Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities Regulation, October 2008

The Ontario Securities Commission (OSC) has finalized its policy which outlines the Commission's views on some of the policy considerations underlying the defence for misrepresentations in forward-looking information. Ontario's laws on statutory civil liability for secondary market disclosure, which came into force in 2005, include specific defences against claims and misrepresentations in forward-looking information (FLI).

OSC Policy 51-604 – Defence for Misrepresentations in Forward-Looking Information (the Policy) was initially published for comment in June 2006. Since the proposed Policy was published for comment, two related developments have occurred. The first was the decision of the Supreme Court of Canada in the Danier case, which involved an allegation of misrepresentation in a forecast contained in a prospectus. The second was the adoption of amendments to National Instrument 51-102 – Continuous Disclosure Obligations that deal with the disclosure of forward-looking information. None of these developments resulted in any changes in the proposed Policy, and the OSC made no substantive changes to the Policy as a result of any comments received.

In its summary of comments received, the OSC noted that several of the comments dealt with suggested changes to the Securities Act (Ontario) or with differences between the Ontario defences and the similar U.S. "safe harbour" defences. However, the OSC responded that the Policy cannot change the requirements of the Securities Act nor state that such requirements are intended to be consistent with the U.S. safe harbour requirements. While those seeking greater guidance in the Policy may be disappointed, there are some useful elements and some clarifying changes made.

The Defence for FLI

Written FLI is protected from statutory civil liability if:

(a) The document contains:

(i) reasonable cautionary language identifying the FLI as such;

(ii) reasonable cautionary language identifying material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the FLI; and

(iii) a statement of the material factors or assumptions that were applied in drawing a conclusion or in making a forecast or projection set out in the FLI;

(b) the foregoing language and statements appear proximate to the forward-looking information; and

(c) the person or company had a reasonable basis for drawing the conclusions or making the forecast or projection.

Material Factors or Assumptions

The OSC declined to provide definitions of a material factor or material assumption or otherwise to establish a standard of materiality in the Policy, saying that this raises issues that fall outside its scope. The OSC believes that issuers should make reasonable judgments with respect to these matters in the context of the particular circumstances.

However, the OSC did confirm that there is no requirement that the cautionary language include an express statement that the issuer believes the assumptions are reasonable, nor must every factor or assumption applied be listed.

The final Policy includes a new statement that failure to include disclosure of a particular assumption that in fact ultimately causes the FLI not to materialize as predicted should not necessarily mean that the defence is not available.

The OSC emphasized that issuers must disclose the assumptions or factors it applies which are relevant and material to the conclusion, forecast or projection (their emphasis).

Proximate Disclosure

The OSC had been asked to confirm whether it was possible to incorporate by reference more lengthy discussion of material risk factors into shorter documents, such as press releases. The OSC declined to provide more specific statutory interpretation, but did state that it believes as a policy matter that in appropriate circumstances, an issuer "ought to be able" to incorporate by reference into a document a more lengthy discussion of material risk factors and assumptions.

Overall, the OSC's responses to the comments indicate that the OSC recognizes that the Policy will not supercede statutory interpretation and cannot create defences or guidance beyond the legislation. It remains to be seen how the legislation will be applied by the courts. As with the Danier case, future court actions that will involve these defences will need to be followed closely to gain further guidance.

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.