NIN 98/26 - Proposal for a Statutory Civil Remedy for Investors in the Secondary Market [NIN - Rescinded]
| Published Date: | 1998-05-29 |
|---|---|
| Effective Date: | 1998-05-27 |
The Commission and other members of the Canadian Securities Administrators (the "CSA") have developed a proposal to amend securities legislation (the "Proposal") to implement the main recommendation of the Final Report of The Toronto Stock Exchange Committee (the "TSE Committee") on Corporate Disclosure (the "TSE Final Report"). (See CSA Notice 53-301.)
The main recommendation in the TSE Final Report is the creation of a limited statutory civil liability regime enabling secondary market investors who are harmed by misrepresentations in disclosure documents and other statements or by failure to make timely disclosure to bring an action against issuers and other responsible parties.
The Securities Act provides to investors who purchase securities in the primary market under a prospectus certain statutory rights, including a right of action for damages against the issuer and others for misrepresentations contained in the prospectus. In contrast, investors who purchase securities in the secondary market from other investors have no similar statutory right of action. This anomaly is of concern to the CSA, given that the volume of trading in the secondary market vastly outweighs that in the primary market.
Non-statutory remedies for misrepresentation are difficult to pursue, because investors must prove that they relied on the misrepresentation to their detriment. The Securities Act deems investors who purchase under a prospectus to have relied on the prospectus and thereby relieves investors of the need to prove reliance. The Proposal would similarly deem reliance by secondary market investors on an issuer's continuous disclosure and public statements.
The objective of the Proposal is to create a meaningful civil remedy for investors who trade in the secondary market when there is a failure to make timely disclosure, or when there are misrepresentations in continuous disclosure documents or oral statements issued by or on behalf of issuers or other responsible persons. At the same time, the Proposal imposes reasonable limitations on potential liability for continuous disclosure misrepresentations to address concerns about the type and extent of costly litigation that has been experienced in the United States. The CSA are of the view that implementation of the Proposal, which largely follows the main recommendation of the TSE Final Report, will enhance public confidence in the integrity of the Canadian capital markets.
Late last year, several members of the CSA, including the Commission, submitted a recommendation to their respective governments for legislative amendments that would implement the Proposal. At this time, the B.C. government has made no decision about any aspect of the draft legislation.
Prior Publication of Request For Comment regarding Definitions of "Material Fact" and "Material Change" and Implementation of a "Loser Pays" Costs Rule
On October 31, 1997, the Commission published a notice (NIN#97/42) seeking comment on proposed changes to the definitions of "material fact" and "material change" and on the implementation of a "loser-pays" costs rule for securities class action lawsuits. Other members of the CSA published similar notices at that time. The proposed changes to the definitions of "material fact" and "material change" were published for comment as they did not form part of the recommendations contained in the TSE Final Report (with the exception of one aspect of the proposed change to the definition of "material fact" to remove the "retroactive" aspect of the current definition, which was recommended by the TSE Committee).
The CSA received several submissions in response to this notice. The CSA thank the commentators for their thoughtful submissions. At this time, the Commission and the other members CSA are considering the comments received and have not made a final decision to recommend to our respective governments that the definitions of material fact" and "material change" be revised as proposed. In the meantime, the proposed revised definitions are reflected in the draft legislation and are substantially the same as those published in the notice.
As with other aspects of the draft legislation, the B.C. government has not made any decision on the implementation of a "loser-pays" costs rule for securities class action lawsuits (which would be different than the costs rule for other class action lawsuits in British Columbia (see NIN#97/42)).
Publication of the Proposal
The text of the draft legislation to implement the Proposal was not previously published for comment because it involved amendments to local legislation which the CSA were hopeful could be considered during the 1998 spring legislative sessions. As that timing does not appear to be feasible, certain members of the CSA have decided to publish for comment the complete text of the draft legislation to implement the Proposal in their respective jurisdictions given its significance and the extent of the public interest generated by the TSE Final Report and the Proposal.
While the text of the draft legislation may differ between jurisdictions, reflecting differences in securities legislation across Canada, the intention is to create the same right of action in all CSA jurisdictions. As the Commission des valeurs mobilières du Québec is in the process of reviewing the Proposal in light of Québec's civil law regime, no draft legislation is presently available for comment in that jurisdiction.
