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Supreme Court Clarifies Disclosure Obligations for Securities Issuers
Published in the October 2007 issue of Litigation Notes - View Article
Synopsis: Canada’s first shareholder class action is dismissed by the Supreme Court of Canada $1 million in costs ordered to be paid by the representative plaintiff
The long-running class action battle between shareholders and Danier Leather has finally come to an end. The Supreme Court recently released a decision clearing the company of any liability for prospectus misrepresentation.
Danier had made an initial public offering of its shares through a prospectus. The prospectus contained a forecast that included projected results for the fourth quarter of the fiscal year. An internal company analysis prepared before the public offering closed showed these fourth quarter results were lagging behind its forecast. Danier did not disclose its intra-quarterly results before closing and a group of shareholders brought a class proceeding for prospectus misrepresentation under s. 130(1) of the Ontario Securities Act (“the Act”).
At trial, the judge found Danier liable for statutory misrepresentation and found that the poor fourth quarter results were material facts required to be disclosed before closing by s. 130(1) of the Act. Danier was found to have impliedly represented that the forecast was reasonable so that while it was true on the date the prospectus was filed, it was false on closing date.
The Ontario Court of Appeal reversed the trial judgment and held that the trial judge had misinterpreted the disclosure requirements of the Act. Although disclosure lies at the heart of the statute, the extent of disclosure is a matter of legislative policy – therefore, compliance with the regulatory demands of ss. 55-58 was sufficient to not trigger liability under s. 130(1). The Court of Appeal held that while investors were entitled to assume that as of the filing date, the prospectus provided full, true and plain disclosure of materials facts, thereafter, they were only entitled to notice of material changes and no material changes arose during the period of distribution.
The Supreme Court agreed with the Court of Appeal and held that the Act is remedial legislation and to be given a broad interpretation. When a prospectus is accurate at the time of filing, the Act limits post-filing disclosure to notice of a “material change” (s. 57(1)). A material change is defined by the Act as “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 any of the securities of the issuer”. An issuer does not have a similar express obligation to notify of a change of “material fact” that does not amount to a “material change”. A change in the intra-quarterly results is not itself a material change. The trial judge rightly found that there was no material change and thus no further disclosure was required. The Supreme Court found that once the issuer has fully complied with its regulatory obligation under s. 57(1), then there is no civil liability under s. 130(1) for failure to disclose post-filing information that does not amount to a material change. It was held that to impose civil liability under s. 130(1) for failure to disclose a “material fact” would be contrary to legislative intent which purposely distinguishes between “material change” and “material fact” for the purposes of liability under the Act.
The Supreme Court also held that having been found by the trial judge to be an objectively reasonable forecast as grounded in the prospectus, it was an error of law to test the objective reasonableness of the forecast at the date of closing as the forecast only carried an implied representation until the prospectus was filed.
The Supreme Court further rejected the respondents’ argument that the Business Judgment Rule should be considered in examining the forecast. The Court clarified that the Business Judgment Rule is a concept in the context of business decisions, and it should not be used to qualify or undermine the duty of disclosure. Disclosure is a legal requirement to be set by legislature and the courts, not to be subordinated to business judgment. In other words, the deference traditionally given to other types of business decisions under the Business Judgment Rule, does not apply when determining whether the issuer fulfilled its disclosure obligations under the Act.
A final interesting note regarding costs. One of the appellants submitted that even if the appeal was unsuccessful, no costs should be awarded on the basis of s. 31(1) of the Class Proceedings Act (C.P.A.)which allows the court to consider when exercising its discretion to order costs, whether the case was a test case, raised novel points of law or involved a matter of public interest. The Supreme Court rejected this argument and held that there was nothing to indicate that this case fell under s. 31(1) of the C.P.A. To that end, it noted that this was not a matter of public interest involving issues of public importance to persons who are historically disadvantaged, but was a commercial dispute between sophisticated and well resourced actors. The Court agreed with the Court of Appeal that this was a well run and well financed piece of Bay Street litigation with substantial potential reward for the plaintiffs, and therefore, there was no reason to interfere with the costs order. : Justice Binnie commented: “… Protracted litigation has become the sport of kings in the sense that only kings or equivalent can afford it. Those who inflict it on others in the hope of significant personal gain and fail can generally expect adverse consequences.”
Kerr v. Danier Leather Inc., 2007 SCC 44