Canada: Canadian Counsel @ Gowlings

Last Updated: January 25 2006

Edited by Christopher Alam

Contents

  • Warning – Recently Passed Consumer Protection Legislation May Seriously Affect U.S. Businesses Doing E-Commerce in Ontario
  • Civil Liability for Secondary Market Disclosure coming into force in Ontario on December 31, 2005
  • Pending legislation to address security review of foreign investments
  • Employee Related Amendments to Bankruptcy Legislation: Creation of New Priority Charges
  • Better Late Than Never for Lobbyists Registration Filings

Warning – Recently Passed Consumer Protection Legislation May Seriously Affect U.S. Businesses Doing E-Commerce in Ontario

On July 30, 2005 the Ontario Government proclaimed into force the Consumer Protection Act , 2002, S.O. 2002 c.30. The new Act brings into force a comprehensive revision of the province's consumer protection laws, including regulations that impose new responsibilities and obligations on U.S.-based companies doing business over the Internet with consumers located in the province of Ontario.

Unlike Ontario's previous consumer protection legislation, the new Act specifically addresses e-commerce related activities, under the heading "Internet agreements". Every business that conducts business over the Internet with Ontario consumers should be aware of these new rules, or risk having its transactions with those consumers held to be unenforceable.

Subject to certain restrictions, the obligations created by the new Act will apply to every agreement with a consumer (someone acting for personal, family, or household purposes and not for business purposes) located in Ontario formed by way of text-based Internet communications, where the consumer's total potential obligation under the agreement, excluding the cost of borrowing, exceeds CDN$50.

The new Act provides for a new comprehensive scheme for ensuring that material information is disclosed to consumers throughout all stages of the e-commerce transaction.

When an e-commerce transaction is subject to the Act, the business involved must: (i) disclose specified information to the consumer before entering into the agreement; (ii) deliver a copy of the agreement containing certain specified information to the consumer within a set amount of time after the contract is concluded; and (iii) ensure that the copy of the agreement is delivered to the consumer in one of the ways set out in the Act.

The information that must be disclosed by the business before the contract is formed is detailed, and includes the identity and contact information of the business; a fair and accurate description of the goods and services sold, including the technical requirements, if any, related to the use of the goods or services; itemized price lists; details relating to the methods and manner of payments; the details pertaining to the delivery of the goods or services; the businesses' policies in relation to cancellations, returns, exchanges and refunds, and any other restrictions, limitations and conditions of purchase that may apply.

The required information must be disclosed to the consumer in a manner that is clear, comprehensible and prominent. Also, the disclosed information must be available in a manner that ensures that the consumer has accessed the information and that the consumer is able to retain and print the information. Finally, the consumer must be given the express opportunity to accept or decline the agreement and to correct errors immediately before entering into it.

Once the contract is formed, the business has fifteen (15) days to provide a copy of the agreement to the consumer in writing. The contract must include all of the information that was disclosed prior to entering into the contract, along with the consumer's name, and the date on which the agreement was entered into. This copy must be delivered by email, fax, postal service, or in any other manner that allows the business to prove that the consumer has actually received it.

Failure to comply with the new requirements can have serious consequences to a business. Unless a court determines otherwise, any consumer agreement that does not comply with the requirements of the Act may not be enforceable. This could mean that failure to comply with the specific requirements under the Act for Internet agreements would permit the affected consumer to cancel his or her contract. For example, failure to disclose all of the information required by the Act and the regulations, or failure to provide the consumer an express opportunity to accept or decline the agreement, would permit the consumer will have to cancel the agreement within 7 days. Failure to provide a copy of the agreement in one of the ways specified in the Act would permit the consumer to cancel the agreement within 30 days. Upon receiving a notice of cancellation from a consumer in accordance with the Act, a business must provide the consumer with a refund within fifteen (15) days. If the consumer does not receive the refund in that time, he or she may commence an action in the courts.