The Commission is publishing with this Notice the text of the draft legislation to implement the Proposal in British Columbia, together with Explanatory Notes that, among other things, highlight changes to current definitions.
Other Matters under Consideration
Replacement of Contractual Right of Action
The Proposal would extend limited statutory civil liability to secondary market transactions effected in reliance upon certain statutory prospectus exemptions only when the investor in such transactions is not already afforded a remedy under British Columbia securities law or is not in a position to obtain by contract comparable rights. As a separate but related initiative, the CSA will consider recommending legislative amendments to introduce a statutory right of action for misrepresentations in connection with certain private placements and other prospectus exempt transactions, which would replace the exisiting contractual right of action provisions.
Integrated Disclosure Regime
The CSA will also consider a further recommendation contained in the TSE Final Report, namely, the adoption of a system for issuers that would integrate prospectus and continuous disclosure requirements for reporting issuers. (See NR#97/29.) The CSA's objectives in considering this recommendation would be to improve the quality of continuous disclosure and streamline and simplify the process of capital formation through distributions of securities in both the public offering and private placement context. Implementation of the Proposal would provide a foundation for the increased reliance on continuous disclosure documents inherent in an integrated disclosure system.
Request for Comment
The Commission encourages securities market participants to comment on the Proposal. Comment letters should be submitted by August 28, 1998 to
Brenda Benham
Director, Policy and Legislation
British Columbia Securities Commission
200 - 865 Hornby Street
Vancouver, B.C. 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 in the public file, comment letters will be circulated amongst the securities regulatory authorities, and freedom of information legislation may not permit confidentiality to be maintained. 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 May 27, 1998.
Douglas M. Hyndman
Chair
NIN#97/42
NIN#97/29
"Explanatory Notes"
Part 1-Interpretation
Section 1(1) of the Act - Definitions
The definitions of "material change" and"material fact" are amended in order to provide uniformity in the standard of disclosure applicable throughout Canada. The amended definitions also deal more appropriately with investment funds. The Commission sought comment on proposed amendments to these definitions (See NIN#97/42). The comments received are currently under consideration and no decision has been made on the proposed changes. These definitions are substantially the same as those published with NIN#97/42.
Part 1 - Interpretation
Delete and substitute the following definitions in s. 1 (1) of the Act
"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, capital, assets or affairs of the issuer 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 an issuer that is an investment fund,
(i) a change in the business, operations or affairs of the issuer 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 or trustees of the issuer or the directors of the investment fund manager is probable, or
The definition of "mutual fund" is amended in order to provide consistency between jurisdictions and to reflect the introduction of "non-redeemable investment fund" as a defined term.
(B) the directors or trustees of the issuer or the directors of the investment fund manager;
"material fact" means, if used in relation to the affairs of an issuer or its securities, a fact or a group of related facts which would be substantially likely to be considered important to a reasonable investor in making an investment decision;
"mutual fund" includes:
(a) an issuer,(i) whose primary purpose is to invest money provided by its security holders, and
(ii) whose securities entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets, including a separate fund or trust account, of the issuer, or(b) an issuer or a class of issuers that is designated as a mutual fund in an order which the commission may make for the purpose of this definition,
but does not include,
(c) an issuer or a class of issuers that is designated not to be a mutual fund in an order the commission may make for the purpose of this definition.
The definition of "investment decision" is added as a consequence of the amendments to the definitions of "material change" and "material fact".
The definition of "investment fund" is added to simplify the wording of the Act by referring to mutual funds and non-redeemable investment funds together.
The definition of "investment fund manager" is addedto include one of the key decision-makers in the context of an investment fund. The traditional concepts of officer and director do not generally apply to investment funds.
The definition of "non-redeemable investment fund" is added to describe a particular type of fund, not currently defined in securities legislation.
