British Columbia has finally introduced its long-awaited civil liability regime for secondary market disclosure. This Securities Alert from Tom Hakemi and Christine J. Mingie outlines the new secondary market civil liability regime.

The new civil liability regime is significant for two reasons. It expands the liability regime on public companies and their directors and officers (and certain other persons who provide services to public companies, such as lawyers, auditors, geologists and financial advisors) because the changes give a cause of action to purchasers of securities in the secondary market. The secondary market includes all trading in securities that takes place after the initial sale from the issuing company. Thus, the secondary market includes all trading on stock exchanges and probably represents over 90% of securities trading.

Furthermore, the changes open the door to class action proceedings for misrepresentations in filed disclosure documents by purchasers in the secondary market by removing the common law requirement that an investor prove he or she relied on the misrepresentation.

The New Right of Action

Under amendments to the Securities Act (the "Act") that took effect in British Columbia on July 4, 2008, public companies and their officers, directors, insiders, experts and others who are subject to British Columbia securities laws will be exposed to civil liability from investors for misrepresentations in a public company's continuous disclosure and for failures to make timely disclosure of material changes.

Investors now have the right to sue if they suffer damages as a result of purchasing or selling securities of a public company in the following circumstances:

  • a failure to make timely disclosure of a material change by a pubic company;
  • a misrepresentation in a document released by or on behalf of the public company;
  • a misrepresentation made in a public oral statement by or on behalf of the public company; or
  • a misrepresentation in a document or public oral statement released or made by an influential person, such as a promoter or an insider of the public company.

The definition of what constitutes a document under the new regime is particularly important to consider. It includes documents, whether in written or electronic form, that are or must be filed with the British Columbia Securities Commission, that are or must be filed with any government agency under securities or corporate law, a stock exchange or quotation and trade reporting system, and any other communication that would reasonably be expected to affect the market price or value of the company's securities. The expansiveness of the definition captures a wide range of documents including, for example, web replays of a conference call and documents filed or required to be filed with the Registrar of Companies (such as notices of articles, annual reports and notices of change of directors).

Persons Potentially Liable

Depending on whether a potential claim involves a disclosure misrepresentation or a failure to make a timely disclosure, an investor is entitled to sue any of the following persons:

  • public companies, their directors and their officers if the officers authorized, permitted or acquiesced in the release of the document or the making of the public oral statement containing the misrepresentation or in the failure to make timely disclosure of a material change;
  • influential persons (which includes a control person, promoter, insider who is not a director or officer of the public company or an investment fund manager if the public company is an investment fund) who knowingly influenced the misrepresentation or failure to make timely disclosure, or who authorized, permitted or acquiesced in the misrepresentation if it was made by the influential person or its representatives;
  • experts (which includes lawyers, auditors, geologists, accountants, engineers or other professional persons) whose report, statement or opinion contained the misrepresentation, who were as quoted in the offending document or public oral statement and who consented in writing to the use of the opinion, statement or report; and
  • in the case of a misrepresentation contained in a pubic oral statement, the person who made the statement regardless of their affiliation with the public company.

Available Defences

A number of defences are available to persons who are sued by an investor depending upon whether the claim involves a claim of disclosure misrepresentation or a failure to make a timely disclosure. Some of the defences available include due diligence defence, reliance on professionals and experts, mistaken release of a document, safe harbour defence, reliance on another public document and whistler blower protection.

Damages and Liability Limits

The new civil liability regime contains detailed provisions on how damages are to be assessed in favour of an investor who bought or sold of securities after a document was released, an oral statement made that contained a misrepresentation, or after a failure to timely disclose a material change. The assessment of damages is subject to a number of variables. Generally, damages are based on the difference between the value of the securities bought or sold when the disclosure record of the public company was inaccurate and the value of the securities after proper disclosure has been made. Absent a finding of fraud, however, the damages are capped as follows:

  • public companies – capped at the greater of 5% of the company's market capitalization and $1 million;
  • directors and officers of public companies – capped at the greater of $25,000 and 50% of the aggregate of the director's or officer's compensation from the public company and its affiliates; 
  • experts – capped at the greater of $1 million and the revenue that the expert or the professional earned from the public company during the 12 months before the misrepresentation or the failure to timely file material change reports occurred; and
  • influential person – capped at the greater of $25,000 and 50% of the aggregate of the person's compensation from the public company and its affiliates.

Proportionate Liability

In addition to liability caps, the liability of each defendant will be assessed proportionately to that person's responsibility for making and not correcting the disclosure that contained the misrepresentation or failing to make the required disclosure. In situations where a defendant knowingly made a misrepresentation or failed to make timely disclosure, the defendant will be jointly and severally liable for the whole amount of the damages assessed.

Leave to Proceed 

In an effort to protect against frivolous lawsuits, the amendments prohibit an action from being commenced without leave of the court. In determining whether to grant leave to commence an action, the court must be satisfied that the action is being brought in good faith and that there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. 

This article was issued as a LM Securities Alert in July 2008