Written by Nick Fader
Bill 25 Receives Royal Assent
The Government of Alberta has opted to follow the lead of its Ontario counterpart and amend the Securities Act (Alberta) to include a secondary market civil liability regime. Bill 25, which includes a number of other amendments to the Securities Act (Alberta), received third reading in the Alberta Legislature on May 16, 2006 and royal assent on May 24, 2006. We are advised that the amendments establishing the Alberta secondary market civil liability regime will come into force by the end of 2006. Accordingly, investors who purchase securities in the secondary market will have a statutory right of action under Alberta securities legislation that will enable them to sue for misrepresentations in an issuer's public disclosure record. The new Alberta secondary market civil liability regime will be contained in Part 17.01 of the Securities Act (Alberta).
Alberta Regime Substantially Identical To The Ontario Model
For the most part, the Alberta secondary market civil liability regime is a direct lift of the corresponding provisions in Part XXIII.1 of the Securities Act (Ontario), which became effective on December 31, 2005. The universe of potential plaintiff s, the list of persons having potential liability and the scope of secondary market liability will be the same in Alberta and Ontario, and the Alberta regime will also provide the same defences to actions for misrepresentation and the same liability caps and safeguards set out in the Securities Act (Ontario). For further information in that regard, please see the September 2005 issue of Securities Watch, which is available through our web site at www.bennettjones.ca.
Implications For Alberta Issuers
For many issuers headquartered in Alberta, the inclusion in the Securities Act (Alberta) of a statutory right of action for the benefit of secondary market purchasers will be of little practical consequence, as a significant number of Alberta issuers are already subject to the Ontario legislation. The Ontario secondary market liability regime applies to publicly traded entities that are reporting issuers in Ontario (including issuers having securities listed on the Toronto Stock Exchange) or that otherwise have a "real and substantial connection" to Ontario. Under the "real and substantial connection" test, issuers that have a physical presence in Ontario and issuers that have raised capital from Ontario residents will likely be subject to the Ontario regime, even in cases where they do not have reporting issuer status in Ontario. However, when Part 17.01 of the Securities Act (Alberta) comes into force, Alberta reporting issuers that do not have an Ontario nexus will become subject to a regime virtually identical to the Ontario model and should consider their response to this development.
Core Versus Non-Core Documents
Like the Ontario regime, Part 17.01 of the Securities Act (Alberta) draws a distinction between core documents (prospectuses, takeover bid circulars, issuer bid circulars, rights offering circulars, MD&A, annual information forms, information circulars, directors' circulars, interim and annual financial statements and, in the case of the issuer itself and its officers, material change reports) and non-core documents (including news releases, business acquisition reports and, in the case of directors who are not also officers of an issuer, material change reports). In cases where a plaintiff proves the existence of a misrepresentation in a core document, the onus will shift to the issuer and its directors and officers (and any other defendants) to establish a defence to the action. In the case of non-core documents (and public oral statements) a plaintiff will also be required, subject to certain exceptions, to prove that the defendant had knowledge of the misrepresentation, deliberately avoided acquiring knowledge or was guilty of gross misconduct.
Although it is difficult to reach definitive conclusions concerning a number of the provisions of the new secondary market civil liability regime at this time (court guidance will be required to establish the boundaries of certain provisions), we believe that issuers subject to the Alberta or Ontario regime (or both) will be well served by taking the following precautions.
Issuers should establish a disclosure policy. The new legislation provides a due diligence defence and one of the factors to be considered by the courts in that regard is the existence and nature of a system designed to ensure that the issuer meets its continuous disclosure obligations. Such systems are ordinarily set out in disclosure policies, which, among other things, provide for the establishment of a disclosure committee charged with responsibility for assessing corporate developments and making determinations of materiality.
Following implementation of the Ontario secondary market civil liability regime, Bennett Jones LLP has been engaged to review and update the disclosure policies of a number of clients (both on an isolated basis and in the context of broader corporate governance reviews). If we can be of assistance to you in updating your disclosure policy (or conducting a broader review of your corporate governance practices), please let us know.
Cautionary Statements For Forward-Looking Information
Issuers should ensure that any forward-looking information ("FLI") included in documents they release to the public is appropriately identified and accompanied by meaningful cautionary language. The new liability regime provides a litigation safe harbour in respect of FLI. Defendants will be able to avail themselves of that safe harbour where the document containing the FLI includes, proximate to that information: (i) reasonable cautionary language identifying the FLI as such and identifying the material factors that could cause actual results to differ materially from any conclusion, forecast or projection contained in the FLI; and (ii) a statement of the material factors or assumptions that were applied in drawing any such conclusion or making such forecast or projection. In addition, the safe harbour is only available if the defendant had a "reasonable basis" for reaching the conclusion or making the forecast or projection included in the FLI. For a number of years, Canadian issuers have looked to the United States for guidance in crafting their cautionary statements for FLI, as those statements originated in the U.S. and have been ubiquitous since the implementation of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which also provides a safe harbour for forward-looking statements. Canadian issuers should note, however, that the availability of the Ontario and Alberta safe harbours is subject to additional requirements. In particular, under the PSLRA, there is no need to state the material factors or assumptions that were applied in drawing conclusions or making forecasts or projections. Canadian issuers need to be sensitive to this important difference in approach and ensure that their cautionary statements for FLI satisfy all of the requirements set out in the Alberta and Ontario legislation. As was the case prior to the introduction of the new amendments in Ontario and Alberta, we encourage issuers to avoid boilerplate language in their cautionary statements. Among other things, issuers should not replicate standard form FLI cautionary statements in news releases that do not actually contain FLI. In addition, cautionary statements (and, in particular, the material factors or assumptions applied in drawing conclusions or making forecasts or projections) should be customized to the forward-looking disclosure in question.
