Securities Litigation

Securities Litigation in Ontario

Securities litigation in Ontario sits at the intersection of capital markets, investor protection, and corporate governance. It arises when investors claim they were misled about a security, when insiders misuse confidential information, or when issuers fail to comply with the disclosure obligations that underpin fair and efficient markets. Modern securities law in Canada assumes that robust, accurate disclosure allows investors to assess risk and allocate capital rationally. When disclosure breaks down, the law provides both regulatory and civil tools to restore confidence and compensate those who have suffered losses.

In practice, securities disputes in Ontario often involve public issuers whose securities trade on the Toronto Stock Exchange or other Canadian marketplaces, but the same principles can apply to exempt-market offerings, investment funds, and complex financing structures. Issuers, underwriters, directors, officers, investment dealers, portfolio managers, and other gatekeepers may all face exposure when disclosure is alleged to be false or incomplete. Investors may sue individually, but the regime is designed with class proceedings in mind, recognizing that many investors suffer similar harm when misrepresentations affect market price.

Ontario's system distinguishes between public enforcement, carried out by regulators such as the Ontario Securities Commission (OSC) through administrative and quasi-criminal proceedings, and private enforcement, where investors seek redress in the civil courts. The same underlying conduct, such as misleading continuous disclosure or insider trading, can trigger both administrative sanctions and civil liability. The civil side rests heavily on statutory civil liability provisions in the Securities Act (Ontario) and parallel statutes in other provinces, which supplement and, in many respects, improve upon traditional common law claims like negligent misrepresentation or fraud.

Statutory Civil Liability Framework

Canadian securities legislation creates a framework of statutory civil liability (SCL) that applies in defined situations, including misrepresentation in a prospectus, an offering memorandum, or certain circulars, trading or tipping while in possession of material non-public information, and misrepresentation in continuous disclosure or other public statements in the secondary market.

The central concept is the statutory definition of "misrepresentation," which captures both an untrue statement of a material fact and an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the circumstances. A material fact is one that would reasonably be expected to have a significant effect on the market price or value of the securities. By focusing on the effect of information on investment decisions and market pricing, the legislation aims to match civil liability to the economic harm that results when the market trades on an inaccurate picture of the issuer's business, operations, or capital.

How Statutory Civil Liability Reshapes Traditional Misrepresentation Claims

Statutory civil liability provisions in Canadian securities law were designed to correct specific weaknesses in traditional misrepresentation actions. At common law, an investor alleging negligent or fraudulent misrepresentation must usually demonstrate that the defendant owed them a duty of care, that the impugned statement was untrue, inaccurate, or incomplete in a material way, that the investor actually relied on it, and that this reliance caused their loss. Those requirements are difficult to satisfy in a public markets context, where investors trade based on a mix of disclosure documents, analyst commentary, index inclusion, and market signals, many of which are not traceable to a particular statement or moment in time.

The statutory regime for civil liability responds to these challenges by imposing clearly defined obligations on issuers and certain other market actors in relation to prescribed categories of disclosure, and by relaxing the reliance burden on investors. In the primary market, the prospectus and related documents are treated as the central disclosure vehicle. In the secondary market, continuous disclosure documents and public oral statements are treated as the key channels through which information reaches the market.

At the same time, statutory civil liability does not displace common law misrepresentation. Plaintiffs often plead both statutory and common law causes of action arising from the same disclosure events. The statutory route may offer advantages such as presumptions about reliance, defined measures of damages, and streamlined standing rules for classes of investors. Common law claims can still be valuable where the statutory provisions do not apply, where the plaintiff seeks different heads of damages, or where the fact pattern is better captured by fraud, negligent misrepresentation, or related economic torts.

Primary Market Liability

Primary market statutory civil liability deals with the distribution of securities to the public through prospectuses, offering memoranda, and circulars used in connection with transactions requiring securityholder approval. These provisions reflect the policy that investors making initial investment decisions should receive complete and accurate information.

Prospectus Misrepresentation

Prospectus liability deals with the primary distribution of securities to the public. When an issuer conducts a public offering, it must file and deliver a prospectus that discloses all material facts relating to the securities being offered. If that prospectus contains a misrepresentation, purchasers who acquired securities under the document during the distribution period have a statutory right of action.