American companies relying on e-commerce should carefully review their web-based sale models to ensure they comply with the new Act, as there are potentially significant consequences for not doing so. Beyond the immediate benefit of complying with the legislation, adapting one's on-line business models to be consistent with the Act, which is based on Canadian Internet Sales Contract Harmonization Agreement, may bring these business models in line with many of the requirements of similar legislation in other Canadian provinces.
Jacques J.M. Shore and Keith T. Desjardins

Civil Liability for Secondary Market Disclosure Coming Into Force in Ontario on December 31, 2005

Amendments to the Securities Act (Ontario) (the "Act"), which come into force on December 31, 2005, will give rise to civil liability for secondary market disclosure. These amendments mark the first time a Canadian jurisdiction has created a civil liability regime for disclosures by issuers in the secondary market, although a number of other provinces are expected to follow suit. In the past, issuers have only been exposed to civil liability in Canada for misrepresentations in prospectuses and other securities offering documents. Under Part XXIII.1 of the Act, investors will have a right of action for damages against specified entities and persons for: (i) misrepresentations in a much broader group of documents and in public oral statements; and (ii) failure to make timely disclosure. The Act establishes limits on liability, subject to certain exceptions, and provides for several defences. Pursuant to the Act, plaintiffs will be deemed to have relied on the misrepresentation or on the issuer having complied with its disclosure obligations. However, leave of the court is required for an action to proceed, court approval is required for settlements and costs will be awarded to the prevailing party as determined by the court.

Who may be sued. Entities and persons who may be sued pursuant to the Act include: (i) the issuer (either a reporting issuer in Ontario or any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded); (ii) directors; (iii) officers who authorized, permitted or acquiesced; (iv) influential persons (control persons, promoters, insiders and investment fund managers); and (v) experts (for example, auditors, engineers, financial analysts and lawyers) whose opinion or report contained a misrepresentation and is communicated by an issuer with the written consent of the expert.

Misrepresentation. Where a misrepresentation is made, in a core document (a prospectus, circular, MD&A, annual information form or financial statements), proof of the misrepresentation alone suffices. Where an officer of an issuer is the defendant, material change reports are also considered core documents. Where a misrepresentation is made in a non-core document or in a public oral statement, the onus on the plaintiff is higher. The plaintiff must prove the misrepresentation and that: (i) the defendant knew of the misrepresentation; (ii) the defendant deliberately avoided acquiring knowledge of the misrepresentation; or (iii) through action or failure to act, the defendant was guilty of gross misconduct. Proof of any of these additional elements is not required where the defendant is an expert.

Failure to make timely disclosure of a material change. In the case of failure to make timely disclosure of a material change, the plaintiff must prove the failure to disclose and that: (i) the defendant knew the material change had occurred; (ii) the defendant had deliberately avoided acquiring knowledge of the material change; or (iii) through action or failure to act, the defendant was guilty of gross misconduct. Proof of any of these additional elements is not required where the defendant is the issuer, an officer, an investment fund or its officers.

Damages. A plaintiff who buys or sells securities following a misrepresentation or a failure to make timely disclosure and prior to its public correction is entitled to damages under the Act. Generally, subject to the liability limits discussed below, damages represent the difference between: (i) the price paid or obtained following the misrepresentation or failure to disclose; and (ii) the price prevailing in the 10 day period following the disclosure or public correction.

Liability limits. Subject to certain exceptions, liability for corporate and individual defendants is limited and each defendant is liable only for the portion of damages corresponding to that defendant's degree of responsibility. The liability limit for corporate defendants is the greater of: (i) 5 % of market capitalization; and (ii) Cdn.$1 million. The liability limit for individual defendants is the greater of: (i) Cdn. $25,000; and (ii) 50% of the aggregate of their compensation in the prior 12 months from the issuer. The liability limit for expert defendants is the greater of: (i) Cdn.$1 million; and (ii) the revenues earned from the issuer during the 12 months preceding the misrepresentation. However, neither the liability limits nor the apportionment provisions apply where a defendant knowingly participated in a misrepresentation or a failure to disclose a material change.

