As late as mid-December 2005, plaintiffs' lawyers were poised to take advantage of Bill 198, which amends Ontario's Securities Act. The new law, which took effect Dec. 31, 2005, created the first Canadian regime to impose civil liability for inaccurate or incomplete written and spoken corporate disclosures in the secondary market.
But on Dec. 15, 2005, the Ontario Court of Appeal broadsided the plaintiffs' bar by reversing the May 2004 judgment of Superior Court Justice Sidney Lederman in the groundbreaking case Kerr v. Danier.
The Court of Appeal agreed with Lederman that the change in the weather that led to lower sales than it expected constituted a new "material fact." But that material fact, in the Court's opinion, didn't produce a material change in Danier's capital, operations or business. Absent a material change, there was no misrepresentation or nondisclosure in the prospectus and liability didn't arise for its failure to disclose it.
"Danier demonstrates that judges will read securities legislation purposefully keeping in mind the expertise of those who drafted it," Campbell says.
While a due-diligence defense is available (see "At A Glance: Bill 198"), defendants relying on it must demonstrate that they have conducted a "reasonable investigation" into the true facts.
"Companies will have to implement a formal disclosure system that is expressly aimed at ensuring that the company meets its disclosure obligations," says Larry Lowenstein, a partner at Osler Hoskin Harcourt in Toronto.