The recently released revised consultation draft of the Capital Markets Act (CMA) for the proposed Cooperative Capital Markets Regulatory System (Cooperative System) includes noteworthy revisions to the definition of “misrepresentation” and to provisions relating to civil liability for insider trading and related conduct. The revised consultation draft is open for comment until December 23, 2015.
A consultation draft of the CMA for the Cooperative System was released in September 2014 for public comment. The consultation period ended on December 8, 2014. A revised version of the draft CMA, which takes into account some of the comments received during the consultation period, was recently released along with a chart summarizing comments received and responses to those comments.
The CMA is intended to replace existing provincial and territorial securities legislation in the participating provinces and territories (Ontario, British Columbia, New Brunswick, Saskatchewan, Prince Edward Island and Yukon) (Participating Jurisdictions). Blakes published a series of Bulletins regarding various aspects of the Cooperative System and subsequently published a series of Bulletins summarizing comments received on the CMA and Capital Markets Stability Act (CMSA) (please see the various Bulletins posted on our website). A revised draft CMSA has not yet been released.
This Bulletin focuses on the changes made to the civil liability sections in the revised draft CMA.
OVERVIEW OF CHANGES
Following the consultation period, few substantive changes have been made to parts 12 and 13 of the draft CMA, which pertain to civil liability. However, revisions to the definition of “misrepresentation” and to provisions relating to civil liability for insider trading and related conduct are worthy of note.
Proposed Changes to the Definition of “Misrepresentation” Reversed
Proposed changes to the definition of “misrepresentation” in the original consultation draft were addressed in a number of comment letters, which expressed the view that the current definition of the term “misrepresentation”, which is used in the context of both civil and regulatory liability, was adopted after considerable review, consideration and deliberation. The new definition, which would have defined a misrepresentation as “a false or misleading statement of a material fact” has been changed back to “an untrue statement of material fact”, in keeping with the current definition in the Securities Acts of the Participating Jurisdictions.
Expansion and Clarification of Liability for Insider Trading
Some significant changes have been made to the offences of “tipping and recommending” and to civil liability provisions dealing with insider trading related activities. As discussed in previous bulletins, the previous draft CMA expanded the insider trading offences and civil causes of action. In response to comments, the ParticipatingJurisdictions explained that “[s]ection 66 of the CMA was based on the most expansive insider trading provisions in current securities legislation of CMR jurisdictions – namely, BCSA s. 57.2 and NBSA s. 147” and that the language incorporated is meant to “clarify the scope of the transactions covered by these provisions.” The ParticipatingJurisdictions acknowledge that civil liability for insider trading has been expanded by allowing a cause of action by direct or indirect purchasers or, in other words, by providing a cause of action even where a person did not purchase directly from the person who engaged in insider trading. This expanded cause of action for insider trading is new to all Participating Jurisdictions except British Columbia. However, the Participating Jurisdictions admit that this creates some uncertainty in the application of the insider trading civil liability provisions and thus have revised the damages sections (as discussed further below) to provide additional certainty.
In response to comments, the revised draft CMA has further expanded the scope of the tipping and recommending offences and related civil causes of action. Specifically, pursuant to the previous version of the provision setting out the offence of tipping, a person who “proposes to take” certain actions, including making a take-over bid for the securities of an issuer, becoming a party to certain transactions or business combinations with an issuer or acquiring a substantial portion of an issuer’s property (Prescribed Actions) must not inform another person of the material change unless the change or fact has been generally disclosed or unless it is necessary to effect the proposed Prescribed Action. Further, under the sections delineating the recommending offence, a person proposing to engage in a Prescribed Action must not recommend to another person to purchase or trade in a security of the issuer. Under the revised draft, the tipping and recommending offences have been expanded to also prohibit tipping or recommending by a person who is “considering or evaluating whether to take, or proposes to take” Prescribed Actions and are no longer limited to a person who “proposes to take” such actions. The Participating Jurisdictions have explained that these changes were made to follow recent amendments to the Ontario Securities Act and be consistent with the definition of “special relationship” in the CMA.
Furthermore, the insider trading damages provisions in the revised draft CMA have been changed to clarify and limit the civil damages that may be recoverable for insider trading, tipping and recommending. The damages are to be “equal to the amount of the loss incurred by the plaintiff as a result of the contravention” but are capped at an amount equal to “triple the amount of the profit made or loss avoided by all persons as a result of the contravention” minus “the aggregate of all damages assessed after appeals, if any, against the person in all other actions brought under this section and under comparable legislation in other provinces and territories in Canada with respect to the same contravention” minus “any amount paid in settlement of those actions.”
Under the original draft CMA, the court was granted broad judicial discretion to determine damages because it was permitted to “consider any other measure of damages that may be appropriate in the circumstances.” This section has been removed in response to comments that such judicial discretion would “make it difficult if not impossible for parties to reasonably quantify potential damages and reach negotiated solutions before trial.”
Finally, sections providing for joint and several liability for insider-trading related activities were added to the revised draft CMA. Thus, while the damages cap and the removal of broad judicial discretion will limit damages and make them easier to ascertain, potentially limiting the exposure of defendants to class actions, the possibility of joint and several liability may expand the exposure of individual defendants by making them liable for the acts of co-defendants in scenarios where concerted action by multiple defendants is involved.