Alberta Tables Legislation Introducing Civil Liability For Secondary Market Disclosure
May 24, 2006
In March 2006, the Alberta Legislature tabled Bill 25, the Securities Amendment Act, 2006 (Bill 25), which, if enacted, will create civil liability for secondary market disclosure under the Securities Act (Alberta) (the Alberta Securities Act) for misrepresentations and omissions made by persons associated with Alberta reporting issuers, and with public issuers having a real and substantial connection to Alberta (responsible issuers).
Although secondary market trading constitutes over 90 per cent of all capital markets trading, civil liability under the Alberta Securities Act currently exists only for misrepresentations made in a prospectus, take-over bid circular, directors’ circular or offering memorandum, but not for misrepresentations made in secondary market disclosure, such as annual and interim financial statements, management’s discussion and analysis, management proxy circulars, annual information forms and certain public oral statements. It is expected that the introduction of statutory civil liability for secondary market disclosure will greatly facilitate the certification of investor class actions under the new Alberta Class Proceedings Act.
Statutory civil liability for continuous disclosure was recommended by the Canadian Securities Administrators (the CSA) in November 2000.1 Amendments to the Securities Act (Ontario)2 (the Ontario Securities Act) creating civil liability for secondary market disclosure came into force on December 31, 2005, more than three years after an initial form of such legislative amendments had been passed by the Ontario legislature. Amendments to the Securities Act (British Columbia), which included provision for civil liability for secondary market disclosure, were enacted on May 13, 2004 but have not been proclaimed into force.
The civil liability provisions of Bill 25 are virtually identical to the recent amendments made to the Ontario Securities Act, and will create unique rights of private action for parties who buy or sell securities against a range of defendants, including the issuer, as well as any director or officer who had a direct connection with the making of a misrepresentation or an omission, for damages with respect to:
- documents containing misrepresentations that are filed with the Alberta Securities Commission (the ASC), a government agency or a stock exchange;
- certain public oral statements that contain misrepresentations; and
- failing to publish material changes.
These proposed legislative amendments should be of particular interest and concern to directors and officers. Influential persons such as control people, promoters, insiders who are not officers or directors and investment fund managers are also potentially liable under the proposed rights of action.
In addition to secondary market civil liability, Bill 25 contains new provisions designed to harmonize the enforcement of securities regulation between Alberta and the other provinces, together with consequential amendments.
New Rights to Sue for Misrepresentations and Omissions in Publicly Filed Documents and Oral Statements
Bill 25 contains a series of new proposed private statutory civil rights of action that will enable an investor who purchased or sold securities during a period when a misrepresentation made within a public oral statement or a publicly filed document is uncorrected, or when a responsible issuer fails to make timely disclosure of a material change, to commence an action to recover damages. Potential defendants include the responsible issuer, its directors and officers, and influential persons related to the responsible issuer who knowingly influenced the release of the document or statement, or the failure to disclose the material change.
The proposed legislation would significantly expand the personal risk faced by directors and officers, and expose experts to civil liability where they are associated with misleading documents or public oral statements.
The new private rights of action are triggered by both "misrepresentations" in documents or oral statements and by failure to disclose "material changes" in a timely manner. A misrepresentation is an untrue statement of a material fact, or an omission to state a material fact that is either required or that is necessary to be stated in order for a statement not to be misleading. A material fact is a fact that significantly affects or would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities. A material change is a change in the business, operations or capital of the issuer that would, if disclosed, reasonably be expected to have a significant effect on the market price or value of the issuer’s securities.
The proposed legislation is complex and will result in different defendants and defences depending upon the type of communication through which a misrepresentation is effected. Officers should note, in particular, that the proposed legislation could result in liability for oral statements made by officers in the course of annual meetings, analyst conference calls and/or media scrums.
Bill 25 also confers new rule-making powers upon the ASC which enable it to, among other things, prescribe new disclosure requirements.
Proof and Standard of Care
The new legislation makes a distinction between "core" and "non-core" documents with respect to documentary misrepresentations.
For directors, influential persons and certain other parties, core documents include: an annual information form; a management proxy circular; a take-over bid circular; management’s discussion and analysis; and annual and interim financial statements. For officers, core documents include all of the foregoing, but also other documents such as material change reports. The ASC has been given the authority to identify and prescribe new core documents pursuant to its rule-making power.
