In the recent decision of Frank v. Farlie, Turner & Co., LLC, 2011 ONSC 5519, Mr. Justice Perell of the Ontario Superior Court of Justice found, among other things, that punitive damages are not available under Part XXIII.1 of the Ontario Securities Act as such damages are inconsistent with the scheme and purpose of Ontario’s statutory secondary market disclosure liability regime.  In so doing, the court confirmed the fundamental importance of liability limits in continuous disclosure claims against directors and officers.


This decision considered a series of procedural motions brought by the defendants in a proposed securities class action commenced against certain directors and officers of Protective Products of America Inc., a former TSX-listed company that sold and manufactured body armour for military and police use (“Protective Products”), two U.S.-based investment bankers and the successor corporation of Protective Products.

The claim, made under Part XXIII.1 (Civil Liability for Secondary Market Disclosure) of the Securities Act, concerned alleged misrepresentations arising from the failure of Protective Products to make timely disclosure of the award of a contract from the U.S. Army with a potential value of $2.7 billion, after it had initially disclosed that it was not awarded the very same contract. The plaintiffs alleged that by failing to disclose this material contract, the price of Protective Products’ common shares was artificially deflated prior to the sale of the company’s assets in U.S. Bankruptcy Court.

Prior to the news that Protective Products had been awarded a potentially lucrative contract, it had retained the defendant investment bankers to advise the company in connection with a potential recapitalization or sale of its business and related assets. Bids for the sale of the company or its assets were subsequently solicited.  Ultimately, the defendant investment bankers assisted in the sale of substantially all of Protective Products’ assets in a bankruptcy setting.

Breach of Part XXIII.1 of the Securities Act Cannot Give Rise to Punitive Damages

As part of the claim, the plaintiffs sought punitive damages in the amount of $20 million against the directors and officers of Protective Products for breaching Part XXIII.1 of the Securities Act. It is important to note that the plaintiffs withdrew their common law claims against the defendants and only pursued statutory claims under the Securities Act.

In arriving at its decision to strike the punitive damages claim, the court accepted the argument of the directors and officers that punitive damages are inconsistent with the scheme of Part XXIII.1 of the Securities Act which “carefully calibrates and achieves a balance between compensation for a director’s or officer’s contraventions of the act and discouraging persons from becoming officers and directors.”  The court found that allowing a claim for punitive damages would circumvent the caps on director liability and allow such caps to be lifted in additional circumstances not provided for in the legislative scheme. In reaching this conclusion, the court recognized and relied on the following underlying legislative purposes for the secondary market liability regime:

  • to “regulate the heat of exposing directors and officers to more liability ... and the chill of discouraging persons from becoming officers and directors by the increased exposure to liability”; and
  • to regulate and moderate the fact that the cost of any increased liability of corporations, directors and officers under Part XXIII.1 of the Securities Act will be directly borne by other shareholders of that corporation or indirectly borne by the shareholders of other corporations as a result of increased corporate insurance premiums.

Claim Struck Against Investment Bankers

The court also granted a motion to permanently stay the claims against the two U.S. investment bankers for lack of jurisdiction. As against the investment bankers, the plaintiffs did not allege a breach of the Securities Act, rather they made, what the court referred to as a novel claim in common law negligence for the failure of the investment bankers to meet their statutory obligations under the Securities Act. Ultimately, Justice Perell found that there was no “real and substantial connection” between the claim against the investment bankers and Ontario since, among other things, they were acting in their capacity as receiver or quasi-receiver in the U.S. bankruptcy proceedings to sell Protective Product assets and were not engaged in matters regulated by the Securities Act.  The court declined to decide whether or not the novel claim against the investment bankers was tenable in law.


The decision of Justice Perell to strike the plaintiffs’ claim for punitive damages is a positive one for directors and officers which reinforces the importance of liability limits in statutory secondary market disclosure claims.

The courts’ recognition of the policy need to avoid exposing directors and officers to excessive penalties or indeterminate liability confirms the appropriate balancing of the goals of providing compensation for shareholders with not discouraging individuals from becoming directors and officers of public companies.