Underwriters are not considered "experts" for purposes of statutory secondary market liability
LBP Holdings v. Allied Nevada Gold Corp. is a proposed
class proceeding alleging that, as a result of misrepresentations
in Allied Nevada's disclosure documents—including a
prospectus for an offering of shares—both shareholders who
purchased shares pursuant to the prospectus and those who traded
shares in the secondary market suffered losses.1 The plaintiff brought
a motion to add the underwriters of the offering as defendants. One
of the claims asserted against the underwriters was that, having
provided the required underwriters' certificate in a prospectus
that formed part of the issuers' disclosure record, the
underwriters were liable for losses to shareholders who purchased
or sold in the secondary market because they were
"experts" under Part XXIII.1 of the Ontario
Securities Act (the Act). In its decision on the motion to
add the underwriters, the Court rejected the plaintiff's
argument that underwriters were "experts" under the
What You Need To Know
Underwriters are not "experts." The
motions Judge (Justice Belobaba) readily acknowledged that
underwriters have professional expertise in the capital markets.
However, the Court found that the legislature had not intended
underwriters be included in the secondary market liability
provisions of Part XXIII.1 of the Act. The terms "expert"
and "underwriter" are defined separately in the Act. The
Court found that underwriters do not meet the definition of an
"expert," hallmarks of which are: being considered a
"professional" (in the sense of being self-regulating or
self-licensing, as other "experts" are); and being part
of a distinct profession that can provide authoritative expertise
to statements made in a professional capacity.
This decision is significant: had the plaintiff's novel
claim been allowed to proceed, it could have significantly expanded
the potential statutory bases for liability to which underwriters
may be exposed. This, in turn, could have impacted the types of
indemnity provisions underwriters seek in their agreements with
Reason for exposing defendants to civil liability is to
"induce care." In applying doctrines of
statutory interpretation to the question of whether underwriters
should be considered "experts," the Court considered the
rationale for limiting their liability to primary market
purchasers. It confirmed that the reason for exposing underwriters
to civil liability for prospectus misrepresentation is to induce
care in assembling the prospectus: as made clear by the primary
market liability provisions of the Act, underwriters are expected
to apply a reasonable level of diligence to this task.
Even if underwriters were experts, certificate is not
enough. The Court also considered the plaintiff's
claim that the underwriters' certificate, included in the
prospectus as required by section 59 of the Act (certifying that
the prospectus contains full, true and plain disclosure) was the
"report, statement or opinion made by the expert"
required to meet the test for statutory secondary market liability
under section 138.3(1)(e). Even had it found that underwriters were
encompassed by the definition of "expert," it would not
have permitted the plaintiff's claim because the certificate
itself was not a misrepresentation in a "report, statement or
opinion." Taken to its logical conclusion, the plaintiff's
claim would have effectively "expertised" the entire
contents of the prospectus. However, the Court found that there was
no alleged misrepresentation in the prospectus that was also
contained in the underwriters' certificate.
1. 2016 ONSC 1629. Torys LLP is counsel to the
underwriters in this case.
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