On December 31, 2005, amendments to the Securities Act1 (the "Act") came into force that will, for the first time, create statutory civil liability for continuous disclosure in the secondary market in Ontario. These amendments create a new liability that will affect a broad category of individuals.
As discussed below, reporting issuers, including public companies and investment funds, as well as their directors, certain officers, influential persons (including controlling share-holders, promoters and insiders) and experts, will be subject to potential statutory civil liability for misrepresentations in continuous documents and public oral statements and the failure to make timely disclosure.
In the insolvency arena, chief restructuring officers, receivers and monitors must be conscious of the new potential liabilities imposed by the amendments when a debtor company continues to operate and remains a public company since the scope of the legislation is broad enough to capture these individuals. Depending on the nature of their powers and responsibilities, these individuals could be considered to be persons acting in a capacity similar to that of a director or officer of a company. This is particularly so in the case of a receiver, since in many situations a receiver is expressly granted the right to exercise all the powers of the directors of the company in receivership.
No Requirement for Reliance
The most significant effect of the amendments to the Act is that the plaintiff does not need to demonstrate reliance on the misrepresentation or the completeness of the issuer’s public disclosure.
Statutory Civil Liability for Secondary Market Disclosure
The amendments to the Act provide investors with a right to sue the issuer and other responsible parties for damages if they acquire or dispose of an issuer’s securities during a period of time when there is (a) a misrepresentation in a document released by or on behalf of the issuer or by an "influential person"2 or in a public oral statement relating to the affairs of the issuer made by a person with authority to speak on behalf of the issuer or by an influential person; or (b) during a period in which the issuer fails to make timely disclosure of a material change.3
A document that may give rise to liability includes any written communication (including a communication prepared and transmitted only in electronic form) that is required to be filed or is filed with (a) the Ontario Securities Commission; (b) any government or agency of a government; or (c) any stock exchange or quotation and trade reporting system. A document also includes any other communication the content of which would reasonably be expected to affect the market price or value of a security of the issuer.
A public oral statement will only give rise to potential liability if the statement relates to the business or affairs of the issuer and is made by a person with actual, implied or apparent authority to speak on behalf of the issuer or by an influential person (or by a person or company with actual, implied or apparent authority to speak on its behalf) in circumstances where a reasonable person would believe that information contained in the statement will become generally disclosed. If the person who makes the public oral statement on behalf of an issuer only had apparent authority (but not implied or actual authority), no other person is liable for any of the issuer’s securities that were acquired or disposed of before such other persons became, or should reasonably have become, aware of the misrepresentation.
Potentially Liable Parties
The parties that are potentially liable for misrepresentations or the failure to make timely disclosure under these new provisions include: (a) the issuer; (b) a person with actual, implied or apparent authority to speak on behalf of the issuer who makes a public oral statement on behalf of the issuer (regardless of whether that person is an officer of director of the issuer); (c) every director of the issuer at the time the document was released or who authorized, permitted or acquiesced either in the making of the public oral statement or in the failure to make timely disclosure; (d) every officer of the issuer who authorized, permitted or acquiesced in the release of the document, the making of the public oral statement or the failure to make timely disclosure; (e) every influential person who authorized, permitted or acquiesced in the release of the document or the making of the public oral statement; (f) every director or officer of an influential person; and (g) every expert, where the misrepresentation is also contained in a report, statement or opinion of the expert, who consented in writing to its report, statement or opinion being included in the document that is publicly released or in the public oral statement that is made. As noted earlier, the definitions of "director" and "officer" in the Act include any person acting in a capacity similar to that of a director or officer of a company. An expert is defined to include such persons as accountants, actuaries, appraisers, auditors, engineers, financial analysts, geologists and lawyers.
Limits on Liability
In general, a person who is found liable under the new provisions is potentially responsible for (a) any losses deemed to be suffered by investors; and (b) a regulatory fine. The total liability for an individual that is a director, officer or influential person is limited to the greater of $25,000 or 50% of his or her compensation from the issuer or its affiliates. An expert’s liability is limited to the greater of $1,000,000 or the revenue that the expert (and its affiliates) have earned from the issuer and its affiliates during the twelve months preceding the misrepresentation.
The new provisions set out several defences to an action for misrepresentation or failure to make timely disclosure. For example, an individual will not be liable if he or she can prove that he or she conducted, or caused to be conducted, a reasonable investigation and that he or she had no reasonable grounds to believe that the document or public oral statement contained a misrepresentation or that failure to make timely disclosure would occur. The Act sets out a list of factors to be considered by the courts in determining whether an investigation was reasonable.
The new provisions also import a concept of "core"4 and "non-core" documents. In general, a person5 will not be liable for a misrepresentation in a non-core document or in a public oral statement or, in the case of persons other than the issuer or its officers, for failure to make timely disclosure, unless the plaintiff proves that the person: (a) knew, at the time the document was released or the statement was made, that it contained a misrepresentation or, in the case of failure to make timely disclosure, knew of the change and that the change was a material change; (b) deliberately avoided acquiring such knowledge; or (c) was guilty of gross misconduct (whether by action or inaction) in connection therewith.
In addition, a person other than the issuer will not be liable for a misrepresentation or failure to make timely disclosure if the disclosure violation was made without that person’s knowledge or consent and, upon becoming aware of the misrepresentation before it was corrected, or of the failure to make timely disclosure, before it was disclosed, (a) the person promptly notified the board of directors (or other persons acting in a similar capacity) of the issuer; and (b) if no correction or subsequent disclosure was made within two business days thereafter, the person (unless prohibited by law or by professional confidentiality rules) promptly notified the Ontario Securities Commission in writing of the misrepresentation or failure to make timely disclosure.
An action under the new provisions cannot be commenced more than three years after the date on which the document was released, the undisclosed information was required to be disclosed or the public oral statement was made.
In addition, an action cannot be commenced without leave of the court. When granting leave, the court must be satisfied that (a) the action is being brought in good faith; and (b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. Until a court has an opportunity to make a decision under these provisions, it is unclear what test will be used to determine whether there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.
The new provisions also stipulate that an action cannot be discontinued, abandoned or settled without the approval of the court. In determining whether to approve a settlement, the court must consider, among other things, whether there are other actions outstanding under the new provisions or under comparable legislation in other provinces or territories in Canada in respect of the same misrepresentation or failure to make timely disclosure.
Protection by Court Orders
Although it has become standard for initial orders under the Companies’ Creditors Arrangement Act and interim receivership orders under the Bankruptcy and Insolvency Act to contain provisions protecting court-appointed officers from certain types of statutory liabilities, it is unclear whether such provisions will prove to be effective to insulate such persons from this potential new source of liability under the Act. This concern is reinforced by the ruling of Farley J., in the case of Re Royal Oak Mines,6 where it was held that the court does not have the power to issue an order that contravenes a statute.
1. R.S.O. 1990, c. S.5, as amended.
2. Section 138.1 of the Act defines an "influential person" as a control person, promoter, an insider who is not a director or senior officer of the issuer or an investment fund manager, if the issuer is an investment fund
3. See definition of "material change" in section 1(1) of the Securities Act.
4. In general, a core document is a prospectus, a take-over bid circular, an issuer bid circular, a directors’ circular, a rights offering circular, management’s discussion and analysis, an annual information form, an information circular, annual financial statements and interim financial statements of the issuer and, in the case of an officer of the issuer, an investment fund manager or an officer of an investment fund, also includes a material change report.
5. The items listed are not necessary where the action is in relation to an expert.
6. (1999), 7 C.B.R. (4th) 293 (Ont. S.C.J.).
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.