Changes to Securities Law will generate new exposures and challenges for public companies, their officers, directors, advisors and insurers.
By the time this article has gone to print, one of the most significant changes in Canadian securities laws in many years will have come into effect. The new secondary market civil liability regime, which will facilitate shareholder class actions, will have been proclaimed in force on December 31, 2005.
The "Bill 198" amendments to the Ontario Securities Act permit investors to sue public companies for investment losses where there has been a misrepresentation in a company’s public disclosure, or a company has failed to report a material change to its business in a timely manner, even if the investors did not rely on or were not even aware of the company’s inaccurate disclosure. Until this new change in our law, it has been necessary for investors to establish "actual reasonable reliance" on the misrepresentation in order to maintain suit for negligent misrepresentation in a company’s disclosure record.
The new "deemed reliance" feature of the Bill 198 amendments removes a significant impediment to the launching of shareholder class actions in Canada, and will bring shareholders’ ability to sue more in line with the United States "fraud on the market" model.
However, the new legislation arguably goes further than the U.S. model by providing for "rebuttable deemed loss causation." That is, price changes in securities after the misrepresentation (or after the late disclosure of a material change) are deemed to have been caused by the misrepresentation or failure to make timely disclosure, subject to the defendant proving that the price changes are due to other factors (i.e. market changes; industry changes; other changes to the issuer’s business which have been disclosed, etc.).
Key features of the new civil liability regime include:
- Deemed reliance by investors on corporate disclosure record. This will facilitate shareholder class actions.
- Rebuttable deemed loss causation: Investment losses are deemed to have been caused by market’s reaction to corporate misrepresentation, subject to proof by defendant that losses caused by other factors.
- Potential Defendants: "Responsible issuers" (a defined term which includes Ontario reporting issuers, and other issuers having a real and substantial connection to Ontario); directors, officers who permitted or acquiesced in the release of the misrepresentation (or failure to make timely disclosure); "influential persons" (i.e. insiders, 20% shareholders, fund managers) who knowingly influenced the release of the misrepresentation or failure to make timely disclosure; expert advisors like accountants, lawyers, or other experts if they have consented in writing to the use of their report in the disclosure.
- "Due Diligence" type defences: There are several due diligence type defences and a "safe-harbour" for forward looking information provided that very specific elements can be proven by the defendant.
- Liability Limits:
For issuers, the greater of $1 million and 5% of market capitalization; for individuals, generally the greater of $25,000, and 50% of the individuals total compensation from the issuer or its affiliates for the 12 months prior to the misrepresentation. Note: individual limits do not apply where individuals knowingly authorized, permitted or acquiesced in the making of the misrepresentation or failure to make timely disclosure - Proportionate Liability: Generally, proportionate and not joint and several liability – except, individuals can be jointly liable if they knowingly authorized, permitted or acquiesced in the misrepresentation or failure to make timely disclosure.
- Anti strike-suit provisions:
Court approval is required to commence suit, and leave will be granted on the basis that the action is brought in good faith and there is a reasonable possibility of success at trial. Note: Leave application may give rise to early discovery, before certification and before summary judgment. Court approval of settlements is also required.
Minimizing Exposures
Some of the things issuers should do to minimize exposures:
This new liability regime is found at Part XXIII.1 of the Ontario Securities Act and it is very complex with different burdens of proof, available defences and limits of liability, depending on the nature of the misrepresentation and the role of the individual or entity regarding the making of the misrepresentation. This article is intended only as a general overview, and should not be construed as legal advice.
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.