 30,1996. The confidential material change report stated that PrimeNet believed that premature disclosure of the material changes could prejudice PrimeNet's abilityto give the special warrant holders comfort with respect to the non-disclosure of the $450,000 payment to Linstok.
30. On or about October 18, 1996, PrimeNet was advised by Staff that the confidential material change report could not be kept confidential.
31. On or about October 18, 1996, Staff contacted the Canadian Dealing Network ("CDN") and CDN temporarily halted trading of the common shares ofPrimeNet.
32. On or about October 23, 1996, PrimeNet withdrew the Preliminary Prospectus. Following the recommendation of Steinman, PrimeNet issued a news release(the "October 23 News Release") announcing the $450,000 payment to Linstok and several developments relating to the Special Warrant Financing. The October23, 1996 News Release stated that: (1) the special warrant holders had the right to obtain a refund of their escrowed monies as PrimeNet had not given noticethat adequate satellite transponder space had been secured for PrimeNet; (2) on July 18, 1996, PrimeNet made a payment of $450,000 to Linstok; (3) "no otherofficer or director of the Company will be receiving any incentive compensation, bonuses or options until 12 months after the successful launch of the Company'sfirst network although the officers of PrimeNet and Linstok, under its new consulting agreement, will continue to receive base compensation payments"; (4)Yorkton's position is that the $450,000 payment to Linstok should not have been made since Linstok signed a termination of the original consulting andmarketing agreements and all related obligations at the closing of the special warrant offering on July 11, 1996; (5) Yorkton has, among other things, demandedthat Linstok repay PrimeNet in full, that Austin and Laks resign as officers and directors of PrimeNet, that Austin surrender sufficient shares of PrimeNet to thecompany for cancellation to reduce his holdings to a minority interest and that two nominees acceptable to Yorkton be appointed to the board of directors ofPrimeNet; (6) Larry Steinman was appointed as an independent committee of the board given that Mr. Steinman was not on the board of PrimeNet on June 20,1996 when the $450,000 payment to Linstok was authorized; (7) independent counsel concluded that the $450,000 payment to Linstok should have beendisclosed in the offering memorandum and the preliminary prospectus; and (8) independent counsel recommended that the special warrant purchasers shouldreceive a notice from PrimeNet setting out fully the financial arrangements between PrimeNet and Linstok, that PrimeNet issue a news release disclosing thepayment and that PrimeNet's prospectus be amended to include details of the payment.
33. After consulting with Yorkton and legal counsel, on or about October 28, 1996, PrimeNet's board of directors passed a resolution that the $450,000 paymentto Linstok be treated as an advance to be repaid by 300,000 PrimeNet shares held by Linstok (valued at the offering price of $1.50 per share).
34. On or about October 31, 1996, PrimeNet issued a news release (the "October 31 News Release") stating that PrimeNet had received notice from all of thespecial warrant purchasers purporting to exercise their rights of rescission in respect of the purchase of the special warrants and the return of their purchaseproceeds. After consultation with counsel, the October 31 News Release stated that it was PrimeNet's position that no rights of rescission exist.
35. On or about January 23, 1997, PrimeNet filed a material change report with the Commission which stated that PrimeNet had repurchased 60% of the issuedspecial warrants from the purchasers because PrimeNet had not secured satellite transponder space by January 31, 1997.
36. The Respondents cooperated with Staff's investigation.
CONDUCT CONTRARY TO THE PUBLIC INTEREST
37. For the purpose of this proceeding, the Respondents have acknowledged that in the circumstances and with the benefit of subsequent legal advice, the$450,000 payment to Linstok was a material change in the affairs of PrimeNet that ought to have been disclosed in a news release and a material change reportand that, in such circumstances, the Respondents' actions were contrary to subsections 75(1) and (2) of the Act and contrary to the public interest.
