Canada: Civil Liability For Secondary Market Disclosure Is Not Limited To Issuers Whose Securities Trade In Canada

Last Updated: August 30 2012
Article by Leslie Gord

Canadian Solar Inc. ("CSI") is a company governed by the Canada Business Corporations Act with its registered office in Toronto and its principal executive office in Kitchener.  Its shares are traded on NASDAQ. They do not trade on the Toronto Stock Exchange or any other Canadian stock exchange.

CSI is the defendant in an as yet uncertified Ontario class action styled Abdula v. Canadian Solar Inc. et. al., which alleges that CSI materially overstated its financial results in press releases, financial statements and an annual report and in the course of investor conference calls.  A preliminary question is whether CSI is a "responsible issuer" which is the threshold issue for establishing civil liability for secondary market disclosure.

Section 138.3 of the Securities Act (Ontario) (the "OSA") defines "responsible issuer" as "(a) a reporting issuer, or (b) any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded".  CSI is not a reporting issuer and, therefore, could not be caught under paragraph (a) of the definition. With respect to paragraph (b), CSA is an "issuer" as defined in the OSA and the court found that it had a "real and substantial connection to Ontario".  In addition to its jurisdiction of incorporation and location of its registered and principal executive offices, CSI held its annual meeting in Ontario, made the alleged misrepresentations in Ontario, issued securities through private placements to Ontario investors and filed private placement forms with the Ontario Securities Commission ("OSC").  In addition, the plaintiff allegedly purchased his shares through an online discount broker from his home in Markham and was one of 1,253 shareholders of CSI in Ontario.

As a result, the only issue was whether there was an implied limit on the definition of "responsible issuer" that the issuer's securities must be traded in Canada.  The court held that "when the words 'publicly traded' in para. (b) of the definition of 'responsible issuer' are read in their entire context and in their grammatical and ordinary sense, harmoniously with the scheme of the OSA, the object of the OSA and the intention of the legislature, gleaned from the legislative history and the words chosen by the legislature, they do not mean 'publicly traded in Canada'."

The court stated that it reached its conclusion for four reasons.  First, the implied restriction was not required by the one case argued by the defendants which involved whether the Insurance Act (Ontario) applied to a British Columbia insurance company in respect of a motor vehicle accident that occurred in British Columbia.  The British Columbia insurance company was not licensed to sell insurance in Ontario and had not, in fact, done so.  Here, an Ontario plaintiff was seeking to have Ontario law apply to an Ontario defendant carrying on business in Ontario.

Second, the legislative history did not establish that the legislature intended the limitation argued by the defendants.  The court examined the legislative history starting with the Allen Committee Report in the early 1990s, proceeding through amendments to the OSA proposed in 1998 and 2000, Bill 198 in October 2002, the draft Uniform Securities Act in December 2003, and ending with Bill 149 which was introduced in November 2004 and came into force on December 31, 2005.  According to the court, the evolution of the legislative history reflected a conscious decision by the legislature not to impose a restriction as to where the securities were publicly traded.  This approach was emulated in the corresponding legislation enacted in all of the other provinces and territories (with the sole exception of Yukon which specifies that the securities must be "publicly traded in Yukon").

Third, the preferred approach to statutory interpretation requires that the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.  On its face, the wording of paragraph (b) of the definition of "responsible issuer" did not support a restrictive interpretation of "publicly traded".  If the legislature had intended this prong of the definition to be confined to issuers that are reporting issuers in Canadian jurisdictions other than Ontario or any of whose securities are listed on Canadian stock exchanges, it would have been a simple task to adopt language which clearly expressed that intent.

This approach was also supported by related provisions of the OSA, namely, the definitions of "document" in section 138.1 and "principal market" in section 250 of the regulations.  A "document" includes any written communication that is not required to be filed with the OSC and "that is filed or required to be filed with a government or an agency of a government under applicable securities or corporate law".  The definition did not, as it easily might have, limit the definition to documents filed with a government of a Canadian province or territory.

The definition of "principal market" contemplated that a responsible issuer's securities may not be traded on a Canadian market, at least during certain periods.

Finally, a stated objective of the OSA is to provide protection to investors from unfair, improper or fraudulent practices.  The plaintiff, an Ontario investor, alleged that he suffered damage as a result of a misrepresentation in documents released or presented in Ontario by a corporation based in Ontario.  The objectives of both the OSA as a whole and Part XXIII.1 (the Part dealing with civil liability for secondary market disclosure) specifically do not support restricting the application of civil liability for secondary market disclosure to those issuers with continuous disclosure obligations in Canada.

Fourth, the cases argued by the defendants which involved prospectus misrepresentations were not applicable to the statutory cause of action for misrepresentations in secondary market disclosure.  This is because the former was restricted to issuers whereas the latter was based on a much broader concept of a responsible issuer being any issuer with a real and substantial connection to Ontario.

The ongoing requirements of Canadian securities laws are concerned primarily with reporting issuers. However, it is worth remembering that in some contexts they embrace a broader universe of issuers. This is particularly the case with civil liability for secondary market disclosure where the concept of responsible issuer includes issuers which have no Canadian market presence but may still be caught if they have a real and substantial connection to a Canadian jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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