In October of 2008, the Ontario Securities Commission (the "OSC") adopted OSC Policy 51-604 - Defence for Misrepresentations in Forward-Looking Information (the "Policy"). The Policy represents the views of the OSC, but does not have the force of law and is not intended to be relied upon as legal advice from the OSC.
The Policy is connected to amendments to the Securities Act (Ontario) (the "Act") that came into force on December 31, 2005 and which impose civil liability for secondary market disclosure. Under those provisions, there is a defence for a misrepresentation in forward-looking information ("FLI").
FLI is defined in the Act as disclosure about possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection. An example of FLI is earnings guidance. Certain FLI is required to be included in an issuer's MD&A.
The relevant provisions in the Act relating to the defence are set out at the end of this publication. The Policy states that the objective behind the defence for a misrepresentation in FLI is to facilitate responsible and balanced disclosure about an issuer's anticipated future prospects. The Policy is intended to address certain questions raised by issuers and counsel regarding establishing this defence.
Principles Underlying the Defence
The Policy outlines the principles underlying the defence. In essence, an investor should be able to readily understand the FLI being provided, identify the FLI, and inform himself or herself of the material assumptions underlying the FLI and the material risk factors associated with a particular conclusion, forecast or projection in the FLI. This requires issuers to present the information clearly and simply.
Risk Factor and Assumption Disclosure
Material factors (i.e. risk factors) that could cause actual results to differ materially from a conclusion, forecast or projection in the FLI, as well as material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in the FLI, must be identified for purposes of the defence. The Policy states that when including material risk factors and assumptions in cautionary language, they must be relevant to the conclusion, forecast or projection and not be boilerplate in nature. Note that the Policy confirms however that the defence should not be interpreted as requiring an issuer to anticipate and discuss everything that could conceivably cause results to differ, nor does it require an exhaustive statement of every factor or assumption applied - a materiality standard applies.
We recommend that clients review their documents for FLI and then tailor the risk factors and assumptions in their cautionary language to address the specific FLI.
The Proximate Requirement
While the Act requires that, within the document, the applicable material factors and assumptions be proximate to the FLI, the term "proximate" is not defined in the Act. The Policy clarifies that the OSC does not interpret the "proximate" requirement to require immediate juxtaposition of material factors and assumptions with the FLI. However, the OSC does have the following views on how the "proximate" requirement may be satisfied, depending on the circumstances:
- Where there are threads of FLI throughout a document or section of a document with common assumptions and risk factors (for example, in MD&A), a single broader reference prefacing or following, as appropriate, the document or section of the document, which identifies and sets out the applicable assumptions and risk factors should generally satisfy the "proximate" requirement.
- Where particular assumptions and risk factors apply equally to multiple instances of FLI in a single document, cross-referencing or footnoting in a manner that supports the principles noted above should be consistent with the "proximate" requirement.
- The more closely-tied a particular risk factor or assumption is to a particular conclusion, forecast or projection, the more "proximate" it should be to the FLI.
The defence requires proof of a reasonable basis for drawing the conclusions or making the forecast and projections set out in the FLI. The Policy indicates, that when interpreting the "reasonable basis" requirement, relevant factors would generally include the reasonableness of the assumptions applied in drawing the conclusion or making the forecast or projection and the inquiries made and the process followed in preparing and reviewing the FLI.
Public Oral Statements
In addition to the points above which may be more specific to documents, the Policy makes the following two points relevant to the defence for a misrepresentation in a public oral statement (see the additional requirements for the defence in these circumstances at the end of this publication):
- The requirements of the defence may be satisfied in appropriate circumstances by one person making the required cautionary statement on behalf of another person who is making the FLI.
- A document filed with the OSC or otherwise generally disclosed will be considered "readily available".
Duty to Update
Finally, the Policy indicates that the OSC does not interpret the defence as imposing upon any person or company a duty to update FLI beyond any duty imposed under Ontario securities laws or otherwise.
In general, issuers should be continuously evaluating their disclosure to ensure that it meets regulatory requirements. In particular, disclosure should be reviewed for FLI and the requirements under the Act to obtain the defence should be followed. For example, all cautionary language, in written documents and oral statements, including on websites and in press releases, should be updated regularly. The Policy gives further clarification on what the OSC's views are on particular aspects of the defence. When preparing disclosure, issuers should review their FLI with the Policy and the OSC's views in mind.
A person or company is not liable for a misrepresentation in FLI if the person or company proves all of the following things:
- the document or public oral statement containing the FLI contained, proximate to that information:
- reasonable cautionary language identifying the FLI as such, and identifying material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the FLI; and
- a statement of the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in the FLI; and
- the person or company had a reasonable basis for drawing the conclusions or making the forecasts and projections set out in the FLI.
With respect to public oral statements, the requirements in (1) above will be satisfied if the person who made the public oral statement,
- made a cautionary statement that the oral statement contains FLI;
- stated that:
- the actual results could differ materially from a conclusion, forecast or projection in the FLI; and
- certain material facts or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the FLI; and
- stated that additional information about:
- the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the FLI; and
- the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the FLI, is contained in a readily-available document or in a portion of such document and has identified that document or that portion of the document.