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Ontario Securities Act and Liability of Experts
Published in the February 2006 issue of Litigation Notes - View Article
In light of recent high-profile financial scandals, many governments have introduced legislation to increase the liability of primary and secondary actors in the securities market.
In November 2002, the Ontario government announced several changes to the Securities Act, and further amendments were introduced in May 2003 as Bill 41. Some of the changes have already been implemented and the changes that we are concerned with, involving the statutory civil liability of experts for misrepresentations, came into force on December 31, 2005.
Until now, statutory civil liability has been limited to the primary market; rights of action were limited to those who bought shares while relying on official documents, such as takeover bid circulars and prospectuses, issued before the initial public offering. The extension of liability into the secondary market means that investors who buy and sell shares on the open market now have legal recourse for misrepresentations against experts, such as accountants, actuaries and lawyers. Furthermore, investors used to have to allege outright fraud and reliance on misrepresentations; the amendments now make it easier to bring a civil action by removing these previous barriers. The key changes are set out below.
1. Right of Action
Investors now have a right of action for misrepresentations against experts, which include an accountant, appraiser, auditor, engineer, financial analyst, geologist or lawyer.
Misrepresentations are defined as an untrue statement of a material fact or an omission to state a material fact. Material facts are facts that would be reasonably expected to have a significant impact on the market price or value of the securities. The misrepresentations can take the form of documents or oral statements.
In the case of a misrepresentation in a document, a right of action for damages will arise if the investor acquired or disposed of securities of an issuer on a stock exchange or other secondary market while there was an uncorrected misrepresentation, during the period between the time the document was released and the time it was publicly corrected, without regard to whether the investor relied on the misrepresentation.
Experts are liable where the misrepresentation is contained in a report, statement or opinion made by the expert and that misrepresentation is included, summarized or quoted in a document released by a person or company other than the expert, where the expert consented in writing to the use of the report, statement or opinion in the document.
These include any written communications, including those in electronic form, filed with the OSC, a government agency, or a stock exchange. They could also include any written communications that would “reasonably be expected to affect the market price or value of a security of the responsible issuer.”
Investors also have a cause of action arising from a public oral misrepresentation during the time between when it was made and corrected, without regard to whether they relied on the misrepresentation.
A public oral statement will only give rise to a right of action if it relates to the business or affairs of the issuer and is made by a person with actual, implied or apparent authority to speak on behalf of the issuer or an influential person, who actually quotes or summarizes from the report, statement or opinion of the expert that contains the misrepresentation and the expert consents in writing to its use in public opinion.
An oral statement may result in liability if it is made in circumstances in which it would be reasonable to conclude that the statement would become generally disclosed, i.e.: public speeches or statements to the press.
Experts are held to the general standard of strict liability. Once it is found that a document or public oral statement contained a misrepresentation, it does not matter whether or not the expert knew or ought to have known of the misrepresentation.
2. Key Defences
Leave of the court is required before an action may be commenced, so that frivolous actions may be reduced. An action must be commenced within 3 years of the release of the document or statement containing the misrepresentation. Any action brought may not be discontinued or settled without approval of the court. The prevailing party is entitled to costs as determined by a court.
Persons other than the expert, can plead the defence of reliance on an expert report—any part of their document or oral statement that includes the expert’s report with written consent, is exempt from liability, if that person did not know or had no reasonable basis to believe it contained a misrepresentation.
Withdrawn Consent
Experts are not liable if their written consent to have their report, statement or opinion included in a document or public oral statement was withdrawn in writing prior to the document’s release or public oral statement being made.
Inadvertent Release
Defendants may escape liability for a misrepresentation contained in a document, other than a document filed with the Commission, by proving they did not know and had no reasonable grounds to believe that the document would be released.
Reasonable Investigation
Defendants will not be liable if they can prove that they had conducted or caused to be conducted a reasonable investigation and did not have reasonable grounds to believe that there was a misrepresentation in the document or public oral statement.
Plaintiff’s Knowledge
A defendant is not liable if the plaintiff knew that the document or public oral statement contained a misrepresentation.
Forward Looking Information Cautions
Defendants will not be liable with respect to “forward-looking” information, provided that the document or public oral statement contains cautionary language, identifies material factors that could cause actual results to differ, states the material factors or assumptions that were applied in making a forecast, and the defendant had a reasonable basis for making the forecast. Forward-looking information means all disclosure regarding possible events and future-oriented financial information, based on assumptions about future economic conditions that is presented as a forecast or a projection.
Corrective Action
A defendant who becomes aware of an uncorrected misrepresentation may avoid liability by notifying the issuer’s board of directors. If the issuer fails to take corrective action within 2 days, the defendant must promptly notify the commission in writing to avoid liability (unless prohibited by law or professional confidentiality rules).
3. Damages
Damages are awarded on a proportionate level. The total liability of an expert is limited to the greater of $1 million and the revenue that the expert has earned from the issuer and its affiliates during the 12 months preceding the misrepresentation. However, if the expert is found to have knowingly made the misrepresentation or knowingly influenced the making of the misrepresentation, then the expert is exempt from the proportionate liability provisions and liability caps.