The statutory cause of action generally allows investors to seek either rescission or damages. Rescission effectively unwinds the transaction by permitting the investor to return the securities in exchange for the original purchase price, whereas damages compensate for the difference between the price paid and the value the securities would have had if the prospectus had been accurate. Responsibility can extend to the issuer, every director at the time of filing, certain officers, underwriters, and experts such as auditors or engineers whose reports are included or referred to in the prospectus.

In many jurisdictions, the regime softens the traditional requirement that each investor prove individual reliance on specific statements in the prospectus. The law recognizes that investors, particularly in public offerings, rely on the integrity of the disclosure system as a whole. If a material misrepresentation is established, reliance may be presumed for purchasers who acquired under the prospectus within the prescribed time frame, subject to the statutory defences available to each defendant.

Offering Memoranda and Exempt-Market Disclosure

Offering memoranda (OMs) are used in many exempt-market offerings when securities are sold without a full prospectus. Even though these offerings target narrower groups (often accredited investors or those with specific connections to the issuer), the legislation still recognizes that disclosure can go wrong, and it extends statutory civil liability to misrepresentations in an OM. Purchasers who receive a misleading offering memorandum generally obtain a right of action similar to that in the prospectus context, again framed around rescission or damages for misrepresentation.

The existence of OM liability reflects a policy judgment that even sophisticated or exempt investors should be able to rely on written disclosure provided in connection with an offering. However, the litigation dynamics can be somewhat different from public offerings. The investor pool is usually smaller and more concentrated, which can shape whether claims proceed individually or via class proceedings. In practice, civil claims in this space often combine statutory OM misrepresentation provisions with common law theories such as negligent misrepresentation, fraud, breach of contract, or breach of fiduciary duty.

Circular Misrepresentation and Takeover-Related Disclosure

Statutory civil liability also extends to misrepresentations in certain circulars, particularly in the context of take-over bids, issuer bids, arrangements, and other corporate transactions that require securityholder approval. When shareholders are asked to vote on a transaction or decide whether to tender into a bid, they ordinarily receive circulars that describe the terms, the rationale, the risks, and the board's recommendations. If those circulars contain a misrepresentation, any securityholder who receives the document may have standing to sue.

Litigation over circular misrepresentation often turns on questions of materiality, conflicts of interest, and the adequacy of fairness opinions or other expert reports. Courts must balance the need for fulsome disclosure against the practical reality that complex transactions cannot be reduced to a few simple sentences. The test remains whether omitted or inaccurate information would reasonably be expected to affect a securityholder's decision to vote or tender. These cases frequently overlap with fiduciary duty and oppression claims, especially when control transactions are perceived to favour insiders at the expense of minority securityholders.

Secondary Market Liability and Continuous Disclosure

One of the most significant developments in Canadian securities litigation has been the introduction of secondary market statutory civil liability. Historically, investors who bought or sold shares on the open market faced serious hurdles if they wanted to sue for misrepresentation in continuous disclosure documents such as annual reports, interim financial statements, and press releases. At common law, each investor generally had to prove that they actually read and relied on the impugned statements, an unrealistic expectation in a liquid market where investors may trade based on price movements, analyst reports, or index inclusion.

The secondary market SCL provisions respond to these difficulties. They create a statutory right of action against "responsible issuers," certain influential persons, and those with authority to speak on their behalf, where a public document or public oral statement contains a misrepresentation, or where there has been a failure to make timely disclosure of a material change. Any person who acquired or disposed of the issuer's securities during the period between the misrepresentation and its public correction (or between the time a material change should have been disclosed and the time it was disclosed) has standing to sue, without needing to prove individual reliance.

Leave Requirement and Class Certification

The legislation tempers this plaintiff-friendly structure with a number of safeguards. Plaintiffs must obtain leave of the court before they can proceed, and the court must be satisfied that the action is brought in good faith and has a reasonable possibility of success. The Supreme Court of Canada has clarified that this threshold is more than a mere speed bump; judges must undertake a reasoned consideration of the evidence to ensure that the case has some merit, while stopping short of conducting a mini-trial.

