On July 4, 2008, amendments to the British Columbia Securities Act, R.S.B.C. 1996, c. 418 (the Act) came into force, introducing secondary market civil liability to that province. The amendments also give investors the statutory right to commence legal action against reporting issuers, directors, and officers — amongst others — for misrepresentations in documents and public oral statements, regardless of whether reliance had been placed on such misrepresentations. These long-awaited changes represent a significant departure from the legislative reforms proposed in 2004, but they harmonize British Columbia with other provinces’ secondary market civil liability regimes.
The new regime
The new Part 16.1 of the Act provides that an investor can sue a responsible issuer (defined as a reporting issuer or any other issuer with a real and substantial connection to British Columbia, any securities of which are publicly traded) for misrepresentation or for failure to make timely disclosure if the investor bought or sold the issuer’s security during the time between the misrepresentation or failure and the time when it was corrected. A plaintiff need not establish that he or she relied upon — or was even aware of — the misrepresentation or failure.
Those who can be held liable include the issuer itself; its directors; any officers who authorized, permitted or acquiesced in the release or statement; each influential person (defined as a control person, promoter, insider or investment fund manager if the issuer is an investment fund); and experts (where the misrepresentation is contained in an expert report).
Where the misrepresentation is not contained in a core document (e.g., prospectuses, circulars, financial statements and other required filings), a plaintiff must prove that the person who released the document or oral statement knew of, or avoided acquiring knowledge of, the misrepresentation — or that he or she was guilty of gross misconduct in making the release or statement.
In order to invoke these new statutory causes of action, investors must seek leave from the court, with notice to all defendants. Leave will be granted when the court is satisfied that the action is being brought in good faith, and has a reasonable possibility of success. Likewise, an action cannot be discontinued, abandoned or settled without the approval of the court. Under this new regime, all actions must be commenced no later than the earlier of three years after the date of the misrepresentation’s first release (whether oral or written), and six months after the issuance of a news release disclosing that leave had been granted.
A surge of lawsuits commenced by investors whose fortunes have been detrimentally affected by an increasingly volatile market is not expected as a result of the new amendments. While the new legislative regime is designed to enable individual investors to pursue the remedies to which they believe they are entitled, so far, the only legal action that has been pursued has been in the form of proposed class actions commenced in those jurisdictions where secondary market civil liability legislative reforms have come into effect.
The first case brought under the Ontario provisions was Silver v. IMAX Corp. In June 2008, the court heard a joint application to obtain leave and to have the action certified as a class action, such that a group of similarly situated people would all have standing as plaintiffs in the action. To date, the court has not yet ruled on leave and certification, but has issued a significant ruling granting the prospective plaintiffs the right to extensive oral and document discovery of the defendants at the stage of considering leave. Leave to appeal this ruling was denied and may have the effect of encouraging more actions. A discussion on this recent ruling in IMAX can be found in the next edition of Business Law Quarterly, due to be published at the end of August 2008.
A defendant will escape liability if it can prove that the plaintiff knew the document or statement contained a misrepresentation when the plaintiff acquired or disposed of the security, or if the defendant can prove that it undertook a reasonable investigation and had no reasonable grounds at the time to believe the document or statement contained a misrepresentation. Lack of knowledge is not a defence for either the issuer or officers of the issuer who will still face liability if the investor can prove that they deliberately avoided knowledge of the issue.
A person is not liable for a misrepresentation in forward-looking information, so long as the document or statement includes cautionary language identifying the forward-looking information as such. The document or statement should also disclose material factors that could cause results to differ, as well as material assumptions that were considered. Further, the person issuing the release must have a reasonable basis for making the forecasts and projections.
In addition, a person is not liable for failure to make timely disclosure if the material change was disclosed on a confidential basis with the British Columbia Securities Commission on a reasonable basis.
The legislation imposes limits on liability. In the case of an issuer or an influential person who is not an individual, liability is limited to the greater of 5% of its market capitalization and $1 million. For directors, officers, influential persons who are individuals, or persons who make public oral statements, it is the greater of $25,000 and 50% of the aggregate of the compensation received by the individual from the issuer and its affiliates. For experts, liability is limited to the greater of $1 million and the revenue that the expert and the affiliates of the expert have earned from the issuer and its affiliates during the twelve months preceding the misrepresentation.
Significantly, these limits do not apply if the defendant knowingly participated in the misrepresentation or failure to disclose.
The response: minimizing liability
In order to minimize exposure to secondary civil market liability, issuers should consider taking the following steps:
- Ensure that disclosure policies and procedures are in place and that everyone involved in the creation and release of information to the public is aware of, and follows, the policies and procedures. The procedures should capture all material information and ensure its accuracy. The effectiveness of the policies and procedures should be evaluated from time to time based on the experience of those involved. Implement an internal certification process where managers certify, with respect to their areas and expertise, to the CEO or CFO that disclosure controls and procedures are in place and that the effectiveness of such controls has been evaluated.
- Establish definitive personal responsibility for verifying the accuracy and completeness of the various portions of disclosure documents based on subject matter expertise.
- Assign specific responsibility for reviewing boilerplate language, risk factor disclosure and forward-looking statement disclosure in disclosure documents to a senior officer who has a firm understanding of the true risks of the business taken as a whole. Risk factors and forward-looking statement warnings should be reviewed and updated, where appropriate, quarterly.
- Have a business person with first-hand knowledge of the subject matter draft all material change reports and review any press releases prepared by investor relations persons or internal or external counsel.
- Appoint one person responsible for keeping informed about developments in case law and securities commission enforcement proceedings affecting disclosure practices, as well as relevant notices, reports and policies/rules issued by the securities regulators. Reviewing the disclosure of competitors will likely be of interest as well, as it will assist in arriving at materiality judgments.
- Appoint one person responsible for documenting the review process for each filing. One option would be to create a chronology specifying the names of individuals and dates they reviewed draft documents, as well as a record of meetings of the committees involved in the preparation of the document. (Note, however, that this takes company resources and could become an unwieldy process if it is too detailed or covers too many documents.) The other option would be for the person to be actively responsible for maintaining the disclosure policy and ensuring that it is always followed, so that the person could verify that it would have been followed in the case of any particular document — even though he or she potentially had no recollection or notes of the precise actions taken.
- Have documents reviewed by someone not involved in the preparation. The person would not be responsible for vetting but rather would identify areas of confusion or ambiguity and ask questions to ensure that those responsible for preparing the document have not overlooked something obvious because of their familiarity with the material.
- Ensure that with respect to the disclosure of any forward-looking information, there is a reasonable basis for making the forecast or projection, and that it is accompanied by: (i) reasonable cautionary language; (ii) a statement identifying the forward-looking information as such; (iii) details of any material factors that could cause actual results to differ materially from the forecast or projection; and (iv) a discussion of material factors or assumptions that were considered in drawing a conclusion or making the forecast or projection.
- Place strict controls on who may make public statements or otherwise act as a spokesperson for the issuer so as to ensure a consistent message. Whenever possible, script public oral statements and review them after delivery to identify and correct any misrepresentations or selective disclosure. Keep records of presentations and oral statements.
- Review your D&O insurance coverage.
This list, adapted from an earlier article introducing secondary market civil liability in other jurisdictions, is by no means exhaustive. Issuers should consult their legal advisors about implementing policies and procedures that are tailored for their business and take into account the particular circumstances and resources of the issuer.