Forward-looking information is defined by Ontario securities laws to include disclosure about possible events, conditions or results of operations that is based on assumptions about future courses of action and economic conditions. The definition also includes future-oriented financial information typically found in documents such as financial statements or management's discussion and analysis.
Forward-looking information can help shareholders and investors gain an understanding of a company's future prospects, yet the uncertain nature of such information can leave that same company open to potential liability for misrepresentation. The Securities Act of Ontario (the Act) provides secondary market purchasers with the right to assert a cause of action for misrepresentations in forward-looking information contained in public documents and public oral statements. Recognizing the value of forward-looking information, the Act also provides a defence from statutory civil liability where there is responsible and balanced disclosure about a company's future prospects. On October 3, 2008, the Ontario Securities Commission (OSC) adopted Policy 51-604 (the Policy), setting out how it interprets certain aspects of section 138.4 of the Act with respect to the defence against misrepresentation in forward-looking information. This Law Note provides a brief summary of the OSC's views from the Policy.
Defence for Forward-Looking Information
A public document or oral statement containing forwardlooking information will be protected from statutory civil liability if:
- the document or statement contains a. reasonable cautionary language identifying the forward-looking information and material risk factors that could cause the projection, forecast or conclusion of the forward-looking statement to differ materially, and b. a statement of the material factors or assumptions that were applied in making the forward-looking statement;
- the risk factors and assumptions appear proximate to the forward-looking information; and
- there was a reasonable basis for drawing the conclusion or making the forecast or projection.
The Act recognizes that oral statements require a more flexible approach when determining if the requirements for the defence are satisfied. A public oral statement containing forward-looking information is deemed to have provided the cautionary language and assumptions above, if the speaker states that:
- the oral statement contains forward-looking information;
- actual results could differ materially from a conclusion, forecast or projection;
- certain material factors or assumptions were applied in drawing the conclusion; and
- additional information about the applicable risk factors and assumptions are contained in a 'readily available' document (i.e. a document filed with the OSC) and the oral statement identifies that document.
Further, in appropriate circumstances, the requirements for the defence may be satisfied where a spokesperson introducing the individual making the public statement containing forward-looking information complies with the criteria noted above.
Generally, the more closely-tied a risk factor or assumption is to the forward-looking information, the more 'proximate' they should be to one another. Where a closely tied risk factor or assumption does not immediately precede or follow a forward-looking statement, a cross reference or footnote should link them together. This clarification by the OSC recognizes that it is not always practical or desirable to immediately juxtapose cautionary statements with the forward-looking information.
A determination of whether a company has a reasonable basis for making a forward-looking statement includes consideration of the reasonableness of the assumptions and factors being applied, and the inquiries made and process for preparing and reviewing the forward-looking statement.
The defence for a misrepresentation in forward-looking information under section 138.4 of the Act is not applicable to:
- a document released in connection with an initial public offering, or
- financial statements.
While the Policy provides guidance only and does not impose any legal requirements, historically the courts have shown great deference to specialized regulatory bodies, such as the OSC, and its guidance would likely be influential to a court.
When making a forward-looking statement a company should be satisfied that its recipient is able to readily:
- understand that there is forward-looking information in the document or statement;
- identify the forward-looking information; and
- inform itself of the material assumptions underlying the forward-looking information and the material risk factors associated with it.
A company need not identify all factors or assumptions applicable to forward-looking information in order to avail itself of the defence, only those considered material. Further, a company only has to identify significant and reasonably forseeable 'material' risk factors that may cause a conclusion, projection or forecast to differ materially. The failure to identify a 'risk factor' that causes forward-looking information to differ materially will not necessarily preclude the use of the defence against misrepresentation.
The Policy also provides that the OSC believes the defence for misrepresentation in forward-looking information does not impose any duty to update forward-looking information beyond what is already required under the securities laws of Ontario.