The Supreme Court of Canada released a landmark corporate disclosure ruling on October 12, 2007. In a unanimous decision, the Court held that where a prospectus (or amendment) contains no misrepresentations on the date it is filed, information amounting to material facts1 – but not material changes2 – that subsequently arise cannot support an action under s. 130(1) of the Ontario Securities Act (the “Act”).

Unseasonably warm weather in the spring of 1998 coincided with an initial public offering of Danier’s shares through a prospectus. The prospectus contained a forecast of Danier’s projected results for its fiscal fourth quarter for 1998. An internal company analysis prepared before the public offering closed, but after the receipt for the prospectus was issued, showed that Danier’s fourth quarter results lagged behind its forecast. Danier did not disclose its intra-quarterly results before closing. The appellant investors brought a class proceeding in which they alleged a prospectus misrepresentation under s. 130(1) of the Act.

The trial judge found that the cause of the poor results was the warm weather, which did not constitute a change in the business, operations or capital of the issuer. Accordingly, the sales results did not amount to a “material change” requiring that an amendment to the prospectus be filed under s. 57(1). However, the trial judge held that there was an additional obligation to disclose material facts arising during the period of distribution to make any implied assertions in the prospectus not misleading as of the closing date.

In a unanimous judgment, the Ontario Court of Appeal reversed the trial judgment. While investors were entitled to assume that the prospectus provided “full, true and plain disclosure of all material facts” as at the date it was filed, thereafter they were entitled only to notice of material changes.

In dismissing the appeal, the Supreme Court found that the relevant date for assessing the accuracy of a statement is the effective date at which the statement was made – the date the prospectus (or amendment) was filed. When a prospectus is accurate at the time of filing, s. 57(1) of the Act limits the obligation of post-filing disclosure to notice of a “material change”. An issuer has no similar obligation to amend a prospectus for changes to material facts occurring after a prospectus receipt is obtained unless those material facts also amount to a “material change”. The Supreme Court found that the distinction between “material change” and “material fact” is one that was deliberate and policy-based. Imposition of civil liability under s. 130(1) for an omission to do something the Legislature, as a matter of policy, has declined to require under s. 57(1) would simply be to substitute the Court’s view of policy for that of the Legislature.

Prospective purchasers were entitled to assume that no material changes had occurred to Danier’s business, operations or capital between the filing date and the closing date, but that is the extent of the assurance given by the Act. There was no evidence that Danier made a change to its business, operations or capital during the period of distribution. Rather, the revenue shortfall was caused by the unusually hot weather which was a factor external to the issuer. Consequently, Danier experienced no material change that required disclosure.

Although not necessary for the disposition of the appeal, the Supreme Court commented on the application of the business judgment rule to disclosure obligations of issuers. It rejected the respondents’ argument that the business judgment rule should be applied when a court considers whether disclosure should have been made pursuant to the Act. It distinguished financial forecasting, a matter of business judgment, with disclosure required under the Act, a matter of legal obligation. The traditional justification for the business judgment rule – that judges are less expert than managers in making business decisions – is absent when the question is the legal one as to whether sufficient disclosure has been made. In those situations, the relative expertise resides with judges.

Finally, the Supreme Court awarded costs to the respondents, rejecting the appellants’ argument that general concerns about access to justice justified a departure from the general rules regarding the awarding of costs. The Court referred to the fact that the representative plaintiff had much to gain financially if he was successful and that he was a person of substance. It held that “those who inflict [protracted and expensive litigation] on others in the hope of significant personal gain and fail can generally expect adverse cost consequences.” This was not a case where the factors outlined in s. 31(1) of the Class Proceedings Act, 1992 were applicable. The Court commented that this case was, in large measure, “an ordinary piece of commercial litigation.”