38. For the purpose of this proceeding, the Respondents have acknowledged that in the circumstances and with the benefit of subsequent legal advice (1) theoffering memorandum dated July 2, 1996; (2) PrimeNet's quarterly financial statements for the period ending June 30, 1996; (3) the Preliminary Prospectus datedSeptember 6, 1996 and filed with the Commission; and (4) the materials sent to shareholders in connection with the annual and special meeting of shareholders tobe held on October 30, 1996 ought to have disclosed the $450,000 payment to Linstok.
IV TERMS OF SETTLEMENT
39. The Respondents agree to the following terms of settlement:
(i) Bleasby, Homer and Laks agree not to serve as a director or officer of a reporting issuer for a period of eighteen months from the date that the Commissionapproves this Settlement Agreement;
(ii) PrimeNet will receive a reprimand from the Commission;
(iii) PrimeNet will provide its shareholders and special warrant holders with an accounting of monies received by PrimeNet from the Special Warrant Financing;
(iv) Homer, Laks and Bleasby will complete the Ivey Directors program offered by the University of Western Ontario by May 4, 1999 or such other directors'educational course approved by the Director of Enforcement of the Ontario Securities Commission, failing which Homer, Laks and Bleasby shall be precluded asof May 5, 1999 from acting as a director of any public company, including PrimeNet, until the course is completed; and
(v) The Respondents will collectively contribute the sum of $20,000 towards the costs of Staff's investigation.
V CONSENT
40. The Respondents hereby consent to an order of the Commission incorporating the provisions of Part IV above in the form annexed hereto as Schedule "A".
VI STAFF COMMITMENT
41. If this Settlement Agreement is approved by the Commission, Staff will not initiate any further proceedings to the Commission or request the Commission tohold a hearing or issue an order or make an application to the Court or commence proceedings under section 122 of the Act in respect of any conduct or allegedconduct of the Respondents in relation to the facts set out in Part III of this Settlement Agreement in respect of which the Notice of Hearing was issued againstthe Respondents other than as set out herein.
VII PROCEDURE FOR APPROVAL OF SETTLEMENT
42. The approval of this Settlement Agreement shall be sought at a public hearing of the Commission scheduled for December 3, 1997.
43. Staff and the Respondents agree that if the Settlement Agreement is approved by the Commission, it will constitute the entirety of the evidence to besubmitted with respect to the Respondents in this matter and the Respondents agree to waive their rights to a full hearing and appeal of the matter under the Act.This will also conclude Staff's investigation respecting matters of which it is currently aware regarding the Respondents.
44. Staff and the Respondents agree that if the Settlement Agreement is approved by the Commission, neither Staff nor any of the Respondents will make anyfurther statements that are inconsistent with the Settlement Agreement.
45. If, for any reason whatsoever, the Settlement Agreement is not approved by the Commission:
(a) the Respondents and Staff will be entitled to proceed to a hearing for the allegations in the Notice of Hearing, unaffected by this Settlement Agreement or thesettlement negotiations;
(b) the terms of this Settlement Agreement will not be raised in any other proceeding or disclosed to any person except with the written consent of theRespondents and the Staff or as may be otherwise required by law; and
(c) the Respondents further agree that they will not raise in any proceeding this Settlement Agreement or the negotiation or process of approval thereof as a basisfor any attach on the Commission's jurisdiction, alleged bias, alleged unfairness or any other challenge that may otherwise be available, so long as the members ofthe Commission who participate in the making of any decision with respect to the Settlement Agreement do not participate as members of the Commission in thesubsequent proceeding.
VIII DISCLOSURE OF SETTLEMENT AGREEMENT
46. The terms of this Settlement Agreement will be treated as confidential by all parties hereto until approved by the Commission, and forever if, for any reasonwhatsoever, the Settlement Agreement is not approved by the Commission.
47. Any obligation as to confidentiality of the Settlement Agreement shall terminate upon the approval of the Settlement Agreement by the Commission.
IX EXECUTION OF SETTLEMENT AGREEMENT
48. This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement and a facsimile copy of anysignature shall be as effective as an original signature.
November 28th, 1997.
SIGNED IN THE PRESENCE OF:
"Primenet Communications Inc."
"Raymond J. Homer"
"Robert F. Bleasby"
"James Laks"
"Larry Waite"