Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities, October 2008
On July 4, 2008, the British Columbia government proclaimed into force the secondary market provisions of Bill 28 – Securities Amendment Act, 2007 (Securities Amendment Act).
The secondary market liability provisions which include the concept of deemed reliance, will make it easier for British Columbia plaintiffs to sue directors, officers and public issuers either by way of a class action or an individual action. (Please see previous Blakes Bulletins on Securities Law – November 2002, May 2003, February 2005, August 2005, December 2006 and November 2007 – which highlight and summarize that legislation.)
Civil Liability for Secondary Market Disclosure
The Securities Amendment Act, introduces new statutory causes of action for investors in the secondary market who suffer damages from misrepresentations in disclosure documents, public oral statements, and from a failure to provide timely disclosure of material changes.
Scope of Liability
Under the new Part 16.1 of the Securities Act (British Columbia) (the Act) investors can now seek damages from responsible issuers for misrepresentations in disclosure documents and public oral statements, and for failure to make timely disclosure, if the particular investor bought or sold the responsible issuer's security during the time between the misrepresentation, or the non-disclosure, and the time it was corrected. A responsible issuer is defined as a reporting issuer or any other issuer with a real and substantial connection to British Columbia, whose securities are publicly traded.
Potential defendants include the responsible issuer, its directors and officers, "influential people" (defined as a control person, promoter, insider who is not a director or officer of the responsible issuer, or investment fund manager of an investment fund issuer), certain persons making public oral statements and certain experts in respect of their reports, statements and opinions.
Part 16.1 distinguishes misrepresentations made in "core" documents from "non-core" documents and public oral statements. When there are misrepresentations contained in core documents, the legislation presumes reliance and loss causation, subject to available defences. Where the misrepresentation is not contained in a core document, a plaintiff must prove that the person who released the document or oral statement knew of the misrepresentation, deliberately avoided acquiring knowledge of the misrepresentation or was guilty of gross misconduct in connection with the release of the misrepresentation. Liability can also attach for a failure to make timely disclosure of a material change, if the plaintiff proves that the defendant knew of the change and that the change was a material change, or the defendant deliberately avoided acquiring knowledge of the material change or was guilty of gross misconduct in connection with the failure to make timely disclosure.
Leave Application Required
Section 140 of the Act contains procedural safeguards designed to prevent unmeritorious and coercive suits from being commenced. An action based on a misrepresentation or failure to make timely disclosure may only be commenced with leave of the court. The court may grant leave where it is satisfied that the action is being brought in good faith and has a reasonable possibility of success. All actions must be commenced no later than the earlier of three years after the date of the misrepresentation's first release (whether oral or written) and six months after the issuance of a news release disclosing that leave to commence an action has been granted. Once the court grants leave, the action may only be discontinued, abandoned or settled with further approval of the court.
Section 140.5 contains a damages assessment mechanism which provides for different damages calculations depending on whether the plaintiff acquired or disposed of the issuer's securities during the period of time following the misrepresentation, or failure to make timely disclosure, and before the correction of the inaccurate disclosure record. Where a plaintiff acquires or disposes of the securities on or before the 10th trading day after the violation is publicly corrected, the damages will equal the difference between the average price paid for the shares and the price received upon disposition. For later trades, damages are calculated based on the average trading price for the security during the 10 trading days following the public correction. Assessed damages do not include any amount that a defendant proves is attributable to a change in the market price of securities that is unrelated to the misrepresentation, or failure to make timely disclosure.
The legislation imposes limits on liability. In the case of a responsible issuer or an influential person that is not an individual, liability is limited to the greater of 5% of its market capitalization and C$1-million. For individuals, the liability is the greater 50% of the aggregate compensation received by the individual from the responsible issuer and its affiliates and C$25,000. For experts, the limit of liability is set at the greater of all revenue earned by the expert from the issuer and its affiliates over a 12-month period and C$1-million.
Significantly, these limits do not apply where a court determines that the defendant knowingly participated in the misrepresentation or failure to disclose.
There are a number of available defences under Part 16.1. If the defendant can prove that the plaintiff had knowledge of the misrepresentation or the non-disclosure when making his or her decision to acquire or dispose of the security then liability will not attach.
In addition, a defendant will not be liable for a misrepresentation if a reasonable investigation was conducted and, at the time of the release of the misrepresentation or the public oral statement, the defendant had reasonable grounds to believe that there was no misrepresentation. Likewise, in relation to a failure to make timely disclosure, a defendant will not be liable if it can be proven that a reasonable investigation was conducted and the defendant had reasonable grounds to believe that there would be no failure to make timely disclosure. The court will determine the reasonableness of the investigation by having regard to all relevant circumstances including a number of factors enumerated in section 140.4(7) of the Act. However, lack of knowledge is not a defence for either the responsible issuer or officers of the responsible issuer who still face liability if the plaintiff can prove that they deliberately avoided knowledge of the issue.
Defendants will also not be liable for misrepresentations in forward-looking information if they prove the document or public oral statement contained reasonable cautionary language identifying the forward-looking information as such and identifying the material factors that could cause actual results to differ materially from a conclusion, forecast or projection. To rely on this exception, defendants must set out in a statement the material factors or assumptions that were applied. Additionally, defendants must show there was a reasonable basis for drawing the conclusions or making the forecasts and projections that they did.
Blakes is currently acting as defence counsel in securities class actions engaging both the common law and secondary market liability provisions in a number of jurisdictions across Canada.
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.