Add the following definitions in s.1(1) of the Act
"investment decision" means a decision to purchase, hold or sell securities;
"investment fund" means an issuer that is either(a) a mutual fund, or
(b) a non-redeemable investment fund;"investment fund manager" means, if used in relation to an investment fund, a person who has the power and exercises the responsibility to direct the affairs of the investment fund;
"non-redeemable investment fund" includes
(a) an issuer
(i) whose primary purpose is to invest money provided by its security holders,
(ii) that does not invest for the purpose of exercising effective control, seeking to exercise effective control, or being actively involved in the management of the issuers in which it invests, other than other mutual funds or non-redeemable investment funds, and
(iii) that is not a mutual fund; or(b) an issuer or class of issuers that is designated as a non-redeemable investment fund in an order which the commission may make for the purpose this definition;
but does not include
(c) an issuer or a class of issuers that is designated not to be a non-redeemable investment fund in an order which the commission may make for the purpose of this definition;
Part 16.1 - Civil Liability for Continuous Disclosure
1(1) Definitions
The definition of"core document" sets out the types of disclosure documents for which a higher standard of care must be demonstrated to establish a defence to liability for misrepresentations (see section 3 of Part 16.1). What a "core document" is depends on the party in relation to whom the term is used.
Part 16.1 - Civil Liability for Continuous Disclosure
1(1) Definitions
In this Part:
"core document" means,
(a) if used in relation to,
(i) a director of a responsible issuer who is not also an officer of the responsible issuer,
(ii) an influential person, other than an officer of the responsible issuer or an investment fund manager, or
(iii) a director or officer of an influential person, other than an officer of an investment fund manager, who is not also an officer of the responsible issuer,a prospectus, a take-over bid circular, an issuer bid circular, a directors' circular, a rights offering circular, MD&A, an annual information form, an information circular, and annual financial statements of the responsible issuer; or
(b) if used in relation to,
(i) an officer of a responsible issuer,
(ii) an investment fund manager where the responsible issuer is an investment fund, or
(iii) an officer of an investment fund manager where the responsible issuer is an investment fund,
The definition of "correction of the failure to make timely disclosure" is used in the sections imposing liability for failure to make timely disclosure (see section 2(4) of Part 16.1) and the sections providing for calculation of damages in connection with a failure to make timely disclosure. (see section 4(2) of Part 16.1).
The definition of"derivative security of a responsible issuer" sets out the types of derivative securities for which a right of action is available in the event of a misrepresentation or failure to disclose a material change (see definition of "specified security"). This definition would include securities backed by underlying securities of an issuer that are issued by a special purpose vehicle on behalf of that issuer, or where the issuer of the underlying securities provides a guarantee.
The definition of"document" sets out the disclosure documents for which a right of action is available when persons acquire or dispose of a security based on misrepresentations in disclosure documents (see sections 2 and 3 of Part 16.1). Documents of relevance to the civil remedies provisions are those that are reasonably likely to have been released to the public (see the definition of "release")
a prospectus, a take-over bid circular, an issuer bid circular, a directors' circular, a rights offering circular, MD&A, an annual information form, an information circular, annual financial statements and interim financial statements of the responsible issuer and a report of the responsible issuer required to be disclosed under section 85(1)(b), and
(c) such other documents as may be prescribed for the purpose of this definition;
"correction of the failure to make timely disclosure" means, where there has been a failure to make timely disclosure, the disclosure of the material change in the manner required under the Act;"derivative security of a responsible issuer" means a derivative security, the value of which is derived primarily from or by reference to securities of the responsible issuer, and which is created by a person on behalf of the responsible issuer or is guaranteed by the responsible issuer;
"document" means any document, including a document that is transmitted in electronic form only,(a) that is filed or required to be filed with the commission, or
(b) that is(i) filed or required to be filed with a government or an agency of a government under applicable securities or corporate law or with any exchange under its by-laws, rules, or regulations, or
(ii) a document the purpose of which makes it likely to contain information substantially likely to be considered important to a reasonable investor in making an investment decision in relation to a specified security,but does not include a document not reasonably likely to be released;
The definition of"expert" is added to clarify who is considered an expert in connection with a right of action for a misrepresentation by an expert (see sections 2 and 3 of Part 16.1).
