Amendments to the Securities Act (Quebec) introduce secondary market civil liability regime similar to that of Ontario.
On November 9, 2007, Bill 19, An Act to amend the Securities Act and other legislative provisions (Bill 19) came into force in Quebec. Bill 19 introduces a regime of secondary market civil liability, enabling investors to sue issuers and others for failing to make timely disclosure of material changes and for misrepresentations contained in public disclosure. Bill 19 closely follows the Ontario regime and readers will notice a substantial similarity between the two. Quebec also joins other provinces, such as Alberta and British Columbia, which have enacted, or are in the process of enacting, secondary market civil liability provisions.
Similar to the Ontario requirement for leave, an action in Quebec may not be brought without prior authorization of the court. In order to determine whether to grant authorization, the court must find that the action “is in good faith” and that there is a reasonable possibility it will be resolved in favour of the plaintiff. Unlike Ontario, however, which prescribes specific limitation periods for the commencement of proceedings of three years from the date of the statement of misrepresentation (or non-disclosure) or six months after the issuance of the news release announcing that leave has been granted, Quebec’s Bill 19 allows any interested party to request the court to perempt the authorization if an action is not commenced within three months of the authorization being awarded.
Cause of Action
Bill 19 identifies four situations that may lead to a cause of action. These consist of situations where:
- the issuer or a representative of the issuer releases a document containing a misrepresentation;
- a representative of the issuer makes a public oral statement relating to the issuer’s business or affairs, which contains a misrepresentation;
- an influential person or representative of the influential person releases a document or makes a public oral statement relating to the issuer, which contains a misrepresentation; or
- the issuer fails to make timely disclosure of a material change.
Persons Potentially Liable
Also similar to Ontario, Quebec’s Bill 19 provides for a number of potential defendants. These include:
- the issuer, its directors and officers who authorized, permitted or acquiesced in the release of the document or the making of the public statement containing the misrepresentation, or in the failure to make timely disclosure of a material change;
- an “influential person”, which includes a control person, promoter, an insider who is not a director or officer of the issuer, or an investment fund manager if the issuer 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 representative;
- an expert, which includes, inter alia, accountants, engineers, financial analysts and geologists whose report, statement or opinion contained the misrepresentation, who was quoted in the offending document or statement and who consented in writing to the use of the report, statement or opinion;
- In the case of a public oral statement, the person who made the statement.
Burden of Proof
The plaintiff is not required to prove that there was reliance on the document or statement containing the misrepresentation or on the issuer having complied with its timely disclosure obligations. Unless the defendant is an expert or the misrepresentation was contained in a core document (prospectus, take-over bid circular, etc.), the plaintiff must prove that the defendant knew of the misrepresentation or deliberately avoided such knowledge, or was guilty of gross fault in connection with the release of the document or of the public oral statement. With respect to a failure to disclose, unless the defendant is the issuer, its officers, an investment fund manager or its officers, the plaintiff must prove that the defendant knew that a material change report should have been filed or deliberately avoided such knowledge, or was guilty of gross fault in the failure to make timely disclosure. In determining “gross fault”, the court will consider a number of factors that are substantially similar to those to be considered in Ontario for determining “gross misconduct”. They include, inter alia: the nature of the issuer, the knowledge, experience and function of the defendant, and the reasonableness of reliance on the disclosure compliance system.
Bill 19 contains a number of defences to an action for civil liability similar to those found in Ontario’s Bill 198. These include:
- that the plaintiff knew of the misrepresentation or material change;
- that the defendant conducted a reasonable investigation and had no reasonable grounds to believe that a misrepresentation or failure to make timely disclosure would occur;
- that the misrepresentation was also contained in a document filed by, or on behalf of, a third person, other than the issuer, with the Autorité des marchés financiers or the securities commission of another province, providing that the misrepresentation was not corrected in another filed document, the document or statement contained the reference to the source of the misrepresentation and the defendant did not know and had no reasonable grounds to believe there was a misrepresentation;
- that a misrepresentation or failure to disclose a material change that was made without the defendant’s knowledge or consent was followed by corrective action in the form of notification to the board of directors of the issuer and possibly notification to the Autorité des marchés financiers. This defence is not available to an issuer;
- in the case of a public oral statement, that a defendant other than the person who made the statement did not become, or should not reasonably have become aware of the misrepresentation before the plaintiff acquired or disposed of the issuer’s security and that the person who made the public oral statement had no authority other than apparent authority to do so;
- with respect to a forward-looking document or statement, that reasonable cautionary language was included in the statement along with a statement of the material factors or assumptions applied. The statement or document must contain certain qualifiers in order for the defendant to rely on this defence. Futher, this defence is not available with respect to a statement or information required to be filed under the Securities Act or regulations;
- non-experts who rely on expert reports, statements or opinions may rely on a lack of knowledge or reasonable grounds to believe there was a misrepresentation in the relied report and that the report of the expert was fairly represented in the document or statement;
- an expert may rely on having withdrawn his or her report, statement or opinion in writing before the document containing the misrepresentation was released or the statement made;
- that a defendant was unaware and had no reasonable grounds to believe that a document containing a misrepresentation would be released; and
- that the issuer filed a material change report on a confidential basis, made the material change known when the basis for confidentiality ceased to exist, did not release a document or statement containing a misrepresentation and, if the material change became publicly known in some other way, promptly disclosed it.
Damages and Liability Cap
Damages under Bill 19 are assessed based on calculations that rely on the price of the securities bought or sold, and the average price of the security once the material change has been disclosed. Damages do not include changes in the value of the security due to market forces unrelated to misrepresentations or the failure to make timely disclosure. Much like Ontario, Bill 19 also includes liability limits. They are:
- in the case of the issuer or an influential person that is not a natural person, the greater of 5% of its market capitalization and $1,000,000;
- in the case of a natural person other than an expert, the greater of 50% of the aggregate of that person’s compensation from the issuer and its affiliates and $25,000 or, if the person is a director or officer of an influential person, the greater of 50% of the aggregate of that person’s compensation from the influential person and its affiliates and $25,000;
- in the case of an expert, the greater of the revenue that the expert and affiliates of the expert earned from the issuer and its affiliates in the year preceding the misrepresentation and $1,000,000.
The liability limits are available unless the plaintiff proves that the defendant, other than the issuer, authorized, permitted or acquiesced in the release of the document or making of the public oral statement containing the misrepresentation, or failed to make timely disclosure, while knowing it to be a misrepresentation or a failure to make timely disclosure.
Implementation and transition
As stated above, Bill 19 came into force on November 9, 2007.