Defences. There are several defences available to defendants, including: (i) the reasonable investigation defence - where the defendant can show that it conducted a reasonable investigation and had no reasonable basis to apprehend the existence of a misrepresentation or the occurrence of a failure to make timely disclosure; (ii) for forward-looking statements – there will be a safe harbour, in certain circumstances, where appropriate cautionary language is provided with the statement; (iii) confidential disclosure – where the defendant proves that the material change was disclosed in a confidential material change report and the issuer had a reasonable basis for making disclosure on a confidential basis; and (iv) for whistleblowers – where the defendant becomes aware of a misrepresentation or failure to make timely disclosure before corrective action is taken and notifies the board of directors of the issuer promptly and, if no action is taken by the issuer, reports to the Ontario Securities Commission within two days.

Deemed reliance. One aspect of the amendments to the Act that is expected to facilitate the introduction of securities class actions in Ontario, Canada is deemed reliance. As noted above, the plaintiff is expressly relieved of the obligation to prove reliance. The right of action exists without regard to whether the plaintiff relied on the misrepresentation or on the issuer having complied with its disclosure obligations. Historically, the necessity of proving reliance has been a significant obstacle for plaintiffs to pursue these actions in Ontario.

Safeguards against strikesuits. A plaintiff must obtain leave from the court to proceed with an action. The plaintiff must show that the action is being brought in good faith and there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. These proceedings will be based on affidavit evidence, subject to cross-examination. Court approval is required for the settlement or disposition otherwise of any action. The prevailing party in an action is entitled to costs as determined by the court.

Suggestions for mitigating risk. Issuers should consider the following to protect their boards and management: (i) adopt/update a corporate disclosure policy and related policies; (ii) establish a disclosure committee; (iii) adopt/update disclosure controls and procedures; (iv) institute a directors' and officers' questionnaire process and ensure back-up of statements; (v) adopt a records retention/destruction policy; (vi) address specific issues with public oral statements; (vii) address specific issues with forward-looking statements; (viii) educate, train and monitor personnel; (x) consider insurance coverage and indemnification; and (x) prepare for corrective action and crisis management.

For more information regarding our the new civil liability regime in Ontario, Canada, please see our MarketCaps publication entitled "Civil Liability for Secondary Market Disclosure" dated September 1, 2005
Julie-Martine Loranger, Martine Guimond and Kathleen Ritchie

Pending Legislation to Address Security Review of Foreign Investments

On June 20, 2005 the Canadian Minister of Industry introduced legislation in Parliament to authorize the Federal government to review any foreign investments, which, in the government's opinion, could be injurious to national security. The legislation died with the start of this winter's general election, but likely will be reintroduced when Parliament resumes.

This amendment, if enacted, will apply to all new businesses and acquisitions by non-Canadians without regard to their size, country of origin or the business sector in which they are to be made.

Any review under the new law will take place at the political level, since the power to allow a reviewed transaction to proceed is in the discretion of the Prime Minister and Cabinet of the day.

The draft legislation does not define what is meant by the phrase "national security," thereby opening the door to increased government regulation, restrictions and involvement with genuine and legitimate commercial investments by non-Canadians.

The Minister of Industry reports that the new legislation is an update of Canada's security system, not a change in investment policy, and that its exercise will be rare. However, limitations of that nature are not specifically incorporated in the draft legislation.

The new political discretions operate on three levels. First, the federal Minister of Industry may decide to issue a notice that immediately freezes the implementation of the investment. Second, the federal Cabinet is empowered to decide if the new business or acquisition should be reviewed. Third, the Federal Cabinet is also given the power to decide the outcome of the reviewincluding the power to prohibit the investment, to order divestiture, and or to impose any conditions deemed advisable to protect "national security".

All steps in the investment are frozen pending the outcome of the reviews. The amendments will give the government the power to demand any information it wishes. While the outcome of a review is within federal jurisdiction, long established Federal practice is to engage in confidential dialog with any provincial government affected by the new investment.

The legislation includes a special provision precluding access to Canadian courts except on procedural grounds, and failure to comply leads to heavy daily fines in addition to other legal sanctions.

