Information about possible future events or results of operations often appear in news releases, management’s discussion and analysis (MD&A), annual reports to shareholders and an array of other documents and oral statements made to analysts, shareholders and others. Ontario’s new liability-for-disclosure legislation recognizes that this forward-looking information (FOLI) is inherently uncertain and seeks to avoid disclosure chill for FOLI through a defence from liability. The defence is intended to shield public companies and their officers and directors from liability for FOLI if certain conditions are met.
Misrepresentations in FOLI will not give rise to liability if (a) the information is identified as forward-looking; (b) the material factors that could cause the actual results to differ materially are identified; (c) the material assumptions that were made in arriving at the initial conclusion, forecast or projection are set out; and (d) there is a reasonable basis for the conclusion, forecast or projection. These cautionary statements must be proximate to the forward-looking information for the defence to apply. In the case of oral statements, the proximity criterion is deemed to be satisfied if the person making the statement (a) cautions the listener that the oral statement contains FOLI, that actual results may differ and that certain material factors and assumptions were applied in arriving at the conclusion, forecast or projection; and (b) identifies a readily available document (e.g., a document that has been filed on SEDAR) that contains additional information about the risk factors and assumptions. More extensive disclosure is required to qualify for the safe harbour than was provided under previous practice.
There has, however, been uncertainty about how to meet certain of these requirements. The Ontario Securities Commission has released for comment a proposed policy setting out its views on some of the policy considerations underlying the defence and how it interprets certain aspects of it. The policy statement is likely to shape market practice and influence the way a court might interpret the FOLI defence.
The policy objective of the liability-for-disclosure legislation and the FOLI defence is to facilitate responsible and balanced disclosure about a company’s future prospects. An investor reading a document or listening to a speech should be able to readily understand that FOLI is being provided, to identify that information, to know the material assumptions underlying the information and the material risk factors associated with the conclusion, forecast or projection. The disclosure must be clearly and simply presented.
The cautionary statements need not be juxtaposed to the FOLI in every case. Investors may be better served by one broad reference that sets out the relevant and material risk factors and assumptions, at either the beginning or the end of the document. Companies must use their judgment about what is appropriate. For example:
- Where threads of FOLI are subject to common risk factors and assumptions, it would be unwieldy to break the flow of the discussion to include cautionary statements at every instance.
- If the same assumptions and risk factors apply to multiple instances of FOLI, it should be acceptable to list them once and cross-reference them in the other cases.
- The more closely tied a risk factor or assumption is to a particular conclusion, forecast or projection, the closer it should be to the FOLI. A cross-reference or footnote should be acceptable in many cases.
Risk Factors and Assumptions
An exhaustive statement of every conceivable risk factor and assumption need not be provided. A materiality standard applies. In terms of risk factors, it should be sufficient to discuss the significant and reasonably foreseeable factors that are relevant to the FOLI. Failure to include the particular factor that ultimately prevents a conclusion, forecast or projection from being met does not necessarily mean that the defence is not available.
Reasonable Basis for the Conclusion, Forecast or Projection
The company must have a reasonable basis for reaching the conclusion or making the forecast or projection if the defence is to apply. The factors that would be considered in determining reasonableness would include the reasonableness of the assumptions applied, the inquiries made and the process followed in preparing and reviewing the FOLI.
The OSC indicates that for oral statements, the proximity requirement can be satisfied by having someone other than the actual speaker make the cautionary statements.
Duty to Update
The defence should not be interpreted as requiring an independent duty to update FOLI.
A copy of proposed OSC Policy 51-604, Defence for Misrepresentations in Forward-Looking Information, can be found on the OSC’s website at:
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.