Canada: Directors and Officers be Aware: Civil Liability for Secondary Market Disclosure is Now in Force Since December 31, 2005

Last Updated: April 3 2006

Edited by Julie-Martine Loranger

Potential Impact: Facilitating Class Actions


Under the new amendments to the Securities Act (Ontario), pertaining to civil liability for secondary market (also known as Bill 198) now into force, directors and officers of public corporations will really have to be proactive in order to avoid liability.

The information in secondary market disclosure documents must be as timely, accurate and complete as the information contained in a prospectus, offering memorandum and take-over bid circular.

What is civil liability for secondary market disclosure?

The amendment to the Securities Act (Ontario) creates two new causes of action, in cases of:

  • misrepresentation in a disclosure document published by an issuer or in a public oral statement; and
  • failure to make timely disclosure of material change

for which a claim may proceed without regard to whether the plaintiff relied on the misrepresentation or on the issuer having complied with its disclosure obligations.

Who may be sued? — Broader range of defendants, with focus on directors and officers

  • The Issuer, meaning a reporting issuer in Ontario or any other issuer, in Québec for example, with a substantial connection to Ontario, any securities of which are publicly traded on the Toronto Stock Exchange.
  • Its directors and officers.
  • Influential Persons, including control persons, promoters, insiders and investment fund managers.
  • Experts, including auditors, financial advisors and lawyers whose opinion or report contained a misrepresentation and is communicated by an Issuer with the written consent of the expert.
  • Causes of action

1) Misrepresentation — In a Core Document, A Non Core Document, A Public Oral Statement

In a Core Document

Where a misrepresentation is made, in a "Core Document" — defined as a Prospectus, Circular, Annual Information Form, MD&A or Financial Statements — proof of the misrepresentation alone suffices.1

Potential impact: New type and greater exposure on the part of directors for written misrepresentation

In a Non Core Document or a Public Oral Statement

Where a misrepresentation is made in a "Non Core Document" or in a "Public Oral Statement" onus on the plaintiff is higher — plaintiff must prove the misrepresentation and that defendant:

  • Knew of the misrepresentation; or
  • Was wilful blind; or
  • Was guilty of gross misconduct.2

2) Failure to make timely disclosure of a material change

Plaintiff must prove the failure to disclose and that the defendant:

  • Knew the material change had occurred;
  • Was wilful blind; or
  • Was guilty of gross misconduct.3

Plaintiff's reclamation and damages calculation

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.

Damages represent the difference between:

  • The price paid or obtained following the misrepresentation or failure to disclose; and
  • The price prevailing in the 10-day period following the disclosure or public correction.

The whole, subject to prescribed liability limits.

Liability limit

Liability for corporate and individual defendants is capped and subject to exceptions, each defendant is liable only for the portion of damages corresponding to that defendant's degree of responsibility.

Cap for Corporate defendants:

The greater of:

  • 5% of market capitalization; or
  • $1 million.

Cap for Individual defendants — such as directors and officers:

The greater of:

  • $25,000; or
  • 50% of the aggregate of their compensation (in the prior 12 months from the issuer).

Cap for Expert defendants:

The greater of:

  • $1 million; or
  • the revenues earned from the issuer during the 12 months preceding the misrepresentation.

However, neither the liability provision nor the apportioning of liability provision apply where a defendant "knowingly" participated in a misrepresentation or a failure to disclose a material change.


Several defences are available to defendants.

The most important ones (i) US style safe harbour for forward looking statements; and (ii) Reasonable investigation — 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.

Impact: Facilitating class actions

Two aspects of the civil liability amendments will surely facilitate introduction of securities class actions in Ontario.

1) The plaintiff is expressly relieved of the duty to prove reliance

The right of action exists without regard to whether the plaintiff relied on the misrepresentation or on the company having complied with its disclosure obligations.

Historically, the necessity of proving reliance has been an obstacle for plaintiff to pursue class action recourses in Ontario.

Because reliance is not a factor anymore, this obstacle is removed.

2) The Courts now have the discretion to treat "multiple misrepresentations having common subject matter or content" as a single misrepresentation.

Before, the receipt by one investor of information in one form and by another in another form could defeat the "common issues" requirement for a class action in Ontario. This obstacle is also removed.

Top ten tips to protect yourself — make sure the board of the Corporation you sit on:


Adopts or updates disclosure policy and related policies


Is ready to address specific issues in public oral statements



Has nominated a disclosure committee


Is ready to address specific issues with forward-looking statements



Adopts or updates disclosure controls and procedures


Educate, train and monitor its employees with respect to disclosure policy and confidentiality



Make sure all of its employees are aware of their responsibility towards disclosure


Considers insurance coverage/indemnification



Keeps the evidence: adopts a record retention policy


Is prepared for corrective action/crisis management

How can Gowlings assist you?

We can work with you in renewing the corporate disclosure policy of the corporation and assist you in your review of your D&O insurance policy.

The foregoing overview is intended to provide information of a general nature only and is not intended as legal advice.


1. Where an officer of an issuer is the defendant, core documents also include Material Change Reports, however, for an officer to be liable, defendant must prove that he "authorized", permitted or acquiesced "in the release of the document." No such proof is required against directors.

2. Proof of any of these additional elements is not required where the defendant is an expert.

3. Proof of any of these additional elements is not required where the defendant is the issuer, the officers, an investment fund or its officers.

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