Secondary Market Liability
Certain of the provincial securities acts, starting with Ontario in 2005 and ending with British Columbia in 2008, were amended to include a statutory right of action against publicly-traded companies and certain of their insiders and related parties for misrepresentations or omissions that affect the price of such companies’ securities. In short, these amendments provide that anyone who acquires or disposes of a company’s securities between: (i) the time in which that company makes a misrepresentation, either orally or in a public disclosure document, or fails to disclose a material piece of information, and (ii) the time in which said misrepresentation or omission is publicly corrected, has a right to sue for damages arising from any losses sustained as a result.
These amendments are particularly significant because the plaintiffs filing such lawsuits need not establish reliance on the misrepresentation or omission in order to establish liability. The liability arises from the misrepresentation or omission itself. A much lower threshold is therefore established as compared to the threshold that exists at common-law which would otherwise require a plaintiff to establish reliance in order to succeed.
The result of this lower threshold is that those persons who acquired or disposed of securities during the period in question may coordinate their efforts and file a class-action lawsuit against the company and related defendants knowing that they will not have to individually prove reliance at trial. While each of the amended provincial securities acts imposes monetary limitations on the awards that plaintiffs may be awarded pursuant to such lawsuits, this lower liability threshold likely increases the odds that such lawsuits will succeed.
In addition to having a court certify their claim as a class proceeding, which generally involves, among other things, demonstrating that the claims of each of the plaintiffs raise common issues and that a class proceeding is the preferable procedure for a fair and efficient resolution of those common issues, the plaintiffs must seek leave of the court in order to bring a claim pursuant to the aforementioned amended sections of the provincial securities acts. The acts generally stipulate that a court may only grant leave in this respect where it is satisfied that the following two-part test is satisfied:
- the action is being brought by the plaintiffs in good faith; and
- there is a reasonable possibility that the plaintiffs will succeed at trial.
Case law in this area is scant given that the amendments to the securities acts creating secondary market liability were enacted relatively recently. However, the first court to consider this two-part test in the context of such a class-action lawsuit, brought in Ontario in 2009, established a low threshold for each of the two parts. Had the court interpreted the two-part test differently it may have established a higher threshold that would have acted as a gate-keeper to such claims. As it stands, however, courts considering this two-part test in future cases may grant leave readily.
Given the current state of the global economy, it is perhaps not surprising that an increasing number of individuals are seeking to exercise their right to file such lawsuits. NERA Economic Consulting, an organization that has been tracking trends in securities class actions for over 15 years, indicates that there has been a statistically notable increase in class-action lawsuits filed against publicly-traded companies since 2008. Of the 15 new securities class-action lawsuits filed in 2011, more than in any previous year, nine were brought pursuant to the aforementioned amended sections of the applicable provincial securities act.
Mining companies are particularly vulnerable to becoming the targets of such lawsuits given the extent of their reporting obligations, the forward-looking information contained in their public disclosure documents, their relatively deep pockets and the relative volatility of stock prices in the mining sector. In fact, a number of Canadian publicly-traded mining companies have recently had high-profile and potentially costly class-action lawsuits filed against them for alleged misrepresentations or omissions.
Most of these cases have not been heard in court so the merits of the claims are not known. However, regardless of the outcome, a company targeted by such a claim may suffer financially and/or in terms of its reputation simply as a result of being so targeted. As such, companies should act decisively when such a claim is filed against them; or, better yet, take precautions in an effort to avoid such claims altogether.
There are a number of practices a company can adopt in an effort to avoid becoming the target of such a lawsuit. Such practices include:
- Establishing, and regularly updating, a corporate disclosure policy providing a process for timely and accurate disclosure of material information.
- Ensuring that its officers, directors and employees are aware of, and comply with, its disclosure policy, and are informed of the potential consequences of failing to so comply, including requiring an annual certificate from officers, directors and employees confirming the same.
- Understanding the civil liability that it is exposed to and implementing procedures that may provide a successful defence to any claims that arise. In particular, ensuring that it maintains detailed records. The target of a claim may be able to rely on the due diligence defence if it can be proven that a reasonable investigation was conducted prior to the error in question and that the target had no reasonable grounds to believe that an error was made. Keeping detailed records at all times may assist in establishing such a defence.
- Relying on experts, advisors and legal counsel when preparing public disclosure documents and/or public statements. More specifically: (i) ensuring that technical and geological advisors, who are “qualified persons” under National Instrument 43-101 Standards of Disclosure for Mineral Projects, review scientific and technical disclosures made by the company; and (ii) ensuring that the company receive the written consents of experts whose reports, statements or opinions are summarized or quoted in any disclosure made by the company in order to satisfy the requirement with respect to the defence of expert reliance.
- Conducting regular reviews or audits of its business practices in order to identify potential areas of non-compliance or vulnerability.
- Establishing a plan for promptly addressing any misrepresentations or omissions that the company becomes aware of which includes the involvement of external counsel and advisors.
- Reviewing its insurance policies to ensure that it and other affected parties are properly insured for such lawsuits.
While taking these preventative measures will not necessarily protect a company from such a lawsuit, they may help to reduce a company’s level of risk in this regard.
If, despite taking preventative measures, a company has such a lawsuit filed against it, it is important that it act carefully and decisively in an effort to minimize the impact. Some of the actions it should consider are:
- Assuming that it kept detailed records on an ongoing basis as a preventive measure (as suggested above), retrieving and organizing such records for potential future use as a due diligence defence to the claim in question. Detailed records should continue to be kept after a claim is filed.
- Engaging external counsel to assess the merits of the claim and to develop a litigation strategy.
- Notifying the company’s insurers of the claim.
Taking the above measures may assist a company in significantly reducing the impact, both in terms of its finances and its reputation, of being the target of such a lawsuit.
In addition to being exposed to such civil liability, publicly-traded companies may face regulatory sanctions for misrepresentations or omissions as well. Canadian securities regulators are imbued with a public interest jurisdiction which empowers them to issue a variety of orders against such companies in order to protect the investing public. For example, securities regulators may issue a reprimand, impose a fine or cease the trade of the company’s securities.
Although it is unsettled whether a securities commission’s reasons and findings that underlie one of its orders are always admissible in a subsequent civil lawsuit filed against the same company, the securities commission’s order itself is generally admissible in such a proceeding. The strength of a class-action against a company may increase, therefore, in the event that the company is subject to such an order. Given this potential, it behooves companies to invest the time and resources required to take the precautions noted above in order to minimize the likelihood of being subject to such an order.
Companies should also be mindful that a settlement agreement entered into, either in the civil or regulatory context, may be considered in subsequent proceedings. Companies should therefore have external counsel review any proposed settlement agreements prior to entering into one.
Amendments to certain of the provincial securities acts which have created a statutory right of action against publicly-traded companies and certain of their insiders and related parties for misrepresentations or omissions, and one court’s interpretation of the two-part test that must be met by the plaintiffs in order to acquire leave from the court to bring such a lawsuit, have potentially laid the foundation for an increase in the number and size of lawsuits filed against such companies. The current state of the economy has also likely increased such risk.
Mining companies are particularly vulnerable and should take preventative steps to avoid such lawsuits, and take careful and decisive action in the event that such lawsuits are filed against them. Doing so may reduce the potential damage that such lawsuits can do both to their financial positions and their reputations.