The definition of "failure to make timely disclosure" is added to clarify the circumstances giving rise to a right of action where a material change is not disclosed when required. The existing definition of "misrepresentation" covers an "omission" of a material fact, but is less clear, in its application to a failure to make timely disclosure (see sections 2(4), 3, 4, and 5 of Part 16.1).
The definition of "forward-looking information" is added to clarify what constitutes forward-looking information for purposes of the defences available for a misrepresentation in forward looking information (see section 3(6) of Part 16.1).
The definition of"influential person" is added to extend investors' right of action for misrepresentations against persons with a substantial connection to the issuer and who act on behalf of the issuer. (see sections 2(1), (2) and (3) of Part 16.1).
The definition of "MD&A" is added as a consequence of the term being usedin the definition of "core document".
"expert" means a person whose profession or practice gives authority to a statement made by the person in the person's professional capacity and includes an actuary, an appraiser, an auditor, a barrister and solicitor, an engineer, a geologist and a public accountant;
"failure to make timely disclosure" means a failure to disclose a material change as and when required to do so by the Act;
"forward-looking information" means all prospective disclosure and includes future-oriented financial information about prospective results of operations, financial position or changes in financial position based on assumptions about future economic conditions and courses of action presented as either a forecast or a projection;
"influential person" means, in respect of a responsible issuer,(a) a control person of the responsible issuer,
(b) a promoter of the responsible issuer,
(c) an insider of the responsible issuer, or
(d) an investment fund manager where the responsible issuer is an investment fund;"MD&A" means the section of an annual information form, financial statement, annual report, or other document that contains management's discussion and analysis of financial condition and results of operations of a responsible issuer as required under the Act;
The definition of"market price" relates to the calculation of loss and, in particular, the benchmark price as determined in section 4 of Part 16.1. Refer also to the definitions of "published market", "principal market" and "trading day".
"market price" means for the securities of a class for which there is a published market
(a) except as provided in paragraphs (b) or (c),
(i) if the published market provides a closing price, an amount equal to the weighted average of the closing price of securities of that class on the published market for each trading day on which there was a closing price for the period during which the market price is being determined, and
(ii) if the published market does not provide a closing price, but provides only the highest and lowest prices of securities traded, an amount equal to the average of the weighted averages of the highest and lowest prices of the securities of that class for each of the trading days on which there were highest and lowest prices for the period during which the market price is being determined,(b) if there has been trading of the securities of the class in the published market on fewer than half of the trading days for the period during which the market price is being determined, the average weighted by the number of trading days of the following amounts established for each trading day of the period during which the market price is being determined,
(i) the simple average of the bid and ask price for each trading day on which there was no trading, and
(ii) either(A) the weighted average of the closing price of the securities of that class for each trading day on which there has been trading, if the published market provides a closing price, or
The definition ofa"person who acquires or disposes of a specified security" identifies secondary market investors who may have a right of action under the new civil remedy (see sections 2(1), (2), (3) and (4) of Part 16.1). Acquisitions and dispositions of securities under a prospectus, pursuant to exemptions from the prospectus requirements under the Act or pursuant to a take-over bid or issuer bid are generally excluded from the operation of the civil remedy.
The definition contemplates the authority to extend availability of the new civil remedy by rule, to investors who acquire or dispose of securities in transactions that would otherwise be excluded from the definition. The accompanying Rules currently identify investors purchasing from a control person or from a creditor selling securities held as collateral for a debt, and those acquiring or disposing of securities under take-over bids and issuer bids made (i) through the facilities of a recognized stock exchange, (ii) for not more than 5% of a class of securities, and (iii) in reliance on the de minimis exemption (see Rules 3 and 4). In these cases, no other comparable right of action is likely to be available to public investors, either by statute or through negotiation
(B) the weighted average of the highest and lowest prices of the securities of that class for each trading day on which there has been trading, if the published market provides only the highest and lowest prices of securities traded on a trading day, or
(c) if there has been no trading of the securities of the class in the published market on any of the trading days during which the market price is being determined, the fair market value of the securities as determined by a court;
"person who acquires or disposes of a specified security" means a person who acquires or disposes of a specified security, other than(a) a person who acquires a specified security under a prospectus,
(b) a person who acquires a specified security under an exemption from section 61 except as may be prescribed for the purpose of this definition,(c) a person who acquires or disposes of a specified security in connection with or pursuant to a take over bid or issuer bid except as may be prescribed for the purposes of this definition, or
(d) such other person or class of persons as may be prescribed for the purpose of this definition;
The definition of"principal market" relates to the calculation of loss and, in particular, the benchmark price as determined in section 4 of Part 16.1. Refer also to the definitions of "market price", "published market" and "trading day".