The only exemptions are generally for matters that are already subject to intensive government review, and it is noteworthy that the government bill will exempt the government itself when it is a party to an investment by non-Canadians.

The draft law does not require that reasons be given for any decision made.

At present there is no review of any new business investments, except by Cabinet order in the cultural field. Likewise, there is no generally no review of the acquisition of existing companies below a $250 million threshold, except in the transportation, cultural, uranium and financial service sectors, where the threshold is only $5 million. Current law requires the notification of all new businesses and all acquisitions, but generally only after the transaction is implemented.

Hopefully the legislation will provide more certainty when it is reintroduced after the election.

Gowlings provides legal advice and full government relations support in dealing with Federal and provincial government officials.
Henry S. Brown

Employee Related Amendments to Bankruptcy Legislation: Creation of New Priority Charges

On November 25, 2005, An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to make consequential amendments to other Ac ts ("Bill C-55") received Royal Assent. Bill C-55 will not be in come into force until the day fixed by order of the Governor in Council. The portions of this Bill related to the Wage Earner Protection Program can create a charge on certain assets of which creditors and directors should be aware.

Bill C-55 is intended to accomplish four key objectives: (a) continue to encourage the restructuring of viable companies; (b) protect employee claims for wages and vacation pay; (c) make bankruptcy more fair and reduce abuse; and (d) improve the administration of the insolvency system.

This article briefly explains the impact of Bill C-55 with respect to the following employee related amendments: (i) the creation of the Wage Earner Protection Program (the "WEPP"); (ii) the employee remuneration charge under the Bankruptcy and Insolvency Act (the "BIA"); and (iii) pension contributions under the BIA.

Wage Earner Protection Program

The WEPP will provide compensation for non-management and non-related party employees who have been employed for at least three months as at the date their employer becomes bankrupt or a receiver is appointed in respect of the employer.

Eligible employees will be able to apply for compensation from the WEPP for any unpaid wages or vacation pay earned during the six month period prior to the employer becoming bankrupt or being placed into receivership (but not severance or termination pay). The maximum amount of the compensation any employee will be entitled to receive is the greater of $3,000 or four times the employee's maximum weekly insurable earnings under the Employment Insurance Act .

The WEPP will be funded out of a consolidated revenue fund, but if a payment is made out of the WEPP to an employee, the Crown will be subrogated to the employee's right to recover against the employer and the employer's directors. The Crown will, for example, be entitled to seek recovery in a bankruptcy from assets subject to the employee remuneration charge to be created by Bill C-55.

Bill C-55 imposes a positive obligation on trustees and receivers to, among other things: (a) identify employees who are owed wages or vacation pay; (b) determine the amount of the wages or vacation pay owing to each employee; (c) provide information to employees with respect to the WEPP and any wages or vacation pay owing to them; (d) provide information to the Minister designated under the WEPP with respect to employees and the amount of wages or vacation pay owing to those employees; and (e) comply with directions from the Minister designated under the WEPP.

Employee Remuneration Charge

Bill C-55 amends the BIA to create a charge in favour of employees for unpaid wages and vacation pay (but not severance or termination pay), up to a maximum of $2,000, owing in respect of the six months prior to their employer becoming bankrupt or a receiver being appointed in respect of the employer. The employee remuneration charge will apply to all of the debtor's current assets. "Current assets" will be defined to mean unrestricted cash or any other asset that is expected to be converted to cash or consumed in the production of income within one year or the debtor's ordinary operating cycle, whichever is longer.

The employee remuneration charge will rank in priority to the claims of all creditors, but will be subject to the rights of unpaid suppliers and the statutory deemed trust claims that survive bankruptcy. If a bankruptcy trustee or receiver realizes on any assets subject to the employee remuneration charge, the trustee or receiver will become personally liable for any employee claims that are secured by the charge up to the amount realized and will be subrogated to any rights that the employees might have to recover this claim.

Pension Related Charge

Bill C-55 will amend the BIA to create a charge over all of the assets of a debtor to secure: (a) any unremitted employee pension contributions; (b) any unpaid employer contributions in respect of defined contribution pension plans; and (c) any unpaid normal costs as required by the applicable pension legislation in respect of a defined benefit plan. This charge will not cover employer-funding deficiencies under a defined benefit pension plan.

