Statutory Civil Liability (“SCL“) is established by legislation for misrepresentations in a prospectus, Offering Memorandum (“OM“), or circulars for a take-over bid (“TOB”) or issuer bid (“IB”), including directors’ and director’s or officer’s circulars. This civil liability is covered under Part 23 of the Ontario Securities Act (“OSA“).
Prospectus liability arises when an investor buys a security covered by the prospectus during the distribution period, which is between the final receipt date and the closing date. Liability arises if the prospectus contained a misrepresentation or if a misrepresentation resulted during that period from a material change that was disclosed improperly or not at all. Liability does not arise from events that occur after the closing date.
The same liability arises for OM and TOB documents when an investor relies on a misrepresentation. In each case, the investor is effectively deemed to rely on the misrepresentation. Thus, the investor does not have to prove receipt, comprehension or reliance.
The issuer must disclose any material change that occurs during the distribution period. However, the issuer is not required to disclose material facts that do not amount to a material change during the distribution period.
The prospectus investor has a right of action against the issuer, selling securityholder, any underwriter who signed the prospectus certificate, any director of the issuer when the prospectus was filed, any person who consented to any part of the prospectus, and any other person who signed the prospectus. OM investors have a right of rescission or damages against the issuer and a selling securityholder. TOB document investors have a right of rescission or damages against the offeror and a right of damages only against any director of the offeror when the TOB document was signed, any person who consented to any part of the TOB document, and any other person who signed the TOB document.
The legislation provides several defences, and the onus of proof is on the party claiming the defence. For example, it is a complete defence to prove that the investor knew of the misrepresentation at the time of purchase. An impugned party is not liable for misrepresentation if it proves that the prospectus was filed, or the TOB document sent, without that person’s “knowledge or consent.” The legislation also allows for the defence of withdrawal of consent or reliance on an expert. Due diligence is also an available defence.
Damages are limited to the amount the security depreciated as a result of the misrepresentation. Liability for misrepresentations is generally joint and several. The court may disallow recovery of the contribution between the paying defendant and the others if recovery is not “just and equitable.”
In Kerr v. Danier Leather, the Supreme Court held that the forecast contained an implied representation that the forecast was objectively reasonable. The prospectus was a “snapshot” that contained full, true, and plain disclosure of all material facts at the time it was issued. The court held that an issuer is not required to disclose any material facts that arise later and call into question the reasonableness of the forecast, though it must disclose material changes.
To wrap up, it’s important for directors, officers, underwriters, and their respective counsel to thoroughly investigate all claims and statements made in the prospectus, OM, or TOB documents. Remember, at The Framers’ Forum, we believe in framing success through diligence and attention to detail. So, make sure to keep written records of due diligence investigations until all dangers of liability have passed.