The definition of"published market" relates tothe calculation of loss and, in particular, the benchmark price as determined in section 4 of Part 16.1. Refer also to the definitions of "market price", "principal market" and "trading day".
The definition of"release" is added because it is the release of documents which contain a misrepresentation that gives rise to a right of action (see sections 2 and 3 of Part 16.1).
The definition of "responsible issuer" is added because the definition of "issuer" is broader, and the definition of "reporting issuer" is narrower, than considered appropriate with respect to the new civil remedy. The civil remedy is intended to be available in relation to issuers whose securities are publicly traded, whether or not they are reporting issuers in a particular jurisdiction. (see sections 2(1), (2), (3) and (4) of Part 16.1)
"principal market"means for a class of securities of an issuer in respect of which there has been a misrepresentation or a failure to make timely disclosure,
(a) if there is only one published market in Canada, that market,
(b) if there is more than one published market in Canada, the published market in Canada on which the greatest volume of trading in the particular class of securities occurred during the 10 trading days immediately before the day on which a particular misrepresentation was made or there was a particular failure to make timely disclosure, or
(c) if there is no published market in Canada, the market on which the greatest volume of trading in the particular class of securities occurred during the 10 trading days immediately before the day on which a particular misrepresentation was made or there was a particular failure to make timely disclosure;"published market" means for a class of securities, a market on which the securities of the class are traded that is,
(a) an exchange, or
(b) an over-the-counter market if the prices at which securities of the class have been traded on that market are regularly published in a publication of general and regular paid circulation;
"release" if used in relation to a document, means to publish, make available or disseminate to the public;
"responsible issuer" means an issuer that is not a specified private issuer or a private mutual fund;
The definition of "specified private issuer" is added because the definition of "private issuer" under the Act is not appropriate for the new civil remedy (see subparagraph (c) of the definition of "private issuer" and sections 3, 4 and 5 of Part 16.1). The definition conforms to the definition of "private company" used in other securities legislation in Canada but includes issuers that are not companies. The definition is used in the definition of "responsible issuer" to exclude certain kinds of issuers, such as private issuers and private mutual funds from the operation of the new civil remedy.
The definition of "specified security" identifies the security, the purchase or sale of which may entitle the investor to a right of action. This definition extends to "derivative securities" created on behalf of, or guaranteed by, the responsible issuer (see the definition of derivative security of a responsible issuer and sections 2 and 3 of Part 16.1).
The definition of "trading day" relates to the calculation of loss, and in particular, the benchmark price as determined in section 4 of Part 16.1. Refer also to the definitions of "market price", "principal market" and "published market"
"specified private issuer" means a person that
(a) is not a reporting issuer,
(b) is an issuer all of whose issued and outstanding securities that are designated securities are beneficially owned, directly or indirectly, by not more than 50 persons, counting any 2 or more joint registered owners as one beneficial owner, exclusive of persons(i) that are employed by the issuer or an affiliate of it, or
(ii) that beneficially owned, directly or indirectly, designated securities of the issuer while employed by it or by an affiliate of it and, at all times since ceasing to be so employed, have continued to beneficially own, directly or indirectly, at least one designated security of the issuer, and
(c) is an issuer in whose constating documents or in one or more agreements between the issuer and the holders of its designated securities
(i) the right to transfer designated securities is restricted, and
(ii) any invitation to the public to subscribe for designated securities of the issuer or any securities convertible into or exchangeable for designated securities of the issuer is prohibited;"specified security" means a security of a responsible issuer and includes without limitation a derivative security of a responsible issuer;
"trading day" means a day during which the principal market on which the security is traded is open for trading;
1(2) - Interpretation
Section 1(2) gives the courts discretion to deem multiple misrepresentations in a single document or in several documents to be a single misrepresentation. Where applied, the effect is to prevent multiple rights of action and multiple liability for disclosure violations that are so connected as to be considered a single disclosure violation.
