Does The Business Judgment Rule Have Any Application To The Disclosure Requirements Of The Ontario Securities Act?
Danier made an initial public offering of its shares by way of a
prospectus. The prospectus included Danier’s actual financial figures for the
first three quarters and projected results for the fourth quarter of the fiscal
year. Before the public offering closed, an internal company analysis
indicated that Danier’s fourth quarter results were below its forecast. Danier
did not disclose these fourth quarter results before the offering closed. A
number of individuals brought a class proceeding for prospectus
misrepresentation under s. 130(1) of the Ontario Securities Act (the “Act”).
The trial judge found Danier liable for statutory misrepresentation. He
concluded that the prospectus impliedly represented that the forecast was
objectively reasonable on the date the prospectus was filed and on the date the
public offering closed and that the actual below forecast fourth quarter
results were material facts required by s.57(1) to be disclosed before
closing. The implied representation that the forecast, although true on the
date the prospectus was filed, was false on the closing date. The Court of Appeal
reversed the trial judgment and the Supreme Court of Canada (“SCC”) affirmed
the decision of the Court of Appeal.
In Danier the SCC confirmed that forecasting is a matter of
business judgment and disclosure is a matter of legal obligation. Under common
law and the present wording and the SCC's legal interpretation of the Securities
Act, a misrepresentation of fact can only give rise to liability if it is
"material." The SCC emphasized that it is the business managers, not
judges, that have the expertise in making business decisions. The legal
obligations imposed by disclosure requirements under the Act were not to
be subordinated to the Business Judgment Rule (Salomon v. Salomon
& Co., Ltd.,  A.C. 22 (H.L.)). The SCC held that managers should
be free to take reasonable risks without later facing second-guessing by the
Courts. Thus, the exercise of business judgment to maximize shareholder return
is justified based on expertise and a requirement for reasonable risk taking.
The SCC also underwent an exercise in legislative interpretation. It
is up to the legislature and the courts, not business management, to set the
legal disclosure requirements. The Act differentiates between material
changes and material facts. The Act defines a “material change” in s. 1
as “a change in the business, operations or capital of the issuer that would
reasonably be expected to have a significant effect on the market price or
value of any of the securities of the issuer.” A “material fact” is defined in
the Act more broadly than a “material change” and includes “a fact that
significantly affects, or would reasonably be expected to have a significant
effect on, the market price or value of . . . securities” (s. 1). The trial
judge concluded and the SCC agreed that the fourth quarter results constituted
a “material fact.”
The SCC summarized that when a prospectus or an amendment contains no
misrepresentation on the date the document was filed, information amounting to material
facts that arise subsequently could not support an action under s. 130(1)
and that if a material change arises during the period of distribution,
failure to disclose this change as required by s. 57(1) could support an action
under s. 130(1).
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