Secondary market cases are almost always brought as class proceedings. The statutory provisions give standing to anyone who acquired or disposed of the issuer's securities during the misrepresentation period, which naturally lends itself to a class definition centred on purchasers and sellers within a defined time frame. Courts have developed a sophisticated body of law on certification, class definition, and the interaction between common law and statutory claims in this context.

To obtain certification, plaintiffs must satisfy the usual class action criteria, including an identifiable class, common issues, and the preferable procedure requirement. In Ontario, amendments to the Class Proceedings Act, 1992 have raised the bar by requiring that a class proceeding be superior to other reasonably available means of resolving the dispute and that common issues predominate over individual ones.

Liability Caps and Proportionate Liability

In addition, the Acts impose liability caps and detailed defences, recognizing that open-market issuers face a constant stream of disclosure decisions and that exposure to uncapped damages could deter companies from listing or from making legitimate forward-looking statements. Liability is generally proportionate to each defendant's responsibility, and there are specific defences for forward-looking information that is identified as such and accompanied by appropriate cautionary language. Courts assessing these defences look closely at the processes used to verify information, the involvement of experts, the role of audit committees, and how quickly issuers responded once problems were discovered.

Common Law Claims in the Securities Context

Despite the breadth of statutory civil liability, common law causes of action continue to play a significant role in securities litigation. The modern basis for common law civil liability in this area traces back to cases such as Hedley Byrne & Co. v. Heller & Partners Ltd., which established that a party who carelessly makes a statement upon which another reasonably relies can be liable in negligence.

Negligent Misrepresentation

Common law misrepresentation claims require the plaintiff to prove that a false statement was made, that it was material, that the defendant was at least negligent in making it, that the plaintiff relied on it, and that the reliance caused the claimed losses. In individual suits, such as claims involving private placements, investment advice, or bespoke financing arrangements, these elements can often be established with direct evidence. In large secondary market cases, however, individual reliance and causation can be much harder to prove on a class-wide basis.

That difficulty was one of the key drivers behind the creation of the secondary market statutory regime, which relaxes reliance requirements and substitutes a more structured set of presumptions, defences, and damage limits. Courts have recognized that plaintiffs frequently advance both statutory and common law claims in the same proceeding. One reason is that statutory schemes may cap damages or limit liability for certain actors, encouraging plaintiffs to invoke common law theories to seek fuller recovery where the facts support it.

Deceit and Fraud

Deceit is an intentional tort and therefore places a more substantial burden of proof on the plaintiff. This is so because where deceit or fraud is intentional, any insurance or indemnity protection otherwise afforded to the defendant is negated. To establish the intentional tort of deceit, the plaintiff must prove that there was an untrue statement of material fact, that the statement was a positive misrepresentation or intentional omission making the statement misleading overall, that the misstatement or omission was material, that it was made with knowledge of its falsity or recklessness with respect to its truth, that the defendant intended reliance on the misstatement or omission, and that the plaintiff acted in reliance.

Fiduciary Duty and Directors' Liability

Officers and directors owe a fiduciary duty to the corporation, and this duty may be asserted by the company or through a derivative action on behalf of the company. An officer or director is unlikely to be held to owe a securityholder a fiduciary duty directly, unless special circumstances exist with respect to vulnerability, dependency, or discretionary power in closely held companies.

Once a fiduciary duty, and therefore a duty of care, is established, the plaintiff must show that the defendant was in breach of the standard of care required of an officer or director. Case law regarding the required standard of care recognizes that decision-making is an essential role of officers and directors. A director is expected only to act as a reasonably prudent person would in the circumstances. A director is not liable for errors in judgment, particularly given the nature of the position insofar as it involves advocating corporate risk taking. A director is not expected to continuously scrutinize the conduct of corporate officials and is justified in trusting officers. Failure of a director to fulfill the standard of care typically stems from failure to inquire — a diligent director will not be liable where it is reasonable to rely on the information received from inquiries.

