A recent decision of the Ontario Superior Court of Justice
should give directors and officers reason for optimism that the
protections in Part XXIII.1 of the Ontario Securities Act
("OSA") – including the leave requirement and the
statutory defences – can be relied upon at an early stage of
proceedings to defeat personal claims against them in securities
class actions in circumstances where they have followed reasonable
procedures and relied on external advisors.
In Rahimi v. SouthGobi Resources, Justice
Belobaba granted leave to a plaintiff to commence an action under
Part XXIII.1 against the defendant issuer. The plaintiff alleged
that the issuer's financial statements contained
misrepresentations relating to revenue recognition. Notably,
Justice Belobaba refused to allow the plaintiff to include several
directors and officers of the issuer as defendants in the
Justice Belobaba found that the directors and officers had
conducted a reasonable investigation, including obtaining and
relying on expert accounting advice from SouthGobi's external
auditors, and therefore had satisfied the reasonable investigation
defence in section 138.4(6) of the OSA. That defence provides that
a person is not liable in a misrepresentation claim brought
pursuant to the statutory cause of action under section 138.3 if
the person proves that:
before the release of the document or the making of the public
oral statement containing the alleged misrepresentation, the person
or company conducted or caused to be conducted a reasonable
at the time of the release of the document or the making of the
public oral statement, the person or company had no reasonable
grounds to believe that the document or public oral statement
contained a misrepresentation.
Justice Belobaba concluded that, in the circumstances,
"there is no reasonable possibility that the five individual
defendants will not be able to establish both branches of the
reasonable investigation defence at trial."
This decision reinforces the benefits to directors and officers
in maintaining strong internal controls and conducting reasonable
investigations, including, where appropriate, engaging and
following the advice of external experts.
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.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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