Officers and directors are reminded that the secondary market civil liability regime (in both Alberta and Ontario) sets out specific guidance for the cautionary language that must be provided in respect of public oral statements. In particular, a speaker must warn listeners that: (i) actual results could differ materially from any forecast or projection; and (ii) certain material factors or assumptions were applied in making the forecast or projection. The speaker must also refer listeners to a full discussion of the related risk factors and assumptions in a readily available document and identify that document (or the portion of the document containing the discussion of such risk factors and assumptions).
Readers should note that the Ontario Securities Commission has recently released a proposed policy setting out its views with respect to certain elements of the FLI defence contained in the Ontario legislation. That proposed policy is discussed below under the heading "Proposed Ontario Securities Commission Policy 51-604".
Issuers should ensure that the consent of any expert is obtained in circumstances where disclosure is extracted from, or is based upon, a report, statement or opinion made by an expert. Auditors are one obvious example of an expert from whom consent is desirable under the new secondary market civil liability regime. The auditing firms have developed procedures that apply in cases where they are asked to consent to the use of their audit report, including subsequent event review where the document containing the report is filed more than a few days after approval of the applicable financial statements by an issuer's board of directors. Issuers should ensure that the expectations of their auditors in that regard are understood in advance of anticipated filing dates.
Proposed Ontario Securities Commission Policy 51-604
In a related development, the Ontario Securities Commission has recently released proposed Policy 51-604 (Defence for Misrepresentations in Forward-Looking Information) for comment. The OSC has received requests from a number of issuers for guidance concerning the defence for forward looking statements contemplated by the Ontario legislation. The proposed Policy sets out the OSC's approach to the interpretation of certain elements of the defence, including: (1) the requirement that cautionary language and a statement of material factors or assumptions relating to FLI be included "proximate" to the presentation of FLI in publicly released documents; (2) the content of the risk factor and assumption disclosure contemplated by the defence; (3) the requirement that there be a "reasonable basis" for any FLI disclosed; and (4) the operation of the defence in the context of oral public statements. It is important to note that, although the views of the OSC are the result of informed deliberation, the Courts will have the ultimate say as to the interpretation of the FLI defence, as they are called upon to address interpretive issues in the context of litigation commenced by disgruntled investors. (It is a safe assumption that plaintiff s' counsel may advance interpretative arguments at odds with the positions taken by the OSC.) Under the Ontario secondary market civil liability regime, the OSC has the authority to intervene in an action commenced under Part XXIII.1 of the Securities Act (Ontario) and, presumably, to express its views as to the proper interpretation of elements of that regime, although the proposed Policy provides no indication as to whether the OSC intends to intervene in secondary market civil liability actions in an effort to promote its interpretation of the FLI defence. The OSC has advised that the proposed Policy will remain open for comment until August 2, 2006.
The approach of the OSC to interpretive issues associated with the FLI defence is informed by certain principles outlined in the proposed Policy. In the view of the OSC, the animating principles associated with the defence include the following: (1) an investor who reads a disclosure document or listens to an oral statement containing FLI should be able to readily (a) understand that FLI is being provided in the document or statement, (b) identify the FLI, and (c) inform himself or herself of the material assumptions underlying the FLI and the material risk factors associated with a particular conclusion, forecast or projection; and (2) effective disclosure is based upon clarity of presentation and simplicity of language and style. Against that backdrop, the proposed Policy offers the following advice with respect to those elements of the FLI defence noted above.
The "Proximate" Requirement
The OSC is of the view that the requirement to include cautionary language and a statement of material factors or assumptions "proximate" to any FLI does not require that such cautionary language and statements be immediately juxtaposed to the FLI in every case. The OSC has indicated that interrupting the flow of a disclosure document to identify FLI as such and explain the factors that might cause actual outcomes to differ could introduce undue complexity into the presentation and frustrate a reader's ability to easily follow the discussion. In general, the OSC is of the view that readers might be better served by a broader reference, prefacing or following the FLI (as appropriate), and that an approach of that nature should generally satisfy the "proximate" requirement associated with the defence.
Risk Factors And Assumptions Disclosure
The proposed Policy reiterates the point that the risk factors identified in cautionary language should be customized to the conclusion, forecast or projection presented and should not be in the nature of boilerplate. Cautionary statements should identify significant and reasonably foreseeable factors that might cause actual outcomes to differ materially from those implied by any forward-looking statement. The OSC notes that the defence should not be interpreted as requiring an issuer to anticipate and discuss everything that could conceivably cause a different outcome. A similar approach is suggested with respect to the disclosure of assumptions. According to the OSC, the discussion of assumptions should be tailored to the specific conclusion, forecast or projection presented and the defence does not require an exhaustive statement of every factor or assumption applied -- only material assumptions need be discussed.
The "Reasonable Basis" Requirement
As noted above, in order to benefit from the defence for FLI, there must be a reasonable basis for an issuer to draw the conclusions or make the forecasts or projections set out in its forward-looking disclosure. The OSC has indicated that, in determining whether a "reasonable basis" exists, the relevant factors would include: (a) the reasonableness of the assumptions applied in drawing the conclusion or making the forecast or projection; and (b) the process followed in preparing and reviewing forward-looking disclosure.
Forward-Looking Information In Public Oral Statements
The Ontario secondary market civil liability regime provides for an abbreviated approach to FLI contained in public oral statements, which, as the OSC has noted, is designed to facilitate oral communication of FLI while at the same time providing the public with the information it would have received if the FLI were contained in a written disclosure document. In particular, the OSC has indicated its view that the requirements of the defence may be satisfied in appropriate circumstances by one person making the required cautionary statements on behalf of a second person who actually makes a forward-looking statement.
Readers are reminded that proposed Policy 51-604 may change as a result of comments received by the OSC.