On November 9, 2007, An Act to amend the Securities Act and other legislative provisions (the “Act”) came into force. The Act introduces a civil liability remedy for secondary market disclosure in Quebec as first proposed by Bill 19 which was introduced in June 2007. Such a remedy is not new in Canada as similar provisions have been in force in Ontario since December 31, 2005.
A HIGHLY HARMONIZED REMEDY
Just as in Ontario, the Act makes it easier for an investor to bring an action for damages if an issuer releases documents or statements containing a misrepresentation or fails to disclose a material change. An action can be brought against the issuer, its officers, its directors, influential persons or an expert involved in the violation. The investor does not have to prove that he relied on a document or oral public statement containing a misrepresentation or on the issuer having complied with its timely disclosure obligations and he does not have the burden of proving damage. As in Ontario, several defences are available under the Act. The defendant may defeat the action by proving that the plaintiff knew about the misrepresentation or the undisclosed material change. The defendant may also claim that he conducted a reasonable investigation to ensure that the document or public oral statement did not contain a misrepresentation or that no failure to make timely disclosure would occur. As is the case under Ontario law, other defences are available to a defendant other than the issuer if the alleged violation occurred without such defendant’s knowledge or consent. In such a case, the defendant must have notified the issuer’s board of directors of the misrepresentation or failure before the correction, or, if no correction is made, must have notified the Autorité des marchés financiers of the misrepresentation or failure, unless such a defendant is prohibited by law or by professional confidentiality rules from so doing.
In the case of a misrepresentation in forward-looking information, the defendant may defeat an action by proving that there was reasonable cautionary language, a statement of the material factors or assumptions that were applied in the forward-looking information and that there was a reasonable basis for drawing the conclusions or making the forecasts or projections. The Act also provides a defence for an expert who can prove that his consent to use of his report, statement or opinion had been withdrawn in writing before the document was released or the public oral statement was made. In the case of a document that is not required to be filed with the Autorité, the defendant may defeat an action by proving that he did not know and had no reasonable grounds to believe that the document would be released. Finally, a defendant may defeat an action in the case of failure to make timely disclosure when the issuer filed the material change report with the Autorité des marchés financiers on a confidential basis and the material change was made public as soon as possible.
The assessment of damages and apportionment of liability are also similar to the Ontario formula. There is no limit on the damages that may be awarded if the misrepresentation or the failure to make timely disclosure was made knowingly. In other cases, limitations on liability are provided.
Issuers and influential persons (other than individuals) will have their liability limited to the greater of 5% of their market capitalization and $1 million. The liability of a natural person, other than an expert, and that of directors and officers will be limited to the greater of $25,000 or 50% of the aggregate compensation (including all deferred compensation) received during the 12-month period preceding the date of the misrepresentation or omission. The liability of an expert will be limited to the greater of $1 million and the revenue that the expert and the expert’s affiliates earned from the issuer and its affiliates during the 12-month period preceding the time the misrepresentation was made.
As in Ontario, an action may only be brought with the prior authorization of the court.
In addition, the remedy is not available during the distribution of securities made with a prospectus or, unless otherwise provided by regulation, under a prospectus exemption, nor is it available to a person who acquires or disposes of a security in connection with or pursuant to a take-over bid or issuer bid, unless otherwise provided by regulation. On November 9, 2007, the Autorité des marchés financiers published amendments to the Securities Regulation in its weekly bulletin for a 30-day consultation period. The amendments would provide certain definitions for purposes of determining damages and would also provide for special situations in which the remedy would be available. The proposed amendments are harmonized with the provisions in force in Ontario and provide that the civil liability remedy for secondary market disclosure is available to a person who subscribes for or acquires a security in connection with certain designated transactions by a control person of an issuer. The amendments also make the remedy available to a person who acquires or disposes of a security in connection with a take-over bid or an issuer bid made in reliance on the legislative exemption for take-over bids or issuer bids made through a stock exchange, or in connection with a bid that is subject to equivalent rules established by another recognized authority in a de minimis situation in Quebec, or in connection with an acquisition of not more than 5% or, in the case of an issuer bid, less than 5%, of the securities of the class.
The secondary market civil liability remedy is now available to any person who acquires or disposes of a security of a reporting issuer or of any other issuer closely connected to Quebec whose securities are publicly traded.
PRINCIPAL AMENDMENTS TO BILL 19
Certain amendments were made to Bill 19 by the National Assembly when the Act was adopted.
The most important amendment concerns limitation periods. As introduced, Bill 19 would have resulted in different limitation periods in Quebec than elsewhere, since the general limitation for actions in damages provided in the Securities Act remained unchanged, that is to say, an action could be instituted up to three (3) years from knowledge of the facts giving rise to the action. The limitation period could thus have expired later in Quebec than elsewhere. Consequently, Bill 19 was amended and the Act now provides for a new paragraph to be added to section 235 of the Securities Act which makes an exception from the general rule of limitation in the case of civil liability for secondary market disclosure by providing that, in such a case, the plaintiff is deemed to have knowledge of the facts as of the date a document is first released or a public oral statement containing a misrepresentation is made or a material change should have been disclosed. Thus, limitation periods in Quebec will be harmonized with the limitation periods that apply in Ontario.
The definition of an influential person has also been amended to specify that, where the issuer is an investment fund, it means the fund manager.
The provision giving rise to an action when a public oral statement contains a misrepresentation has been amended to specify that the statement must have been made in relation to the issuer’s business or affairs and not simply in relation to the issuer, as had been provided in Bill 19. This amendment was made in order to harmonize the remedy provided in the Act with that provided in Ontario. This will avoid an unduly broad interpretation of information relating to the issuer.
The provision regarding the defences available to a person other than the issuer who establishes that the failure to make timely disclosure occurred without his knowledge and that he notified the issuer has been amended to specify that the person must notify the board of directors of the issuer or other persons acting in a similar capacity. This amendment was necessary since Bill 19 referred only to the “board of directors of the issuer”, which would have caused problems for unincorporated issuers.
PRINCIPAL DIFFERENCES BETWEEN QUEBEC AND ONTARIO
Despite the considerable harmonization effort on the part of the Quebec legislator, there are a few differences with the Ontario regime. First, to determine the fault of certain persons acting for the issuer, the Quebec legislator uses the words “mandatary or other representative” of the issuer, whereas in Ontario this class of persons includes “persons with actual, implied or apparent authority.” We understand that the Quebec legislator intends these provisions to be interpreted in the same way in Quebec as elsewhere. Since the rules of “mandate” are specific to Quebec civil law, we hope that the courts which will have to interpret these provisions and allow actions in civil liability for secondary market disclosure will not be tempted to give them a different interpretation.
Another distinction worth noting is that the Act provides that to determine whether a gross fault has been committed, courts must consider all relevant circumstances including, in respect of a report, statement or opinion of an expert, “any standards, rules or practices applicable to the expert.” In Ontario, the same provision refers instead to “professional standards applicable to the expert.” Once again, it will be up to the courts to decide whether such terms are equivalent and may be entered into evidence. Despite the differences in wording of the legislation, we hope that the courts will favour objective standards rather than custom and other standards that could be arbitrary.
There are other differences between the Quebec and Ontario statutes, for example in the syntax of certain provisions, but they are not likely to give rise to different interpretations.
The Government of Quebec’s desire to see harmonized securities regulation adopted across Canada can be seen by its enactment of a civil liability regime for secondary market disclosure that is substantially similar to the regime that is already in force in Ontario and soon to come into force in all the provinces and territories of Canada.