Insider Trading, Tipping, and Accountability Actions

Statutory civil liability is not limited to disclosure documents. It also extends to insider trading and tipping — trading or recommending trades while in possession of material non-public information (MNPI). Canadian statutes treat this conduct as a serious breach of market integrity because it allows informed insiders to profit at the expense of uninformed market participants. In addition to administrative sanctions and potential quasi-criminal charges, insiders and tippees may face civil actions from those on the other side of their trades, along with accountability actions brought on behalf of the issuer itself.

Civil Accountability for Insider Trading

Persons in a special relationship with a reporting issuer such that they have, and act upon, knowledge of an undisclosed material fact or change may be guilty of insider trading offences, and may further be civilly liable for damages as a result of the trade. The defendant in an insider trading action is liable to compensate the purchaser or seller of the securities for damages resulting from the trade. In an action to recover damages for a tipping offence, the defendant may be, among others, the reporting issuer, a person in a special relationship with the issuer, or a person or company that proposes to acquire a substantial portion of the property of a reporting issuer, who informs another person or company of a material fact or material change that has not been generally disclosed.

In an accountability action, the issuer can sue an insider, affiliate, or associate who has traded or tipped while in possession of MNPI, seeking to recover the profit made or the loss avoided. If the issuer fails to act, legislation allows the securities commission or a securityholder to ask the court for permission to pursue the claim in the issuer's name. The court must be satisfied that the action is in the best interests of the issuer and its securityholders, balancing the anticipated costs against the likely benefits.

Defences to Insider Trading Claims

Liability for insider trading or tipping will not be found where the defendant proves that they reasonably believed that the material fact or material change had been generally disclosed, or that the material fact or material change at issue was known or ought reasonably to have been known by the plaintiff at the time of the transaction. Where the information provided by the alleged tipper was disclosed in the necessary, and not merely ordinary, course of business, the tipper will not be liable for damages. With respect to tipping in the context of take-over bids, business combinations, or substantial acquisitions, the accused will not be liable where the disclosure was necessary to effect the respective transaction.

Class Actions and Procedural Requirements

Securities class actions have become a prominent feature of the Canadian litigation landscape. All provinces now have legislation that can be used to bring class proceedings, though they do not share identical approaches. In Ontario, British Columbia, Québec, Alberta, and more recently Prince Edward Island, courts have developed detailed jurisprudence on when securities cases should be certified and how to manage them efficiently.

Certification Criteria

Certification is not a judgment on the merits but a procedural gateway designed to determine whether a class action is a fair and efficient way of resolving common issues compared to multiple individual suits or alternative processes. Judges consider whether there is an identifiable class, whether common issues predominate, whether a class proceeding is the preferable procedure, and whether there is an appropriate representative plaintiff who can fairly and adequately represent the class.

In securities cases, the common issues often focus on the existence of a misrepresentation, the materiality of omitted information, the timing and adequacy of corrective disclosure, and the role of each defendant. Where common law negligent misrepresentation claims are advanced alongside statutory ones, courts wrestle with whether reliance issues can be addressed efficiently, and in some instances have declined to certify common law claims while allowing statutory SCL claims to proceed.

The Reliance Barrier and Fraud on the Market

The most significant hurdle in Canadian securities class actions has been the reliance requirement. In order to establish reliance on an individual basis, as is required by secondary market participants particularly for negligent misrepresentation claims, the plaintiff essentially had to undermine the commonality requirement of certification. In other words, by requiring each class member to prove reliance, this made the claims unsuitable for class actions.

United States common law has developed the "fraud on the market" theory to overcome the reliance requirement. The fraud on the market theory is a cause of action for securities violations which does not require litigants to prove individual reliance. Canadian courts have carefully considered whether to adopt this theory, recognizing that procedural restrictions and certification requirements in Canada differ from those in the United States. The statutory secondary market provisions largely obviate the need for this theory by dispensing with individual reliance requirements for statutory claims.

Leave Requirement and Strike Suits

Before reaching the certification stage, plaintiffs in class actions regarding securities must obtain leave of the court to pursue certification. This leave requirement was introduced as a method of preventing or deterring "strike suits" — claims brought with little merit but designed to extract settlement payments from defendants who wish to avoid the costs associated with protracted litigation. Leave of the court will be granted where the plaintiff can establish, through affidavit evidence, that the action is brought in good faith and that the class has a reasonable possibility of success against the defendant.

