A recent decision of the Ontario Superior Court of Justice should give directors and officers reason for optimism that the protections in Part XXIII.1 of the Ontario Securities Act (“OSA”) – including the leave requirement and the statutory defences – can be relied upon at an early stage of proceedings to defeat personal claims against them in securities class actions in circumstances where they have followed reasonable procedures and relied on external advisors.
In Rahimi v. SouthGobi Resources, Justice Belobaba granted leave to a plaintiff to commence an action under Part XXIII.1 against the defendant issuer. The plaintiff alleged that the issuer’s financial statements contained misrepresentations relating to revenue recognition. Notably, Justice Belobaba refused to allow the plaintiff to include several directors and officers of the issuer as defendants in the action.
Justice Belobaba found that the directors and officers had conducted a reasonable investigation, including obtaining and relying on expert accounting advice from SouthGobi’s external auditors, and therefore had satisfied the reasonable investigation defence in section 138.4(6) of the OSA. That defence provides that a person is not liable in a misrepresentation claim brought pursuant to the statutory cause of action under section 138.3 if the person proves that:
(i) before the release of the document or the making of the public oral statement containing the alleged misrepresentation, the person or company conducted or caused to be conducted a reasonable investigation, and
(ii) at the time of the release of the document or the making of the public oral statement, the person or company had no reasonable grounds to believe that the document or public oral statement contained a misrepresentation.
Justice Belobaba concluded that, in the circumstances, “there is no reasonable possibility that the five individual defendants will not be able to establish both branches of the reasonable investigation defence at trial.”
This decision reinforces the benefits to directors and officers in maintaining strong internal controls and conducting reasonable investigations, including, where appropriate, engaging and following the advice of external experts.