Originally published in Blakes Bulletin on Securities Regulation/Litigation, November 2007
The Quebec National Assembly recently enacted amendments to the Securities Act (Quebec) introducing statutory civil liability for secondary market disclosure. These changes became effective on November 9, 2007. They are set out in An Act to amend the Securities Act and other legislative provisions (Quebec) and are substantially similar to those implemented in Ontario in December 2005 and Alberta in December 2006. Passage of the Quebec legislation means that class actions based on secondary market liability are now possible in Quebec, although the legislation contains a number of built-in safeguards to prevent so-called "strike suits" prevalent in the United States.
Scope Of Liability
The Quebec legislation, like its counterpart legislation in other provinces, expands civil liability for misrepresentation in disclosure documents and introduces civil liability for public oral statements. It also creates civil liability for failure to provide timely disclosure of material changes. Note that this regime only applies to publicly traded companies.
Liability is not limited to the issuer concerned, but also extends to the following:
- the issuer’s directors and officers
- "influential persons" including control persons, promoters, insiders and investment fund managers (for investment fund issuers)
- directors and officers of influential persons
- other persons with authority to speak for the issuer, and experts (such as auditors, lawyers, engineers, geologists and financial analysts) with respect to their reports, statements or opinions.
A right of action for damages will exist under the legislation against those persons or companies listed above, as applicable, in favour of any person who acquires or disposes of securities during the period between when the document was released or public oral statement was made, and when the misrepresentation is publicly corrected, or in the case of failure to provide timely disclosure, when the material change was required to be disclosed and when it is subsequently disclosed.
The legislation dispenses with the requirement that the plaintiff prove the elements of reliance and loss causation, key elements to a case of ordinary civil liability.
The legislation tempers potential liability with respect to misrepresentations in public oral statements and so-called "non-core" documents (other than experts’ reports) by requiring the plaintiff to prove that the defendant knew or deliberately avoided knowledge of the misrepresentation, or was guilty of gross fault in connection with the release of the document or making the public oral statement.
With respect to claims based on the failure to make timely disclosure of a material change (with the exception of a claim against an issuer, its officers, an investment fund manager or its officers), the legislation requires the plaintiff to prove that the defendant knew of the change and that the change was a material change, or deliberately avoided acquiring such knowledge, or was guilty of gross fault in connection with the failure to make timely disclosure.
Court Authorization Required
Among the built-in safeguards, the legislation contains a requirement that a legal action based on a misrepresentation or failure to make timely disclosure can only be commenced with prior authorization of the court. The court can only grant authorization where it is satisfied that the action is being brought in good faith and there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. Any action that is brought may not be discontinued or settled without approval of the court. The prevailing party is entitled to costs as determined by the court. Like its counterpart legislation in other provinces, these procedural provisions are clearly intended to prevent abusive "strike suits" and class actions which have been used to harass public companies in the United States.
Damage Assessment And Cap On Liability
Damages will be assessed in favour of investors who acquire or dispose of an issuer’s securities after the release of a document or public oral statement containing a misrepresentation, or after a failure to disclose the material change. Damages are assessed differently depending on a number of factors. And while the legislation creates a presumption of loss causation, it leaves open the door to a plaintiff proving that the loss is attributable to a change in the market price of the securities that is unrelated to the misrepresentation or the failure to make timely disclosure.
Another important safeguard in the legislation is the cap on liability:
- the total liability of an issuer is limited to the greater of CAD 1 million and 5% of its market capitalization
- the liability limit of an individual is the greater of CAD 25,000 and 50% of their total 12 month compensation from the issuer or other relevant company (including the fair market value of all deferred compensation such as options, pension benefits and stock appreciation rights)
- an expert’s liability is limited to the greater of CAD 1 million and the revenue that the expert has earned from the issuer and its affiliates during the 12 months proceeding the misrepresentation.
The court has the ability to apportion liability corresponding to a defendant’s specific responsibility for the damages. If a court determines that a particular defendant, other than the responsible issuer, authorized, permitted or acquiesced in the making or influencing of the misrepresentation or failure to make timely disclosure while knowing that it was a misrepresentation or failure to make timely disclosure, the caps on damages do not apply.
In addition to the various safeguards discussed above, a number of defences may be available under the legislation, including by showing that a "reasonable investigation" was conducted and that there were no reasonable grounds to believe that the document or public statement contained a misrepresentation. Also, a person or company may avoid liability for a misrepresentation in "forward-looking information", provided the person or company proves that appropriate cautionary language was put forth and the person or company had a reasonable basis for drawing the conclusions in the forward-looking information.
Some Best Practices
A number of proactive measures can be undertaken to potentially limit liability under the new legislation – indeed, such steps may already have been undertaken following the adoption of secondary market liability regimes in Ontario and Alberta. First and foremost, issuers and their directors and officers are reminded that it is best to assume that the new legislation creates liability for any public disclosure – and, as a consequence, they should establish, implement and monitor the appropriate measures in order to avoid or at least mitigate such liability, which can include the following:
- establish and disseminate a disclosure policy and establish a disclosure committee
- review public disclosure records, Web site disclosure and transcripts of public meetings
- ensure that all disclosure and statements are materially accurate and, to the extent an inaccuracy is discovered, ensure such information is corrected by later disclosure
- ensure the existence of a system designed to meet continuous disclosure obligations and review policies and current procedures followed in the creation and verification of such information
- discourage directors, officers and other corporate representatives from making impromptu public remarks
- ensure that all public statements made by or on behalf of a company are approved by appropriate representatives of the company in advance
- institutionalize briefing sessions
- create a written policy for the review of all public statements made by officers and directors, including a procedure to be followed in the event inaccuracy is subsequently found
- ensure that forward-looking statements are accompanied by appropriate cautionary language
- provide the appropriate cautionary statements at the beginning of any analyst call
- avoid boilerplate cautionary language and tailor such language to the specific disclosure situation.
The full text of the legislation is available on Blakes Web site at www.blakes.com in our "Publications – Corporate Finance & Securities Regulation" section. Click here to view.
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.