This article originally appeared in Business in Vancouver and is reprinted with the permission of the publisher.
Public mining companies have become even more vulnerable due to recent amendments to provincial securities acts, which have simplified the process for filing class-action lawsuits.
The ongoing global economic downturn has coincided with a significant increase in class actions filed against publicly traded companies since 2008. This has important implications for Canada and B.C.'s mining sector.
Mining companies are particularly vulnerable to becoming targets of these lawsuits because of the extent of their reporting obligations, the forward-looking information contained in their public disclosure documents, their relatively deep pockets, sensitivity to escalating project costs and the relative volatility of stock prices in the mining sector.
In fact, a number of Canadian publicly traded mining companies have recently had high-profile and potentially costly class-action lawsuits filed against them for alleged misrepresentations or omissions.
In addition to being affected by this litigious trend, public mining companies have become even more vulnerable due to recent amendments to provincial securities acts, which have simplified the process for filing class-action lawsuits.
Certain provincial securities acts in Canada, including British Columbia's in 2008, were amended to include a statutory right to file a lawsuit against publicly traded companies and certain of their insiders and related parties for misrepresentations or omissions affecting the price of such companies' securities.
Generally speaking, these amendments mean anyone who buys or sells a company's securities between
i. the time in which that company makes a misrepresentation or fails to disclose a material piece of information; and
ii. the time in which such misrepresentation or omission is publicly corrected has a right to sue for damages arising from any losses sustained as a result.
These amendments are significant because the plaintiffs filing such lawsuits do not need to establish reliance on the misrepresentation or omission to establish liability. The liability arises from the misrepresentation or omission itself.
This lower threshold means those who bought or sold securities during the period in question may team up and file a class-action lawsuit against the company and related defendants knowing they will not have to individually prove reliance at trial.
A company can help reduce the risk of becoming the target of such a lawsuit, and may improve its ability to make use of certain available defences to such claims if they arise, by:
- establishing, and regularly updating, a corporate disclosure policy providing a clear and consistent process for timely and accurate disclosure of material information;
- ensuring its officers, directors and employees are aware of, and comply with, its disclosure policy, and are informed of the potential consequences of failing to comply;
- maintaining detailed records. The target of a claim may be able to rely on the due diligence defence if it can be proven that a reasonable investigation was conducted prior to the error in question and that the target had no reasonable grounds to believe that an error was made. Keeping detailed records at all times may assist in establishing such a defence;
- relying on experts, advisers and legal counsel when preparing public disclosure documents/public statements. More specifically, ensuring technical advisers review scientific and technical disclosures made by the company; and ensuring the company receives the written consent of experts whose reports, statements or opinions are summarized or quoted in any disclosure made by the company;
- conducting regular reviews or audits of its business practices to identify potential areas of non-compliance or vulnerability;
- establishing a plan, which involves external counsel and advisers, for promptly addressing any misrepresentations or omissions the company becomes aware of; and
- reviewing its insurance policies to ensure it and other affected parties are properly insured for such lawsuits.
If a company does become the target of a suit, it must act carefully and decisively to: minimize the impact. Things it can do include
- assuming that it kept detailed records on an ongoing basis as a preventive measure, retrieving and organizing these for potential future use as a due diligence defence to the claim in question;
- engaging external counsel to assess the merits of the claim and to develop a litigation strategy; and
- notifying the company's insurers of the claim.
While recent economic conditions and statutory changes could make mining companies vulnerable to class-action lawsuits, taking preventative steps and acting carefully and decisively if they are targeted may reduce the potential damage to their financial positions and reputations.
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.