NIN 97/42 - Proposed Changes to the Definition of Material Fact and Material Change and Proposed Introduction of a "Loser-Pays" Cost Rule Under Securities Legislation [NIN - Rescinded]

Published Date:	1997-10-31
Effective Date:	1997-10-30

The Commission and other members of the Canadian Securities Administrators, intend to submit to their respective governments a proposal recommending legislative amendments to implement the main recommendation of the Final Report of the Toronto Stock Exchange Committee on Corporate Disclosure (the "Final Report"). (See CSA Notice 53-301). The main recommendation in the Final Report is the creation of a limited statutory civil liability regime that would enable investors that purchase securities in the secondary markets to bring a civil action against issuers and other responsible parties for misrepresentations in disclosure documents and other statements relating to the securities or where there has been a failure by the issuer to meet its timely disclosure obligations. The CSA recommendations are expected to include:

(1) draft legislation that would amend the definitions of "material fact" and "material change" for all purposes under securities legislation; and

(2) a "loser-pays" cost rule.

Proposed Changes to Material Fact and Material Change

The Final Report recommended that the definition of "material fact" for the purposes of the civil remedies provisions exclude the current ex post facto examination of the effects of the disclosure on the market price or the value of the security. In the course of considering this proposal, the CSA identified concerns regarding the definition of "material fact" and "material change" in securities legislation. Specifically, it was noted that the Quebec Securities Act does not define "material fact". The courts in Quebec have applied United States case law to develop a different standard of materiality from that used in other provinces in Canada. According to the standard in Quebec, facts are material when they would be substantially likely to be considered important to a reasonable investor in making an investment decision. It was also noted that the definition of "material fact" and "material change" do not apply very well to mutual funds and that proposed National Instrument 81-102 includes a definition of "significant change" to deal with this concern. The proposed definition of significant change is similar in concept to the Quebec standard for materiality for material fact. Accordingly, the CSA determined that it would be appropriate to consider amending the definitions of "material fact" and "material change" to adopt the Quebec/U.S. standard. Adopting the Quebec/U.S. standard would result in uniformity in the standard of disclosure applicable in Canada (as well as with the U.S.) and would remove the current ex post facto examination of the effects of the disclosure on the market price or the value of the security.

The proposed definitions were developed using the standard set out in the U.S. case, TSC Industries, Inc. v. Northway Inc., 426 U.S. 438 (1976). The TSC Industries decision involved misrepresentation in the context of a proxy solicitation. In developing the definitions of the terms "material fact" and "material change", the CSA modified the TSC Industries standards to apply to an investment decision. The standard proposed by the CSA under the new definitions is an easier standard to apply than the current standard. However, it is not expected that the changes to the definitions will have a significant impact on the standard of materiality under the legislation, particularly in light of the removal of the ex post facto determination. In addition, it is noted that under the proposed civil liability regime a plaintiff will not have a remedy in an action unless there has been an impact on market price.

The terms "material fact" and "material change" are used throughout the Securities Act. Most notably "material fact" is used in the definition of "misrepresentation" and consequentially the change in the definition of "material fact" affects the definition of "misrepresentation". The terms "material fact", "material change" and "misrepresentation" are used extensively in the provisions dealing with disclosure requirements, for setting the standard of disclosure in disclosure documents, including prospectuses, offering memoranda, bid circulars and material change reports, and for providing remedies and sanctions where the disclosure does not meet the standard. The terms are also used in the provisions prohibiting certain activities such as trading with undisclosed material information, both for setting the standard of materiality and for providing remedies and sanctions where the provision is contravened.

The Commission is seeking comment on the proposed new definitions of "material fact" and "material change" in the Securities Act attached to this notice. In particular, the Commission is seeking comment on whether the proposed change in the definitions may have any unintended impact on requirements under the legislation.

"Loser-Pays" Cost Rule

The Final Report recommends that the limited statutory civil liability regime include a "loser-pays" cost rule in those jurisdictions where class proceedings legislation does not include a loser-pays cost rule. The inclusion of a "loser-pays" cost rule in the proposed legislation would serve as a deterrent to unmeritorious litigation, thereby reducing the risk of U.S. style strike suits against public companies.

The Class Proceedings Act in British Columbia provides for a "no costs" rule. This rule generally prohibits the court from awarding costs to any party in a class proceeding except in special circumstances. Specifically, the Class Proceedings Act permits a court to award costs only where the court considers that:

• there has been vexatious, frivolous or abusive conduct on the part of any party to the action,

• an improper or unnecessary application or other step has been made or taken for the purpose of delay or increasing costs or for any other improper purpose, or

• there are exceptional circumstances that make it unjust to deprive the successful party of costs.

Despite the limited ability of the court to award costs, the general rule differs from the costs rule in Ontario. Excluding the application of the "no costs" rule in the Class Proceedings Act and including a "loser-pays" cost rule similar to that contained in the Ontario Class Proceedings Act in the proposed amendments would avoid a significant discrepancy between the proposed civil liability regime in British Columbia and that proposed in other provinces that provide for class actions.

The Commission is seeking comment on the proposal to include a loser-pays cost rule as part of the proposed amendments to the Securities Act. In particular, the Commission is seeking comment on:

• the potential impact of not including a "loser-pays" cost rule in the proposed amendments; and
• whether the "loser-pays" cost rule should extend to the statutory civil remedies applicable under the prospectus regime and the contractual right of action applicable under exempt offerings by offering memorandum.

The Commission notes that the proposals outlined in this request for comment, as with the overall recommendations to implement a limited statutory civil liability regime, represent the recommendations of the Commission and other members of the CSA to their respective governments. The decision whether to proceed to adopt legislation and the content of any legislation that is adopted will ultimately be the decision of the government.

Request for Comment

The Commission encourages securities market participants to comment on the two proposals. Comment letters should be submitted by November 30, 1997 to:

Brenda Benham
Director, Policy and Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, British Columbia
V6Z 2H4

Comment letters submitted in response to Requests for Comment are placed on the public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed on the public file, freedom of information legislation may require the Commission to make comment letters available. Persons submitting comment letters should therefore be aware that the press and members of the public may be able to obtain access to any comment letter.


DATED at Vancouver, British Columbia, on October 30, 1997

Douglas M. Hyndman
Chair

"material change" means,

(a) if used in relation to the affairs of an issuer other than an investment fund,

(i) a change in the business, operations, assets or ownership of the issuer the disclosure of which would be substantially likely to be considered important to a reasonable investor in making an investment decision, or

 

(ii) a decision to implement a change referred to in subparagraph (a)(i) made by

(A) senior management of the issuer who believe that confirmation of the decision by the directors is probable, or

(B) the directors of the issuer, and

(b) if used in relation to the affairs of an investment fund,

(i) a change in the business, operations or assets of the issuer the disclosure of which would be substantially likely to be considered important to a reasonable investor in making an investment decision, or

 

(ii) a decision to implement a change referred to in subparagraph (b)(i) made by

(A) senior management of the issuer or by senior management of the investment fund manager who believe that confirmation of the decision by the directors of the issuer or the directors of the investment fund manager is probable, or

(B) directors of the issuer or the directors of the investment fund manager;