The distinction between core and non-core documents is significant since there is a greater risk of liability for misrepresentations made in core documents. Where a plaintiff alleges a misrepresentation in a core document, the plaintiff does not have to prove that the defendant had actual knowledge of the misrepresentation, but only that the misrepresentation occurred. The defendant will then be required to demonstrate that he or she exercised an appropriate level of due diligence or investigation as to the accuracy of the document or statement. Conversely, where the misrepresentation is in a non-core document, the plaintiff must establish overt misconduct on the part of the defendant or that the defendant had actual knowledge that the document contained the misrepresentation.
The new legislation also removes the common law requirement in misrepresentation actions that the plaintiff demonstrate actual reliance upon the misrepresentation. The extension of this statutory "deemed reliance" concept, which is currently limited to primary market misrepresentation in offering documents, will greatly increase the likelihood of investor class actions, as the difficulties in establishing mutual reliance among a large class of plaintiffs have historically inhibited the certification of common law actions for secondary market misrepresentation. Nevertheless, in an attempt to curb the trend toward U.S. style "strike suits" which could emerge from this development, Bill 25 will require that a plaintiff obtain the leave of the court prior to commencing an action under the new liability regime.
Where monetary damages are assessed against multiple defendants for a misrepresentation or failure to make timely material change disclosure, the court shall determine each such defendant’s responsibility for the damages assessed in the action, and each such defendant shall be liable, subject to certain liability limits, for the assessed portion of the aggregate amount of damages.
Bill 25 also proposes certain limits on liability for monetary damages for misrepresentation or failure to make timely disclosure. Total liability will be limited:
- for the responsible issuer or influential person (if the influential person is not an individual), to the greater of 5 per cent of its market capitalization and $1 million; and
- for each director, officer and influential person (if the influential person is an individual), to the greater of $25,000, and 50 per cent of the aggregate of that person’s total compensation from the responsible issuer and its affiliates during the 12-month period immediately preceding the day on which the misrepresentation was made or the failure to make timely disclosure occurred.
There will be no limit on liability (up to the amount of the aggregate damages) if it can be shown that a defendant knowingly authorized, permitted or acquiesced in the making of a misrepresentation or failure to make timely disclosure.
A so-called "safe harbour" will be available for statements defined as forward-looking information made in both the primary market (such as in a prospectus, take-over bid circular, directors’ circular or offering memorandum), and in the secondary market.
"Forward-looking information" means disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action. This includes future-oriented financial information with respect to prospective results of operations, financial position or cash flows that are presented either as forecasts or as a projection, such as oil and gas reserve estimates.
To rely upon the safe harbour defence, it will not be sufficient to invoke boilerplate cautionary language concerning forward-looking information when making the statement. Rather, Bill 25 requires that the document or public oral statement containing the forward-looking information also contain proximate to the forward-looking information:
- reasonable cautionary language identifying the forward-looking information as such and identifying material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information; and
- a statement of the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in the forward-looking statement.
Additionally, the person or company must have had a reasonable basis for drawing the conclusions or making the forecasts and projections set out in the forward-looking information.
Action Required by Issuers
In light of these potential new liabilities, issuers and their directors and officers should:
- make sure everyone in their organization is aware of the new regime;
- note that if the issuer is a reporting issuer in Ontario or has a real and substantial connection to Ontario, similar legislation is already in force there;
- review their disclosure practices and update their written policies to ensure they are effective in producing timely, accurate public filings and that they allow the full range of potential defendants to defend themselves if they are joined in litigation;
- revamp processes that are in place to monitor the effectiveness of their disclosure system and practices by controlling the manner in which information, including forward-looking information, is disseminated and verified;
- review and update their director and officer protective measures;
- place controls on who may speak for the issuer and prepare an introductory script for all public oral statements; and
- in the case of issuers subject to National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities, ensure that all reserve estimates (including any summaries thereof) and other forward-looking information, are disclosed in a manner which engages the application of the "safe harbour" defence for such statements.
McCarthy Tétrault will be closely monitoring the progress of the proposed Alberta amendments and the impact of this new regime in order to offer guidance to clients.
- CSA Notice 53-302 – Proposal for a Statutory Civil Remedy for Investors in the Secondary Market and Response to the Proposed Definitions of "Material Fact" and "Material Change". The CSA had earlier reviewed and expressed its support for the conclusions in the report of the Toronto Stock Exchange Committee on Corporate Disclosure (the "Allen Report") issued in March 1997 which also recommended a statutory civil liability regime with respect to continuous, or secondary market, disclosure.
- For a detailed discussion of the Ontario amendments, which were enacted on December 31, 2005, see our Legal Update of December 6, 2004, Ontario Revives Misleading Disclosure Legislation; British Columbia Delays Its Legislation and our Legal Update of August 26, 2005, Ontario Misleading Disclosure Legislation to Become Effective December 31, 2005.