Rossana Di Lieto

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Civil Liability for Secondary Market Disclosure
Part XXIII.1 of the Securities Act

• Rossana Di Lieto
• Jean-Paul Bureaud
• March 17, 2005

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Bill 198 passed December 9, 2002
• Bill 149 passed December 16, 2004
• Amendments to Regulation 1015 pending
• Securities Act amendments to come into force on a
  day to be proclaimed by the Lieutenant Governor

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Background
• CSA Draft Legislation (November 2000)
• Closely follows Allen Committees recommendations
• Deterrence model versus compensating model

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Key Features of Civil Remedy
• Limited right of action against issuers other
  responsible parties
• Directors, Officers, Influential Persons,
  Experts
• No need to prove reliance
• Basis for Liability
• Misrepresentations in disclosure (oral or
  written)
• Failure to Make Timely Disclosure

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Procedural Safeguards Against Strike Suits
• Screening Mechanism Plaintiff to obtain leave
  of the court
• Action brought in good faith
• Reasonable possibility of success
• Court Approval of Settlements
• No proceeding can be stayed, discontinued,
  settled or dismissed for delay without approval
  of the court
• Proportionate Liability
• Loser Pays Cost Rules
• Costs of litigation may be awarded to prevailing
  party

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Basis For Liability
• Misrepresentation in documents released by the
  issuer
• Misrepresentation in public oral statements by
  the issuer
• Misrepresentation in documents or public oral
  statements by influential persons
• Failure to make timely disclosure by the issuer

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Potential Plaintiffs
• Any person or company acquiring or disposing of
  the issuers securities during a time when the
  misrepresentation or non-disclosure went
  uncorrected
• No need to prove reliance

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Potential Defendants
• Responsible Issuer
• Reporting Issuers
• Any issuer with a substantial connection to
  Ontario with publicly traded securities
• Directors
• Officers
• Influential Persons
• Control Persons, Promoters, Insiders, Investment
  Fund Managers
• Experts (including auditors)
• Carve-out for approved rating organizations

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Liability Standards
• Two liability standards, which vary according to
  type of disclosure
• Core
• If misrepresentation proved, onus shifts to
  Defendant
• Non-Core Documents/Public Oral Statements/Material
  Changes
• If misrepresentation proved, onus remains with
  Plaintiff to prove Knowledge or Deliberate
  Avoidance or Gross Misconduct
• Exception for material changes issuer, officer,
  investment fund manager or officer of an
  investment fund manager
• Burden of proof also varies depending on
  Defendant
• Written documents e.g., responsible issuer and
  director, each officer who authorized, permitted
  or acquiesced in release of document
• Oral statements e.g., responsible issuer, each
  director and officer who authorized, permitted
  and acquiesced in the making of the public oral
  statement

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Defences
• Plaintiff Had Knowledge (s.138.4(5))
• Reasonable Investigation (Due Diligence)
  (s.138.4(6))
• No Authority Defence (public oral statement)
  (s.138.3(7))
• Confidential Disclosure (s.138.4(8))
• Safe harbour for forward-looking information
  (s.138.4(9))
• Expertized Statements (reliance on experts)
  (s.138.4(11))
• Defence for Experts (No consent or withdrawal of
  consent) (s.138.4(12))
• Release of Documents - No knowledge or reasonable
  grounds to believe that document would be
  released (s.138.4(13))
• Derivative Information (s.138.4(14))
• Corrective Action (s.138.4(15))

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Defences Reasonable Investigation
• Factors considered
• Knowledge, experience and function of person
• Office held, role and responsibility of person
• Existence, if any, and nature of any disclosure
  compliance system
• Reasonableness of reliance on disclosure
  compliance system
• Professional standards applicable to expert
• Period of time within which disclosure was
  required

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Defences Confidential Disclosure
• Confidential filing with Commission
• Reasonable basis for making disclosure on
  confidential basis
• Prompt disclosure when basis for confidentiality
  ceases to exist
• No release of information that, due to
  undisclosed material change, contains a
  misrepresentation, and
• Where information becomes publicly known other
  than as required by the Act, responsible issuer
  promptly discloses as required by the Act

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Defences Forward-Looking Information
• Definition possible events, conditions or
  results of operations based on assumptions about
  future economic conditions and course of action
  (includes FOFI presented either as a forecast or
  projection)
• Reasonable cautionary language, proximate to the
  FLI
• identify information as FLI
• identify material factors or assumptions applied
• identify material factors that could cause actual
  results to differ materially
• Reasonable basis for making statement

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Calculation of Damages
• Damages based on difference between
• the value of the securities acquired or disposed
  of at a time when the public disclosure record of
  the issuer was inaccurate and
• the value of the securities after the disclosure
  has been corrected
• Damages are to be calculated with respect to the
  change in price of the responsible issuers
  security during the relevant period
• typically begins on the date of the purchase or
  sale of securities and ends on tenth trading day
  after the public correction

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Damages Calculation of Damages
• No amount is recoverable for the portion of the
  Plaintiffs loss that the Defendant proves is
  attributable to a change in the market price of
  securities that is unrelated to the
  misrepresentation or failure to make timely
  disclosure
• No need to crystallize a loss
• Damages are subject to caps.

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Damages Liability Limits
• Responsible issuers and influential persons
  (other than individuals) are liable for the
  greater of
• 5 of their market capitalization (as defined in
  the regulations basically, the weighted average
  trading price) and
• 1 million

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Damages Liability Limits
• Directors and officers of responsible issuers
  influential persons who are individuals
  directors and officers of influential persons
  and other persons making a public oral
  misrepresentation are liable for the greater of
• 25,000 and
• 50 of their compensation from the particular
  company and its affiliates during the 12 months
  preceding the misrepresentation or failure to
  make timely disclosure
• compensation cash compensation FMV of all
  deferred compensation (e.g. options)

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Damages Liability Limits
• Experts are liable for up to the greater of
• 1 million and
• revenue earned by the expert or its affiliates
  from the responsible issuer during the preceding
  12 months

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Damages Other Limits
• National application of Liability Limits (s.
  138.7(1))
• Court to deduct
• Damages assessed in other related actions in
  Ontario and other provinces and territories in
  Canada under comparable legislation
• Amounts paid to settle those actions

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Damages Exception to Liability Limits
• Liability limits do not apply to defendant, other
  than responsible issuer, if
• Plaintiff proves person or company authorized,
  permitted or acquiesced in the making of
  misrepresentation or failure to make timely
  disclosure while knowing it was misrepresentation
  or failure to make timely disclosure

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Damages Allocation of Liability
• Proportionate liability (contrast with primary
  market disclosure)
• Safeguard mechanism against targetting deep
  pocket defendants
• Exception
• Defendant authorized, permitted or acquiesced in
  making misrepresentation or failure to make
  timely disclosure while knowing it to be
  misrepresentation or failure to make timely
  disclosure
• If so, joint and several

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Procedural Matters
• Commission and Public Notifications
• Automatic intervenor status for the Commission
• Limitation Periods
• Not an exclusive remedy

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Changed Definition of Material Fact
• Material Fact
• amended to delete ex post facto determination of
  materiality

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Civil Liability for Secondary Market Disclosure
(Part XXIII.1)

• Comparison to United States
• Rule 10b-5
• anti-fraud rule
• implied right of action
• Plaintiff must prove defendant acted with
  scienter
• mental state embracing intent to deceive,
  manipulate or defraud
• most U.S. courts have held that recklessness
  constitutes scienter as well