- within Litigation and Mediation & Arbitration topic(s)
- with readers working within the Healthcare and Metals & Mining industries
Ontario's Court of Appeal has held in Terry Longair Professional Corporation v. Akumin Inc.1 that an issuer and other defendants can be sued even when a public correction of a misrepresentation is not directly associated with a drop in the secondary market price of the issuer's shares. While this decision means reporting issuers have greater class action risk from public corrections, it may also allow defendants to argue for reduced damages in light of the statutory damages provisions of the Ontario Securities Act ("OSA").
Background
The background facts and allegations are explained in our prior article.
Briefly, in June 2021, Akumin Inc. ("Akumin") announced an agreement to acquire Alliance HealthCare Services Inc. ("Alliance") for $820 million USD. If completed, this transaction would transform Akumin's business and roughly triple its size. It was expected to close in Q3 2021.
In August 2021, Akumin announced that its Q2 2021 financial statements would be delayed to allow further analysis of potential credit losses in prior years. Following this disclosure, Akumin's share price dropped by around 25%.
Between October and November 2021, Akumin publicly disclosed that:
- its potential credit losses were expected to negatively impact its accounts receivable by about $25-30 million,
- there would be a downward adjustment to property and equipment of about $19 million, and
- its financial statements for FY 2019, FY 2020, and Q1 2021 would be restated.
Despite these announcements, Akumin's share price did not materially decrease. Instead, it remained stable or even increased.
A putative global class action was commenced against Akumin, certain of its directors and officers, and its auditor in Ontario. In opposing leave2 to commence the class action, Akumin argued that there had been no public correction of a prior misrepresentation since:
- The August 2021 share price drop was attributable to concerns about the Alliance transaction and the delay in releasing financial statements, not to any correction of any prior misrepresentation.
- The October and November 2021 disclosures did not cause Akumin's share price to drop and therefore were not "corrective" of a prior misrepresentation.
The motion judge rejected Akumin's arguments, holding that a misrepresentation can be publicly corrected even if the issuer's share price does not decline.
Court of Appeal Decision
The Court of Appeal agreed with the motion judge's decision and made four holdings that will have a significant impact on secondary market misrepresentation cases going forward:
First, public corrections can occur without share movement. While a statistically significant change in share price following a disclosure is evidence that there was a public correction, its absence does not mean a public correction did not occur. The Court of Appeal explained:
[63] There is no materiality analysis for a public correction, nor is a drop in price required to establish a public correction. That would miss the point of the public correction inquiry. An issuer might plainly correct an untrue statement without discernable reaction from the market (this might affect materiality or damages, but not the existence of a correction). Equally, market movement may provide evidence of how a disclosure was perceived. For example, where a disclosure is not facially connected to the misrepresentation, a drop in price may indicate that the market viewed the disclosure as a correction. In all cases, the inquiry should be straightforward and functional: did the alleged correction actually correct the alleged misrepresentation or not?
Second, public corrections do not need to specify the extent of a prior misstatement. A public correction occurs as soon as the issuer alerts the market that a prior disclosure is inaccurate, even if that corrective disclosure does not address the extent of the prior misrepresentation. The Court explained this principle with reference to the August 15, 2021 disclosure, which noted that the financial statements might need to be restated but did not provide any details of the issue.
Third, implicit public corrections are actionable. The Court of Appeal confirmed that a disclosure need not state outright that a prior statement was wrong to qualify as a "public correction" under the OSA. An implicit public correction may suffice if it is "a disclosure that is reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement."3
[53] The fact that the alleged public correction did not expressly identify a prior misstatement could not be the end of the analysis. This is because even if the subsequent disclosure did not expressly identify a prior error or misstatement, when considered in context and in light of all surrounding circumstances, the public correction was reasonably capable of being understood as revealing to the market the existence of an untrue statement of material fact or an omission to state a material fact. [emphasis added].
Fourth, "partial" corrections are potentially actionable. The Court held that Akumin only fully corrected its financial statements in November. Prior to that, from August to October, it had made only "partial" corrections. Nevertheless, the claim for the "partial" public corrections was not dismissed.
The OSA does not contemplate a "partial" public correction. It is therefore not clear how courts should differentiate between "partial" and "full" public corrections in the future, especially when assessing damages. It appears that the Court of Appeal's goal in recognizing "partial" corrections was to emphasize that issuers may be held liable for incremental public corrections:
[48] Broadly, a public correction establishes an end-point for the market distortion caused by a misrepresentation. The [OSA] presumes causation: once a misrepresentation has been fully corrected (either by a single public correction or the cumulative effect of several partial corrections), the price of the security should no longer be impacted by the misrepresentation.
[...]
[83] I see no palpable or overriding error in the motion judge's finding that the August 15, 2021 and October 12, 2021 Disclosures only partially corrected the misrepresentations in the prior years' financial statements and those misrepresentations were not fully corrected until November 15, 2021.
Takeaways
- This decision clarifies the law on corrections to public disclosure. Specifically, public corrections do not require (1) a statistically significant share price decline, and (2) a complete correction of the misrepresentation.
- The Court's reasoning could allow defendants to limit potential damages. Section 138.5 of the Securities Act sets a fixed formula for damages:4 the difference between the price paid per share and the issuer's average share price 10 days after the public correction. In other words, the "damages clock" starts running when the public correction occurs, not when the investor actually experiences losses. This has important implications for damages. If there is no price decline after a public correction, the resulting damages may be minimal or even zero. Viewed through this lens, issuers could seek to minimize damages by arguing that:
- A misrepresentation was already corrected by earlier disclosures, even if the market did not react, resulting in near-zero statutory damages.
- Even if an issuer's share price eventually drops after a public correction, damages should be reduced because "partial" corrections elicited no market reaction.
The Court did not consider these or any other damages issues in its reasons. This will be an important issue for another day.
Footnotes
1. Terry Longair Professional Corporation v. Akumin Inc., 2025 ONCA 606
2. Section 138.8(1) of the OSA requires that the court grant leave to a plaintiff to commence a secondary market liability proceeding. Leave will be granted when (i) the action is brought in good faith; (ii) there is misrepresentation; (iii) the misrepresentation is material; and (iv) the misrepresentation has been publicly corrected.
3. at para. 50.
4. For securities sold 10 trading days after the public correction.
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