Section 2-Continuous Disclosure Liability
Section 2 sets out the new civil right of action for misrepresentations in documents and public statements and for failures to disclose material changes when required by the Act. An investor is deemed to have relied on a misrepresentation or on the responsible issuer having complied with the disclosure requirements under the Act. In this regard, the new right of action provided to investors purchasing or selling previously-issued securities in the secondary market is comparable to the existing right of action available to investors purchasing securities under a prospectus.
Documents Released by Responsible Issuer
Section 2(1) provides that a person who acquired or disposed of securities between the time a responsible issuer releases a document that contains a misrepresentation and the time the misrepresentation is publicly corrected, is deemed to have relied on the misrepresentation and to have a right of action against the responsible issuer, its directors and officers, influential persons and quoted experts.
1(2) Interpretatio
For the purpose of this Part,
(a) multiple misrepresentations that have sufficient common features, including the persons responsible for releasing the documents or making the public oral statements in which misrepresentations are contained and the content of the misrepresentations may, in the discretion of the court, be treated as a single misrepresentation; and
(b) multiple instances of a failure to make timely disclosure that have sufficient common features, including the persons responsible for failures to make timely disclosure and the subject matter of the information that was required to be disclosed may in the discretion of the court be treated as a single failure to make timely disclosure.
2. Continuous Disclosure Liability
Documents Released by Responsible Issuer
(1) Where a responsible issuer or a person with actual, implied or apparent authority to act on behalf of a responsible issuer releases a documentthat contains a misrepresentation, a person who acquires or disposes of a specified security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected, is deemed to have relied on the misrepresentation and has a right of action for damages against:
(a) the responsible issuer,
(b) each director of the responsible issuer,
(c) each officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document,
(d) each influential person or director or officer of an influential person, who is not also an officer or director of the responsible issuer, and who knowingly influenced(i) the responsible issuer or any person on behalf of the responsible issuer to release the document, or
(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the release of the document, and(e) each expert where
(i) the misrepresentation is also contained in a report, statement or opinion made by the expert,
(ii) the document includes, refers to or quotes from the report, statement or opinion of the expert, and
(iii) the written consent of the expert to the use of the expert's report, statement or opinion in the document has been obtained.
Public Oral Statements by Responsible Issuer
Section 2(2) provides a right of action for misrepresentations in public oral statements that relate to the business or affairs of the responsible issuer.
Public Oral Statements by Responsible Issuer
(2) Where a person with actual, implied or apparent authority to speak on behalf of a responsible issuer makes a public oral statement that relates directly or indirectly to the business or affairs of the responsible issuer and that contains a misrepresentation, a person who acquires or disposes of a specified security during the period between the time when the public oral statement was made and the time when the misrepresentation contained in the public oral statement was publicly corrected is deemed to have relied on the misrepresentation and has a right of action for damages against
(a) the responsible issuer,
(b) the person who made the public oral statement,
(c) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the making of the public oral statement,
(d) each influential person, or director or officer of the influential person who is not also an officer or director of the responsible issuer, and who knowingly influenced(i) the person who made the public oral statement to make the public oral statement, or
(ii) any of the responsible issuer's directors or officers to authorize, permit or acquiesce in the making of the public oral statement, and(e) each expert where
(i) the misrepresentation is also contained in a report, statement or opinion made by the expert,
(ii) the person making the public oral statement includes, refers to or quotes from the report, statement or opinion of the expert, and
(iii) the written consent of the expert to the use of the expert's report, statement or opinion in the public oral statement has been obtained.
Documents or Public Oral Statements by Influential Persons
Section 2(3) provides a right of action for misrepresentations in documents released by, or statements made by, influential persons or persons with actual, implied or apparent authority to act on behalf of the influential person.
