It's a long-held maxim that Canadians are less litigious than their American counterparts, especially when it comes to commercial class-action lawsuits. But we're about to actually find out if that's true. New legislation in Ontario allows any investor or group of investors in the secondary market to sue for losses brought on by companies that issue misleading statements or don't promptly disclose information that could influence stock prices. That might open the legal floodgates for those feeling put out by a corporation's less-than-stellar record.
Until now, such class-action lawsuits have been hard to bring to trial, because individual investors have to prove that they relied on misinformation in their decision to buy or sell a security. That obstacle–which Ed Babin, a senior partner at law firm Davies Ward Phillips & Vineberg LLP in Toronto, says has been “considered the single biggest impediment to certifying a class action in this area”–will be removed on Dec. 31 as part of a slew of amendments to the Securities Act (Ontario) contained in Bill 198. Instead, investors who buy or sell securities during the period when alleged misrepresentation took place will automatically be deemed to have relied on that information.
In theory, the change should mean companies are more exposed to class-action lawsuits, although Babin isn't so sure. Forensic accountant Mark Rosen of Rosen & Associates Ltd. in Toronto is even less convinced. “The new law is useless,” says Rosen. “It's kind of unfortunate that it's taken them so long to come up with something this weak.” Rosen says the penalties for companies that play fast and loose with the facts are not nearly tough enough–and action won't be worth the hassle.
Under the new bill, companies can be sued for up to $1 million or 5% of their market cap, whichever is higher. That could be a substantial penalty for some of the larger corporations, although it pales in comparison with what is available under U.S. law. Directors and officers, meanwhile, can be sued for up to the greater of $25,000 or 50% of the compensation they received during the previous 12 months. Persons of influence–for example, a manager of an investment fund or a controlling shareholder who is neither director nor officer–can also be sued, as can lawyers, accountants and financial analysts connected to the company in question.
It all has some lawyers advising companies to step up their corporate disclosure policies. “You can expect an increase in individual actions, but a dramatic increase in class-action activity,” says Ava Yaskiel, a partner at Ogilvy Renault LLP in Toronto. Yaskiel admits the law doesn't go as far as U.S. legislation in protecting investors, but believes it is tough enough to make executives a little more wary about releasing information to the markets or making off-the-cuff comments in public. “You don't want to discourage companies by scaring them into not saying anything,” says Yaskiel. “That's not good for investors or the markets. You want to encourage them to be good disclosure companies.”
Yaskiel adds that the best protection your company has from the potential legal onslaught is quite simple: don't screw up. But one of the key defences if you do is to show due diligence. In other words, your company should have a corporate disclosure policy or system that complies with the rules, and is followed by everyone. That means identifying which employees speak in public or are involved in issuing press releases, making investor presentation slide shows or even producing website content–and carefully going over the information that is to be released to the public. “Going off script is just too dangerous,” Yaskiel warns. Executives should also make sure to include the “safe harbour” language included in the legislation when making predictions or forward-looking statements, which essentially means telling the market they are making best estimates based on certain assumptions.
While a plaintiff doesn't have to prove that any alleged misrepresentations affected the price of a stock, Babin says a company can try to prove in court that some other non-related factor, such as a plant blowing up, environmental damage or loss of a key customer, was behind a stock's decline. Fortunately, perhaps, the law will not permit the sort of nuisance cases that crop up in the U.S. Before a case can proceed to trial in Ontario, the plaintiff will have to prove to a judge that there was a misrepresentation and that he has a good chance of winning. “What they're trying to avoid are those strike-suit type of actions that you see in the States, where a plaintiff files an action in the hopes of getting a ridiculous settlement,” says Yaskiel. The Ontario law is a bit more balanced if, ultimately, not as protective for investors.