Canada: When Should Corporations Disclose Regulatory Enforcement?

A Delaware judge dismissed a lawsuit on May 16 by Wal-Mart Stores Inc. shareholders who had alleged the corporation's management had covered up and failed to properly investigate bribes paid by executives in Mexico, finding that an earlier dismissal by an Arkansas judge into the same allegations precluded the Delaware case from going forward.

The dismissal ended litigation stemming from a 2012 New York Times article alleging Wal-Mart had shut down an internal probe and failed to notify U.S. or Mexican authorities after its initial investigation found evidence of suspect payments totaling more than $24 million. The CEO of Wal-Mart's Mexican subsidiary had allegedly authorized bribes to quickly secure construction permits, zoning approvals and licenses with the goal of expanding before competitors could react.

Although largely decided on procedural grounds, the case provides a useful reminder of the risks companies face outside a regulatory framework when faced with allegations of corruption. In the Wal-Mart case, shareholders brought derivative claims against the corporation's directors and executives for, among other things, breach of fiduciary duty, allowing the corporation to violate laws, and violations of the Securities Exchange Act. Companies will face similar issues under Canadian law.

In addition to shareholder actions brought on behalf of the corporation against its directors, a corporation itself may be liable to shareholders or subject to other sanctions if it fails to properly investigate or disclose allegations of wrongdoing. The corporation's continuous disclosure obligations under Canadian securities legislation may in certain circumstances require disclosure of potential or ongoing regulatory enforcement in its public filings, particularly if the enforcement is or could reasonably be expected to have a significant effect on the corporation's share prices. Among other things, companies could face misrepresentation claims from shareholders or potential sanctions from regulatory authorities for failing to meet their reporting obligations.

It will often be difficult to determine whether a particular set of allegations needs to be included in the corporation's filings, particularly in the early stages of an investigation. Anti-corruption allegations may encompass any number of scenarios, from unsubstantiated allegations asserted by disgruntled employees to widespread wrongdoing undertaken by management. Whether potential wrongdoing constitutes a material fact subject to disclosure obligations under Canadian securities law will depend on a number of factors, including the scope of the alleged misconduct, attention from enforcement agencies and the corporation's assessment of the truth of the allegations following investigation. As such, corporations should seek advice from their corporate counsel as to whether and at what stage potential enforcement needs to be disclosed, and the scope of disclosure that is required to satisfy the disclosure obligations while at the same time not prejudicing the corporation's ability to defend collateral litigation.

Above all, companies need to vigorously investigate any allegations received, both to determine the veracity of the allegations and so as not to be seen as turning a blind eye to any wrongdoing which has occurred. Such investigations should ideally be undertaken under the guidance of external counsel, with an eye to determining the extent of the wrongdoing, remediating any issues and deciding whether disclosure needs to be made to the regulator. By properly investigating allegations and undertaking a detailed analysis of whether they meet public disclosure obligations, companies can diminish the risk of further legal exposure.

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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