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Secondary Market Disclosure – Why you need to review your Insurance before December 31, 2005


December 14, 2005

Bill 198 (as amended by Bill 149) contains amendments to the Ontario Securities Act which create a statutory civil liability regime for continuous disclosure. Civil liability for secondary market disclosure will change drastically when these amendments come into force on December 31, 2005 (similar legislation is pending in other Canadian jurisdictions). Corporations, directors, officers and others are likely insufficiently insured, both in terms of limits and conditions of coverage, as a result of this new risk of civil liability.

Securities class actions involving secondary market disclosure are commonplace in the U.S., as are multi-million dollar settlements. In 2004, 235 new federal securities fraud class actions were filed in the U.S.[1] and 119 securities class actions were settled, with an average settlement value of US $27.1 million[2].

To date, the experience north of the border has been very different. Unlike the U.S., in Canada, to establish civil liability for misrepresentation, investors must establish that they relied on the impugned misrepresentation, and that they suffered damages as a result. The "individual issue" of reliance has made it very difficult for Plaintiffs to certify class proceedings in Canada (which are designed to deal with common, as opposed to individual issues[3]).

Under the new statutory civil liability regime, investors will no longer have to establish the individual issues of reliance. Based on the U.S. experience, it is anticipated that the prevalence of securities class actions in Canada, and sizeable settlements, will increase significantly once the reliance hurdle to class certification is removed.

The new liability regime will provide investors with the right to sue for damages if they acquire or dispose of securities during a period of time when there is an uncorrected misrepresentation in a document released by an issuer, in a public statement made with respect to the affairs of the issuer, or if the issuer fails to make timely disclosure of a "material change." The responsible issuer, its directors and officers, "influential persons" within the responsible issuer and "experts" (defined as a person whose profession gives authority to a statement made in a professional capacity, such as an accountant, actuary, financial analyst or lawyer) are all potentially exposed, and are likely insufficiently insured as a result of this new risk of civil liability.

Existing coverage should be carefully reviewed with the assistance of your insurance broker and counsel to ensure that adequate coverage is in place. Given the potential for conflicts of insurance among insureds, it may be appropriate for directors, officers, "influential persons" and other to obtain independent advice. Among other things, the policy limits, sub-limits, exclusions, definition of Insured and order of payment provisions should be carefully considered.


[1] Stanford Law School Securities Class Action Clearinghouse.

[2] Nera Economic Consulting.

[3] A few class actions have nonetheless been authorized in Quebec in the recent years.



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