The Ontario government has proclaimed amendments to the Ontario Securities Act to create new causes of action for disgruntled investors in the secondary market with respect to misleading, insufficient or late corporate disclosure in Ontario. The amendments will become effective on December 31, 2005. As there is currently no statutory civil liability for deficient secondary market disclosure, these amendments represent a fundamental change to the existing law in Ontario, and could expose issuers and others to increased litigation, including class proceedings. In some instances, the new provisions embody stricter standards than are currently imposed under U.S. law.
Since it is possible that the amendments will apply to corporate disclosure filed prior to the effective date, issuers are already beginning to prepare their disclosure documents on the expectation that they will be subject to the civil liability contemplated by the amendments.
What do the new amendments do?
- Investors who purchase securities in the secondary market will be able to sue “responsible issuers”, directors, and certain officers, experts and influential persons (such as promoters, controlling persons and certain other insiders) for:
- a misrepresentation in a document such as an AIF, MD&A, or press release;
- a misrepresentation in a speech, conference call or other public oral statement;
- a failure to make timely disclosure of material changes.
- A “responsible issuer” means a reporting issuer in Ontario or an issuer whose securities are publicly traded outside Ontario if the issuer has a substantial connection to Ontario.
- Unlike at common law, an investor will not have to prove that the investor acquired or disposed of securities in reliance on the particular misrepresentation or failure to make timely disclosure in order to establish liability. Furthermore:
- for a “core” document, such as an AIF, MD&A or financial statement, once an investor proves that a misrepresentation has been made, the defendant will have to establish certain statutory defences in order to avoid liability;
- for “non-core” documents, public oral statements, and failures to make timely disclosure, an investor generally has the higher burden (with certain exceptions) of proving knowledge, willful blindness or gross misconduct by the defendant before the defendant will have to establish its defence.
- The amendments provide two key defences, among others:
- a due diligence defence if, after a reasonable investigation, the defendant had no reasonable grounds to believe that a misrepresentation had been made or that there had been a failure to make timely disclosure; and
- a “safe harbour” for forward-looking information.
The essential element of the due diligence defence is a “reasonable investigation.” In determining whether the defendant’s investigation was reasonable, the amendments require the court to consider “all relevant circumstances” including a list of specified factors. One such specified factor is “the existence, if any, and the nature of any system designed to ensure that the issuer meets its continuous disclosure obligations”. We believe that a well documented and effectively administered corporate disclosure policy will be very important in establishing a due diligence defence.
- Many issuers are accustomed to taking steps to avail themselves of the safe harbour for forward looking information under U.S. securities law; however, issuers will likely be required to take additional steps in order to take advantage of the safe harbour in Ontario.
- The amendments also set out a prescribed formula for calculating damages in the event of a misrepresentation or failure to make timely disclosure. Again, the burden is on the defendant to prove that any subsequent change in the market price of an issuer’s securities was not caused by the misrepresentation or failure to make timely disclosure.
What can issuers do to prepare?
Issuers are already getting ready for the new regime by taking steps such as:
- Developing a formal corporate disclosure policy with respect to the review and release of oral and written company information, if no such policy is in place;
- Assessing existing disclosure policies and other disclosure controls or procedures in light of the new potential for civil liability and the need to lay groundwork for the defences;
- Considering the need to establish a formal disclosure committee that includes senior officers with responsibility for overseeing public corporate disclosure, if none is in place, or reviewing the mandate of any existing committee;
- Reviewing and revising practices for the treatment of forward-looking information in existing corporate disclosure, both oral and written, in light of the new “safe harbour”;
- Preparing forward-looking corporate disclosure in a manner which will ensure that it satisfies (and is sensitive to the differences in) the requirements of the “safe harbour” in both Ontario and the U.S.;
- Reviewing corporate practices regarding document production, record keeping and record retention;
- Evaluating the implications of the new regime for directors’ and officers’ insurance coverage and indemnification arrangements.
Can we help?
What is a “reasonable investigation”? What are the essential elements of an effective disclosure policy? What other internal disclosure controls and procedures will assist in avoiding liability and establishing the defences? How should forward-looking information and cautionary language be positioned relative to each other and what should the cautionary language say? What disclosure should be made regarding material factors or assumptions? How can a defendant establish a “reasonable basis” for a forecast or projection? What documentation practices should issuers adopt in order to benefit from the due diligence defence?
Authors credit: Jean Fraser is a senior partner in Osler’s Business Law Department and a former managing partner of the firm. Larry Lowenstein is the Chair of the Osler Litigation Department and Co-Chair of the Corporate Governance and Securities Litigation Specialty Group. He is also a member of the Class Action Specialty Group. Andrew MacDougall is a partner in the firm’s Business Law Department and a respected advisor to boards and in-house counsel on a wide variety of general corporate and commercial legal issues. Doug Marshall is a partner in the firm's Business Law Department and a member of the firm's Executive Committee. Robert Yalden is a partner in the firm’s Business Law Department and Co-Chair of the firm’s Mergers and Acquisitions Group. Jacqueline Code is an associate in the Research Department in the firm's Toronto office.