The pension contribution charge will rank in priority to the claims of all creditors, but will be subject to the rights of unpaid suppliers, statutory deemed trust claims that survive bankruptcy and the employee remuneration charge. If a bankruptcy trustee or receiver realizes on any assets subject to the pension contribution charge, the trustee or receiver will become personally liable for the amounts secured by the charge up to the amount realized and will be subrogated to any rights that the pension plan might have to recover those amounts.

Bill C-55 will also amend the BIA to require that a reorganization or plan provide for the payment in full of amounts subject to the pension contribution charge unless there is an agreement in place with respect to the payment of those amounts that has been approved by the appropriate pension regulator.
Patrick Shea and Leila Burden

Better Late Than Never for Lobbyists Registration Filings

With a federal general election campaign now underway, there is heightened profile being given to issues related to "public ethics," "accountability," and "transparency." The four political parties are engaging in what some are calling an ethics auction; that is, trying to outbid one another with promises about how tough they're going to be, if elected, in dealing with various transgressions against public trust.

Among the most common themes are those related to "lobbying" and the degree to which certain practices should be curtailed or outlawed entirely (e.g. contingency fees for lobbyists), whether the "cooling off" period by which former public-office holders would be banned from lobbying for private interests should be extended to, say, 5 years and whether enforcement of the Lobbyists Registration Act (the "Act") should be toughened up.

Stung by the suggestion that the current federal government is too easy on, cozy with and influenced by hired-gun lobbyists, the government determined to flex some muscle. It has announced its proposal for a new series of administrative fines for violations of either the Act or its related Lobbyists Code of Conduct . The government has also talked about broadening the law's enforcement limitation period, making the Registrar of Lobbyists more independent of Government and introducing a new sanction for those who violate the Act or the Code of Conduct: the withdrawal of lobbyists registration privileges for offenders for up to two years.

In the meantime, the government has instructed the Office of the Registrar of Lobbyists (the "ORL") (until recently known as the LRB - Lobbyists Registration Branch) to become much more aggressive in its enforcement of the law. Four new investigators are being hired by the ORL and they are expected to be busy from day one as a number of cases have been identified by officials as warranting exploration and consideration of charges under the Act.

So what does this mean for companies that have not yet submitted their firm's lobbyists registration? Simply put, it means that those that have not yet registered should immediately carefully reconsider, if, for no other reason than to avoid what could be needless embarrassment – or worse.

It has become clear the government is taking a more assertive approach to compliance enforcement than has been the case previously. Since the revised Act went into effect June 22, the ORL has rejected numerous new filings from both in-house and consultant lobbyists where the information provided in the registration has been deemed inadequate or unclear.

But it is those organizations that are registering late – or not at all – that will most likely directly experience the tougher regime that the ORL intends to manifest.

It is too early to characterize how the ORL will deal with companies that have failed to meet their obligations to file single company-wide or organization-wide registrations (signed by the most senior officer of the company or organization.) However, it appears that there are some people out there aiming to give the ORL a hand. Government officials say they have observed an increase in complaints (or reports) of non-compliance. The source of many such complaints, say government officials, appear to be commercial competitors. (The government need not publicly identify the source of such complaints or reports.)

All instances of late filing will be reviewed by the ORL and decisions on how to deal with them made on an individual basis.

Earlier in the fall, government officials conceded that they were overwhelmed by the volume of registrations submitted and that they were running slightly behind in the processing of registrations and applications for "user agreements." But the backlog is now cleared.

On another, lobbying-related front, Industry Canada is continuing its audit of companies that have received Technology Partnership Canada ("TPC") loans in the search for, among other things, instances where recipients of TPC funding have paid contingency fees to lobbyists who had been retained to help obtain the funding. Applicants for TPC funding are required to certify, as part of their application, that they have not paid lobbyists or other agents on the basis of a contingency or success fee related to their work on TPC applications.
Sean Moore

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