All class action settlements must be approved by the court. Securities class actions must also gain judicial approval in order to discontinue the litigation. Both requirements are further legislative efforts to deter strike suits and ensure that settlements are fair and reasonable to all class members.

Damages, Remedies, and Settlement Dynamics

Calculating Damages in Securities Cases

Damages in securities class actions are typically calculated by comparing the price at which class members bought or sold securities during the misrepresentation period with the price that would likely have prevailed had the truth been known. Economists may perform event studies to isolate the portion of price movement attributable to the misrepresentation as opposed to general market or industry factors. This can be an intricate exercise; models such as proportionate trading approaches have been discussed to estimate how many securities were held by class members at different points in time, although courts remain cautious about complex methodologies that may be difficult to prove.

Rescission and Equitable Remedies

For primary market claims, rescission may be available even where there is an innocent misrepresentation, whereas damages will only be successfully sought where the plaintiff can show that the misrepresentation was material at the time of the contract. Rescission effectively places parties back in their pre-contract positions, unwinding the transaction. This remedy must typically be sought within tight time frames measured from the date of purchase.

In exceptional cases, courts may impose constructive trusts or grant other equitable remedies where damages alone would be insufficient to address the wrong or where tracing principles support proprietary relief.

Limitation Periods

Limitation periods for statutory claims involving a prospectus, offering memorandum, circular, or insider trading typically feature two distinct limitation periods: one tied to rescission and another to damages. Investors seeking rescission of a purchase usually must act within a relatively short period, often measured in months from the date of the transaction. By contrast, an action for damages can usually be brought within the earlier of a fixed number of years from the transaction and a shorter period after the investor first had knowledge of the facts giving rise to the cause of action.

For secondary market claims, limitation periods are framed differently. Rather than tying the clock to the date of a particular transaction, the legislation generally links the limitation period to the date of the impugned conduct and to a subsequent news release disclosing that leave to commence a secondary market action has been obtained. These dual limitation periods reflect a policy choice about fairness and finality.

Defences and Due Diligence

Reasonable Investigation and Due Diligence

The statutory provisions introduce detailed defences and liability allocation mechanisms that have no real counterpart at common law. For example, the legislation provides for due diligence defences where defendants can show they conducted a reasonable investigation and had reasonable grounds to believe that the disclosure was accurate. In some circumstances, proportionate liability between multiple defendants is available, reflecting a policy choice to encourage rigorous disclosure processes without exposing participants to unlimited and unpredictable damages.

Courts assessing due diligence defences look closely at the processes used to verify information, the involvement of experts, the role of audit committees, and whether documentation supports the conclusion that the issuer took disclosure obligations seriously. Robust governance structures and a culture of compliance do not guarantee immunity from litigation, but they can significantly strengthen the defence position and may persuade courts that any misstatements were inadvertent and promptly corrected.

Forward-Looking Information

There are specific defences for forward-looking information that is identified as such and accompanied by appropriate cautionary language. This recognizes that companies must be able to discuss future plans, projections, and estimates without fear that every forecast that does not materialize will trigger liability. The legislation strikes a balance by requiring that forward-looking statements be clearly identified and accompanied by meaningful cautions about the factors that could cause actual results to differ.

Public Knowledge and Prompt Correction

Defendants may avoid liability where they can prove that the plaintiff knew or ought reasonably to have known of the misrepresentation at the time of the transaction, or where a timely public correction was made. Courts examine whether corrective disclosure was sufficiently clear, prominent, and disseminated through appropriate channels to reach the market effectively.

Enforcement and Regulatory Coordination

Investors and issuers operate in an environment where regulatory enforcement is never far in the background. Securities regulators investigate suspected misconduct, hold administrative hearings, and can impose sanctions ranging from cease-trade orders and director-officer bans to significant monetary penalties. Breaches of securities law can also give rise to quasi-criminal or criminal charges in more serious cases. Administrative, civil, and quasi-criminal responses are complementary, not mutually exclusive. A single course of conduct can trigger OSC investigations, settlement discussions, and parallel or follow-on civil suits by investors.

