Summary of the New Regime1
The Ontario government has proclaimed into force on December 31, 2005 the new Securities Act (Ontario) regime that gives securityholders who buy or sell securities on a stock exchange or other secondary markets2 a limited, statutory right to sue the company and its directors, management, controlling shareholders and others if the company’s continuous disclosure is improper. These lawsuits will most likely be brought as class actions.
When Can Someone Sue?
Those who buy or sell securities of a reporting issuer (or other public company with a real and substantial connection to Ontario) in the secondary market while there is a continuous disclosure violation have the right to sue. A disclosure violation begins when a misrepresentation about the company is made in a public document or an oral statement, or when the company fails to make timely disclosure of a material change in its affairs. The disclosure violation ends when the disclosure is corrected or the material change disclosed.
Who Can Be Sued?
A wide range of persons and companies can be sued, depending on the type of continuous disclosure violation. For example, if an issuer files a document that is alleged to contain a misrepresentation, claims can be asserted against (a) the issuer; (b) each director; (c) each officer who authorized, permitted or acquiesced in the release of the document; and (d) each "influential person" (an insider, a 20% shareholder, a promoter, a fund manager and spokespersons for any of them), and each director or officer of the influential person, who knowingly influenced the issuer to file the document or who knowingly influenced a director or an officer of the issuer to authorize, permit or acquiesce in the document’s filing. If the misrepresentation occurs in a portion of the document expertized by an accountant, lawyer or other expert, the expert can also be sued if he or she consented to the use of the opinion or report in the document.
Higher Burden on Plaintiffs for Non-core Documents and Oral Public Statements
Documents are classified as "core" and "non-core" documents, and the classification differs for different parties. For example, material change reports will be core documents for officers but not for outside directors. The plaintiff’s ability to sue successfully will be more difficult for claims (a) about non-core documents and oral public statements; and (b) against outside directors or influential persons about a failure to make timely disclosure. The plaintiff is not put to this higher burden of proof for claims (a) of misrepresentation in core documents; or (b) against the issuer or officers of the issuer about a failure to make timely disclosure.
Defences and Safe Harbour for Forward-Looking Statements
Defendants will have several potential defences. All defendants will have a due diligence defence if they prove that they (a) conducted or caused to be conducted a reasonable investigation; and (b) had no reasonable grounds to believe that the document or oral public statement contained a misrepresentation, or that timely disclosure would not be made. Non-experts will not be responsible for expertized disclosure. There will be no liability for failing to make timely disclosure if the issuer filed a confidential material change report, as long as there was a reasonable basis for making the disclosure on a confidential basis and certain other conditions are met. By taking corrective action, defendants (other than the issuer) may limit their potential liability for continuous disclosure violations made without their knowledge. Other defences are also available.
There will be no liability for forward-looking information if (a) it contains reasonable cautionary language; (b) it identifies the material factors that could cause actual results to differ materially from the forecast or projection; (c) it states the material factors or assumptions that were applied in making the forecast or projection; and (d) there is a reasonable basis for making the forecast or projection.
Calculation of Damages, Apportionment of Liability, Liability Caps and Other Limits on Liability
The legislation contains complex rules to calculate a plaintiff’s loss, and these rules do not require a plaintiff to crystallize a loss by selling the security. The court will generally determine each defendant’s responsibility for the plaintiffs’ losses, and each defendant will be liable for his, her or its proportionate share of the damages. But directors, officers, influential persons or experts who act knowingly in a violation may be fully liable, jointly and severally, for all damages.
A particular defendant’s total liability to all plaintiffs for the same violation is capped under this regime. Misrepresentations having common subject matter or content, or multiple instances of failing to make timely disclosure may, at the discretion of the court, be treated as a single violation. For an issuer or a corporate influential person, these caps are $1 million or 5% of its market capitalization, whichever is greater. For individuals, the cap is generally $25,000 or half of that person’s total compensation from the relevant companies (including affiliates) for the 12 months preceding the violation, whichever is greater. These caps will not apply to directors, officers, influential persons or experts who authorize, permit or acquiesce in the continuous disclosure violation knowing it was a violation.
Protection Against Strike Suits
The law contains two measures to reduce the potential for strike suits. A plaintiff is required to obtain leave of the court before bringing a lawsuit, and the court will grant leave only if it is satisfied that the suit is being brought in good faith and has a reasonable prospect of success at trial. The court must approve any proposed settlement of a lawsuit.
1. For practical advice on what you should do, see our client memo no. 2005-37, Ontario’s New Law Liability for Public Company Disclosure Proclaimed into Force on December 31, 2005: What You Should Do, which is available on our website at http://www.torys.com/publications/pdf/CM05-37T.pdf.
2. The regime will also apply to acquisitions or dispositions of securities in certain exempt takeover bids and exempt issuer bids.
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.