The federal government and the governments of British Columbia, New Brunswick, Ontario, Prince Edward Island and Saskatchewan (Participating Provinces) have signed a memorandum of agreement to formalize the terms and conditions of the new proposed cooperative capital markets regulatory system (Cooperative System), which will be administered by a single Capital Markets Regulatory Authority (Authority). For more information on this, please see our September 2014 Blakes Bulletin: Cooperative Capital Markets Regulatory System Agreement and Draft Legislation Released.
Given the scope of the new proposed federal and provincial legislation, Blakes is publishing a series of bulletins regarding various aspects of the proposed Cooperative System. This bulletin focuses on how the Cooperative System will affect the civil liability of public issuers and their officers and directors in connection with public disclosures and insider trading. A consultation draft of the Provincial Capital Markets Act (PCMA) was released in September for public comment. The consultation period will end on December 8, 2014. If enacted in its present form, the PCMA will replace the statutory civil liability provisions currently set out in the Securities Acts of the Participating Provinces and will result in a series of procedural and substantive changes to the existing provincial regimes.
OVERVIEW OF CHANGES
Parts 12 and 13 of the draft PCMA pertain to civil liability. Among other things, these parts set out provisions designed to harmonize the civil liability regimes of the various Participating Provinces, which create statutory causes of action for misrepresentations affecting the price of securities on primary and secondary markets and for insider trading, tipping and recommending. However, a number of the changes go beyond the mere elimination of variances in the Securities Acts of the Participating Provinces and, if enacted, will introduce new provisions and concepts that do not derive from any existing legislation.
A commentary to the PCMA and its companion federal legislation, the Capital Markets Stability Act (CMSA), sets out the legislative intent behind some of the proposed changes. However, the commentary is not comprehensive and numerous changes are not explained. For example, the definition of “misrepresentation” which, in the existing Securities Acts of the Participating Provinces, refers to “an untrue statement of material fact” is changed in the draft PCMA to “a false or misleading statement of a material fact” without commentary.
The changes that may have the most significant impact on the litigation of civil securities claims in Participating Provinces, including securities class actions, relate to an expansion of the private right of action for insider trading, a shift in the onus placed on certain defendants to primary market misrepresentation claims, and changes to the limitation periods applicable to the statutory causes of action in some provinces.
EXPANDED RIGHT OF ACTION FOR INSIDER TRADING
An important change is the expansion of existing civil remedies for insider trading. Proposed section 129 of the PCMA allows investors to pursue private rights of action for insider trading, tipping and recommending in contravention of proposed section 66. The prohibition on “recommending” in proposed section 66 addresses a scenario in which a person in a special relationship with an issuer is aware of a material change or a material fact that has not been generally disclosed and encourages another person to trade in a security of the issuer or to enter into a transaction involving a related financial instrument (without necessarily disclosing the material change or fact to the person who makes the trade or engages in the transaction). The Ontario Securities Act, unlike the Securities Acts of the other Participating Provinces, does not presently contain an express prohibition on recommending.
Proposed section 129 provides a civil cause of action against a person who contravenes the insider trading prohibitions to all persons who purchased or traded in a security during the period between the time the contravention occurred and the time when the material fact or material change at issue was generally disclosed to the market. Notably, the right of action is available regardless of whether the plaintiff sold the securities to or purchased the securities from the contravening defendant (or from a person who received material information or a recommendation from the contravening defendant). Damages are calculated as the lesser of the loss suffered by the plaintiff and three times the profit gained or loss avoided by all persons as a result of the contravention.
This direct right of action for investors who did not sell to or purchase from a contravener (or a person who received material information or a recommendation from a contravener) resembles section 136 of the British Columbia Securities Act. This remedy is not currently available under the Securities Acts of Ontario, Saskatchewan, New Brunswick or Prince Edward Island. These Securities Acts provide a statutory cause of action for damages resulting from insider trading and related misconduct, but the cause of action is only available to direct sellers and purchasers of the specific securities bought or sold as a result of the misconduct and to the issuer itself.
If enacted, section 129 may increase the likelihood that class actions will be initiated against those alleged to have engaged in insider trading, tipping and recommending, especially when the damages at issue are significant.
SHIFTING ONUS IN RESPECT OF PRIMARY MARKET LIABILITY
Another important change is that the draft PCMA reverses the onus for demonstrating a due diligence defence in respect of primary market claims. For example, existing subsection 130(5) of the Ontario Securities Act provides that a defendant, other than the issuer or selling security holder, is not liable for a misrepresentation in a prospectus unless he or she either (i) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or (ii) believed there had been a misrepresentation. Proposed subsection 119(4) of the PCMA makes it clear that it is the defendant who has the burden of proving that “after conducting a reasonable investigation [he or she] had no reasonable grounds to believe and did not believe that there was a misrepresentation.”
The commentary to the PCMA and CMSA indicates that this and other changes to the defendant’s onus result from attempts to harmonize primary and secondary market provisions but there is no question that they will make it more difficult to establish a “reasonable investigation” defence to a primary market misrepresentation claim.
HARMONIZATION OF LIMITATION PERIODS
The limitation period applicable to secondary market claims in the draft legislation closely resembles the recently enacted changes to section 138.14 of the Ontario Securities Act and section 161.9 of the New Brunswick Securities Act. This limitation period is not subject to discoverability—in other words it runs irrespective of whether a plaintiff is aware of the facts giving rise to the cause of action or not—and expires on the earlier of three years from the date the misrepresentation at issue was made and six months from the date a press release is issued disclosing that leave has been granted to pursue the action. However, the limitation period is suspended as of the date on which a notice of application or motion for leave is filed with the court, and resumes running until the motion for leave is finally determined.
If enacted, this limitation period will constitute a significant departure from the existing limitation periods governing secondary market claims in the Saskatchewan Securities Act, which expires on the earlier of one year from the date of discovery and six years from the date the transaction giving rise to the cause of action took place.
With respect to the limitation period affecting primary market claims, the PCMA is consistent with existing limitation periods in the Ontario, British Columbia and Prince Edward Island Securities Acts which provide that when rescission is not sought, the limitation period will expire on the earlier of 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action and three years after the transaction or alleged contravention at issue. However, this limitation period would cut existing limitation periods applicable to primary market liability claims in New Brunswick and Saskatchewan in half.
THE ROAD AHEAD
It is certainly possible that the PCMA will be revised following the public consultation process. Further, as the entire Cooperative System is designed to operate on a platform model, details of procedural and substantive rules may be expanded and refined through regulations which remain to be released for comment. While the provisions that ultimately come into force could be quite different from those envisaged in the draft legislation, what is clear at this stage is that the Participating Provinces envisage a significant overhaul of the civil litigation regimes in addition to changes to other aspects of their existing Securities Acts.