Regulatory Findings as Evidence

From a litigation standpoint, enforcement activity can have several important effects. Regulatory investigations often generate documentary records, witness interviews, and expert analyses that later become relevant in civil proceedings. Where settlement agreements or reasons for decision are made public, plaintiffs may draw on regulators' findings to support their claims, although courts retain an independent role in assessing evidence.

Civil courts remain careful, however, not to simply adopt regulators' conclusions wholesale. Evidence of regulatory findings may be admissible but not determinative, especially where settlements are negotiated on a no contest basis. The standards of proof and the policy objectives in enforcement proceedings differ from those in civil actions. Litigation primarily aims to compensate investors for losses caused by wrongs, while regulatory enforcement focuses on deterrence, market integrity, and the public interest.

Settlement Coordination

The existence of administrative penalties or sanctions can influence settlement dynamics in civil suits. Issuers and directors may be more inclined to resolve investor claims after addressing regulatory risk, or they may seek to coordinate global settlements that cover both regulatory and private actions. This coordination can be complex, particularly where confidentiality obligations, admissions, and the allocation of settlement funds must be carefully negotiated to avoid prejudicing one proceeding while resolving another.

Practical Considerations for Issuers, Directors, and Investors

Securities litigation is highly fact-specific, but several recurring themes emerge from the Canadian jurisprudence and commentary. For issuers and their boards, one central lesson is that process matters. Courts assessing defences such as due diligence, reasonable investigation, and forward-looking information protections look closely at how disclosure decisions were made. They ask whether audit committees met regularly, whether management engaged qualified experts, whether concerns were raised and properly addressed, and whether documentation supports the conclusion that the issuer took disclosure obligations seriously.

Governance and Compliance Culture

Robust governance structures and a culture of compliance do not guarantee immunity from litigation, but they can significantly strengthen the defence position and may persuade courts that any misstatements were inadvertent and promptly corrected. Boards should ensure that disclosure controls and procedures are documented, tested, and reviewed regularly. Management certifications under National Instrument 52-109 serve as one tool in this process, but they cannot substitute for genuine oversight and engagement with disclosure quality.

Investor Strategy and Funding

For investors contemplating litigation, the regime offers a range of strategic choices. Plaintiffs must decide whether to proceed individually or as part of a class; whether to rely primarily on statutory civil liability or to add common law and contractual claims; and how to coordinate with parallel regulatory processes or foreign proceedings where the issuer has cross-border listings. They must also grapple with practical issues such as limitation periods, funding arrangements, and the evidentiary challenges of proving loss causation and damages in dynamic markets.

Securities class actions may involve third-party litigation funding and cost-sharing arrangements, especially in jurisdictions where unsuccessful plaintiffs are exposed to adverse costs awards. Courts carefully scrutinize these arrangements to ensure they do not create undue conflicts of interest and that they remain consistent with access to justice.

Cross-Border and Jurisdictional Issues

Secondary market civil liability also raises complex jurisdictional questions in an era of globally integrated capital markets. Investors resident in one province may purchase securities of an issuer incorporated or primarily operating elsewhere, listed on multiple exchanges. Courts have held that, for secondary market civil liability, the governing law will often be the law of the jurisdiction where the investor acquired the securities, provided that the issuer has a real and substantial connection to that jurisdiction as defined by the legislation. In some cases, Canadian courts have stayed or declined to hear proposed secondary market class actions in favour of foreign proceedings, particularly where the issuer has minimal continuing ties to Canada or where parallel litigation elsewhere is more closely connected to the dispute.

The Evolving Landscape

The interplay between statutory schemes and common law continues to evolve. Courts are still refining the boundaries between statutory and non-statutory remedies, the extent to which reliance can be presumed in different contexts, and the role of foreign legal theories such as fraud on the market. The Canadian approach reflects a deliberate decision not to simply import U.S. models, but to adapt them in light of domestic policy choices about market integrity, investor protection, and the health of public capital markets.

For practitioners and clients engaged in securities litigation, staying attuned to these developments — both doctrinal and practical — is essential to navigating a field where legal rules, market practices, and regulatory expectations are closely intertwined.