Photo of Joe BrennanBy Joe BrennanMarch 26 2018
Business Law

A Reminder for D&O’s re: Civil Liability for Secondary Market Disclosure

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Investors that purchase the securities of a Canadian public company on the secondary market (i.e. on a stock exchange) may bring claims against the company and its directors and officers for (i) a misrepresentation in a document or in a public oral statement or (ii) a failure to make timely disclosure of a material change. This article provides a very simplified refresher course on those potential civil liabilities. 

Note that this is not a comprehensive summary and you are encouraged to consult with appropriate legal counsel if any of these potential claims could apply to you.  Further, note that this article does not address the potential liability for “influential persons”, or the potential liability stemming from documents or statements produced by "influential persons" (i.e. control persons, promoters, insiders who are not also directors or officers of the responsible issuer, or investment fund managers if the responsible issuer is an investment fund).

Potential Claims

Misrepresentation

Investors may bring claims in the following circumstances:

  • A misrepresentation in a document released by a responsible issuer; or
  • A misrepresentation in a public oral statement made on behalf of a responsible issuer.

Failure to Make Timely Disclosure of a Material Change

Investors may also bring claims where the issuer has failed to make timely disclosure of a material change as required by securities law.

Definitions

A “misrepresentation” means:

  • an untrue statement of a material fact, or
  • an omission to state a material fact that is required to be stated, or
  • an omission to state a material fact that is necessary to be stated in order for a statement not to be misleading.

A “material fact” means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities of the issuer.

A “material change” means:

  • a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of a security of the issuer, or
  • a decision to implement a change referred to in the previous paragraph made by the directors of the issuer, or by senior management of the issuer who believe that confirmation of the decision by the directors is probable.   

Who can sue?

Misrepresentation

A claim for damages can be made by any person who buys or sells securities of the responsible issuer from the time the misrepresentation was made until the time it is publicly corrected.

Failure to Make Timely Disclosure of a Material Change

A claim for damages can be made by any person who buys or sells securities of the responsible issuer between the time when the material change was required to be disclosed and the time it is actually publicly disclosed.

Who can be sued?

Misrepresentation

A claim for damages for a misrepresentation can be brought against:

  • The responsible issuer;
  • Each director of the responsible issuer at the time the document was released;
  • Each officer of the responsible issuer that permitted, authorized or acquiesced in the release of the document; and
  • Each expert where the misrepresentation was contained in an expert report that was included, summarised or quoted in the document or public oral statement with the written consent of the expert.

Failure to Make Timely Disclosure of a Material Change

In the case of failure to make timely disclosure of a material change, a claim for damages can be brought against:

  • The responsible issuer; and
  • Each director and officer of the responsible issuer that permitted, authorized or acquiesced in the failure to make timely disclosure.

 Burden of proof

 Misrepresentation

For a misrepresentation in a core document (i.e. a prospectus, information circular, issuer bid circular, take-over-bid circular, directors’ circular, rights offering circular, MD&A, financial statement, AIF or material changes report), the plaintiff only needs to establish that there was a misrepresentation in the document.

For non-core documents or public oral statements, the plaintiff must show not only that there was a misrepresentation, but that one of the following applies:

  • The defendant knew, at the time the document was released or the public oral statement was made, that the document or public oral statement contained a misrepresentation;
  • At the time the document was released or the public oral statement was made, the defendant deliberately avoided acquiring knowledge that the document or public oral statement contained the misrepresentation; or
  • The defendant, through action or failure to act, was guilty of gross misconduct in connection with the release of the document or the making of the public oral statement that contained the misrepresentation.

Failure to Make Timely Disclosure of a Material Change

For all defendants other than the issuer itself and its officers, the plaintiff must show that one of the following applies: 

  • The defendant knew, at the time that the failure to make timely disclosure first occurred, of the change and that the change was a material change;
  • The defendant, at the time or before the failure to make timely disclosure first occurred, deliberately avoided acquiring knowledge of the change or that the change was a material change; or
  • The defendant, through action or failure to act, was guilty of gross misconduct in connection with the failure to make timely disclosure.

Defences

Investor Knowledge Defence

A person or company is not liable if it can prove that the plaintiff had knowledge of the misrepresentation or the failure to make timely disclosure at the time it purchased or sold the responsible issuer's securities.

Reasonable Investigation / Due Diligence Defence

Misrepresentation

A person or company is not liable in relation to a misrepresentation if that person or company proves that:

  • before the release of the document or the making of the public oral statement containing the misrepresentation, the defendant conducted, or caused to be conducted, a reasonable investigation; and
  • at the time of the release of the document or the making of the public oral statement, the defendant had no reasonable grounds to believe that the document or public oral statement contained a misrepresentation.

Failure to Make Timely Disclosure of a Material Change

A person or company is not liable in relation to a failure to make timely disclosure of a material change if that person or company proves that:

  • before the failure to make timely disclosure first occurred, the defendant conducted, or caused to be conducted, a reasonable investigation; and
  • the defendant had no reasonable grounds to believe that the failure to make timely disclosure would occur.

Damages

The calculation of damages is quite complicated but it is basically the difference between the average price paid for the shares and the price received on the disposition of the shares.

Liability Limits

Responsible Issuer

Subject to the knowledge qualifier discussed below, a responsible issuer is liable for no more than the greater of:

  • 5% of its market capitalization; and
  • $1,000,000.

Directors and Officers

Again subject to the knowledge qualifier discussed below, a director or officer of a responsible issuer is liable for no more than the greater of:

  • $25,000;
  • 50% of the aggregate of the director or officer’s compensation from the responsible issuer in the previous 12 months preceding the day on which the misrepresentation was made or the failure to make timely disclosure first occurred.

Knowingly Authorized, Permitted or Acquiesced

Notwithstanding the foregoing, there is no limit on liability where the defendant knowingly authorised, permitted or acquiesced in the making of a misrepresentation or the failure to make timely disclosure while knowing that it was a misrepresentation of a failure to make timely disclosure.

Invitation for Discussion:

If you would like to discuss any aspect of this blog in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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