On November 9, 2007, the Act to amend the Securities Act and other legislative provisions (2007, c. 15) (the "Act") came into force by assent.
One of the key features of the Act is to introduce in the Québec Securities Act a civil liability regime with respect to the secondary market. Under this regime, an investor may file a claim for damages when an issuer releases a document or makes a public statement containing a misrepresentation or fails to make disclosure of a material change. This claim can be instituted against the issuer, its officers, its directors, influential persons or an expert involved without the investor having to prove the causal relation between the transaction and the misrepresentation or the omission to disclose the material change and without having to prove damages. As the investor’s burden of proof is significantly reduced, the regime provides for grounds of defense and a set of circumstances where defendants cannot be held liable. The Act also limits the amount in damages that may be awarded against persons found guilty.
This regime closely follows the one already introduced in the Ontario Securities Act, which has also been an important source of inspiration for the rules adopted in other provinces and territories. The only changes that were brought to it were those necessary to reflect the civil law notions and terminology particular to Québec and to ensure that the new provisions were harmoniously integrated with those of the Québec Securities Act. The balance between the interests of investors and those of issuers was maintained in the same manner as in Ontario and other provinces.
Prior to the new provisions coming into force, Québec investors could assert their secondary market rights by filing a civil liability claim under the Québec Civil Code. In doing so, the investor had to prove the following: firstly, fault (for example, that false or misleading information had been disclosed); secondly, damages (that a security had been bought and that its value had dropped following the issuance of a public statement rectifying the false or misleading information); and thirdly, causal relation between the fault and the damages (that the security had been bought due to the disclosure of false and misleading information). Consequently, under the provisions of the Québec Civil Code, the investor had to prove that he had relied on false and misleading information to purchase the security and that the change in value of the security was the result of this false and misleading information. The distinctive feature of the remedy found in the Act is to introduce a presumption in favour of investors, whereby a change in value of a security, when it is bought or transferred following the release of a document or the issuance of a public statement containing false or misleading information or non-compliance with a continuous disclosure requirement, is presumed to result from this misrepresentation. Furthermore, it does not require that the claimant prove that, when he purchased or transferred the securities, he relied on false and misleading information or that the issuer had not complied with its continuous disclosure requirements.
Since the burden of proof falling upon the investor is considerably lessened, the new regime provides for a number of grounds of defenses that can be raised by the issuer and for a number of situations where it cannot be held accountable. For example, an issuer could demonstrate that it had performed a reasonable enquiry and that it had no reasonable grounds to believe that the document or public statement contained false or misleading information or that it would not comply with its continuous disclosure obligations. In addition, the regime provides for restrictions on damages that may have to be paid by the person or entity found guilty depending on its nature or its function. These restrictions take into account the market capitalization of the issuer and, in the case of an individual, the income derived from his employment and the amounts already paid out as a result of other claims based on this same false and misleading information or the same failure to disclose a material change.
In this way, the new the civil liability regime with respect to the secondary market seeks to simplify the burden of proof falling upon investors and to maintain the balance between investors and issuers by limiting the damages paid out to claimants. As such, the secondary market regime should promote compliance by issuers and management at the highest continuous disclosure standards. In this context, the regime is a means of improving compliance to continuous disclosure requirements.
The Act gives effect to the undertakings of the government as signatory, in September 2004, of the Provincial/Territorial Memorandum of Understanding Regarding Securities Regulation. In addition to the implementation of a securities passport system, this MOU seeks to harmonize the mechanisms for protecting investors across Canada. As a matter of fact, this remedy has already been introduced, or will be introduced in the near future, in each of the provinces and territories of Canada.