The Supreme Court of Canada has upheld the Ontario Court of Appeal's ruling in this much-anticipated decision, released on October 12, 2007. While the Supreme Court largely followed the Court of Appeal's reasoning, the Court narrowed the application of the business judgment rule, held that there is an implied statement of reasonable belief with respect to forecasts, and narrowly interpreted "material changes" in the securities context. Surprisingly to some, the Court also awarded costs against the unsuccessful class plaintiff.

Summary of facts

Danier filed its prospectus on May 6, 1998, with the offering to conclude on May 20. There was no dispute as to the accuracy of the prospectus as of May 6, but, toward the end of the offering period, management learned of figures showing that unusually hot weather was seriously affecting the outlook for the current quarter as forecast in the prospectus. This was not publicly disclosed until two weeks after the offering had concluded. At that point a material change report was filed and the stock price slumped. However, a combination of cooler weather and a successful nationwide half-price sale resulted in the prospectus forecast being substantially achieved after all.

Lower Courts

The trial judge held that the forecast implied certain statements of fact, notably that the forecaster reasonably believed the forecast and was unaware of anything that would undermine it. While recognizing that s. 57(1) of Ontario's Securities Act (OSA) requires disclosure of post-filing material changes but not post-filing material facts, the trial judge found Danier in breach on the basis of s. 130(1), a general section of the OSA that creates a liability in the event that there is a misrepresentation "at the time of purchase." While Danier's officers might have believed that the forecast would be achieved, and even though it was in fact substantially achieved, the trial judge found that this had not been an "objectively reasonable" belief at the critical time.

The Court of Appeal overturned the trial judge's ruling in 2005, finding that the prospective forecast did not contain any implied assertion of "objective reasonableness," that the general provision of s. 130(1) should not be interpreted so as to override the specific provision of s. 57(1) and that the forecast had in any event been objectively reasonable at all material times - a conclusion supported by the application of the business judgment rule.

Supreme Court of Canada

Harmonious interpretation of the OSA

The Supreme Court upheld the ruling of the Court of Appeal but for slightly different reasons. The Supreme Court held that an application of the general liability provision in s. 130(1) to the case would obliterate the careful distinction in s. 57(1) between the disclosure requirements for material facts and material changes. The Court similarly rejected the appellants' contention that Danier was in breach of common law principles of misrepresentation. The Supreme Court was clearly of the view that where a representation is made pursuant to a statutory disclosure requirement, it is the statute and not the common law that decides when a breach of the requirement is actionable.

Poor results not a "material change"

The appellants argued in the alternative that the intra-quarterly result was a material change, not just a material fact as the trial judge had decided. The Supreme Court held, however, that a change in results is simply not a "change in the business, operations or capital of the issuer," as required by the relevant statutory definition. It may reflect such a change - e.g. that there has been a restructuring - but it does not in itself constitute a material change.

No implication of reasonableness after filing, but there is such an implication at the time of filing

The Court also held that there was no implication of objective reasonableness with respect to the forecast in the post-filing period. However, the Court agreed with the trial judge (and disagreed with the Court of Appeal) that such an assertion was implied up to the date of filing - a point that was of no assistance to the appellants in the circumstances.

Business judgment can't undercut disclosure

Although the question of whether the business judgment rule applied (as had been found by the Court of Appeal) was moot in the circumstances, the Supreme Court voiced disagreement with the Court of Appeal's suggestion that judicial deference to business judgment is appropriate in disputes over disclosure. As Binnie J. stated: "while forecasting is a matter of business judgment, disclosure is a matter of legal obligation" and "the disclosure requirements under the Act are not to be subordinated to the exercise of business judgment."

The Court noted that the fundamental bases of business judgment - the "relative expertise" of the board or management and the "need to support reasonable risk-taking" do not apply in the context of legislated disclosure. One can expect these criteria to be raised for and against "business judgment" arguments in the future.


Like the Court of Appeal, Binnie J. held the representative plaintiff liable for costs. The appellant "representative plaintiff" had argued that he should not be subject to costs, since novel issues were raised and/or it constituted a test case. Both Courts rejected the argument, noting the significant financial means of the plaintiff and the fact that this "case is a piece of Bay Street litigation that was well run and well financed on both sides".

This article will appear in the Class Action Defence Quarterly published by LexisNexis.