Documents or Public Oral Statements by Influential Persons
(3) Where an influential person or a person with actual, implied or apparent authority to act on behalf of the influential person releases a documentor makes a public oral statementthat relates directly or indirectly to the business or affairs of the responsible issuer of which that person is an influential person and that contains a misrepresentation, a person who acquires or disposes of a specified security during the period between the time when the document was released or the public oral statement was made, and the time when the misrepresentation contained in the document or public oral statement was publicly corrected, is deemed to have relied on the misrepresentation and has a right of action for damages against
(a) the responsible issuer, if a director or officer of the responsible issuer, or where the responsible issuer is an investment fund the investment fund manager, authorized, permitted or acquiesced in the release of the document or the making of the public oral statement,
(b) the person who made the public oral statement,
(c) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document or the making of the public oral statement,
(d) the influential person,
(e) each director and officer of the influential person who is not also a director or officer of the responsible issuer and who authorized, permitted or acquiesced in the release of the document or the making of the public oral statement, and(f) each expert where
(i) the misrepresentation is also contained in a report, statement or opinion made by the expert,
Failure to Make Timely Disclosure
Section 2(4) provides a right of action for failures to make timely disclosure of a material change concerning a responsible issuer.
(ii) the document or public oral statement includes, refers to or quotes from the report, statement or opinion of the expert, and
(iii) the written consent of the expert to the use of the expert's report, statement or opinion in the document or public oral statement has been obtained.
Failure to Make Timely Disclosure
(4) Where there is a failure to make timely disclosure by a responsible issuer, a person who acquires or disposes of a specified security between the time when the material change was required to be disclosed and the correction of the failure to make timely disclosure is deemed to have relied on the responsible issuer having complied with its disclosure requirements under the Act and has a right of action for damages against:
(a) the responsible issuer,
(b) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the failure to make timely disclosure, and
(c) each influential person or director or officer of an influential person, who is not also an officer or director of the responsible issuer, and who knowingly influenced(i) the responsible issuer or any person acting on behalf of the responsible issuer in the failure to make timely disclosure, or
(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the failure to make timely disclosure.
Section 3-Standards of Liability, Burdens of Proof and Defences
Knowledge of the Misrepresentation
Section 3(1) is similar to existing section 131(4) of the Act. This section relieves a person from liability for a misrepresentation or a failure to make timely disclosure if the person proves that the plaintiff had knowledge of the misrepresentation or material change.
Reasonable Investigation
Section 3(2) provides a due diligence defence similar to the provisions in section 131(7) of the Act, and extends the due diligence defence to the issuer.
Standard for Non-core Documents, Public Oral Statements and Timely Disclosure
Section 3(3) acknowledges that not all persons play the same role with respect to the release of public documents or the making of public statements. For instance, outside (non-management) directors may not play a significant role in the preparation of news releases. Accordingly, this section limits liability to certain persons in regard to disclosure documents not considered to be core disclosure documents, and affords a defence based on a lesser standard of care, the absence of gross negligence.
3. Standards of Liability, Burdens of Proof and Defences
Knowledge of the Misrepresentation
(1) No person is liable under section 2 in relation to a misrepresentation or a failure to make timely disclosure if that person proves that the plaintiff acquired or disposed of the specified security with knowledge of the misrepresentation or material change.
Reasonable Investigation
(2) No person is liable under section 2 in relation t
(a) a misrepresentation if that person proves that it conducted or caused to be conducted a reasonable investigation and had reasonable grounds to believe that there was no misrepresentation, or
(b) a failure to make timely disclosure if that person proves that it conducted or caused to be conducted a reasonable investigation and had reasonable grounds to believe that there was no failure to make timely disclosure.
Standard for Non-core Documents, Public Oral Statements and Timely Disclosure
(3) No person is liable under section 2, except,
(a) the responsible issuer or an expert, in relation to a misrepresentation in a document that is not a core document, or a misrepresentation in a public oral statement, and
(b) the responsible issuer, an officer of the responsible issuer, or an investment fund manager or an officer of an investment fund manager where the responsible issuer is an investment fund, in relation to a failure to make timely disclosure,
unless the plaintiff proves that the person,
Factors to be Considered
Section 3(4) sets out factors to be considered in determining whether the relevant standard of care, due diligence or absence of gross negligence, has been met.
(c) was aware of the misrepresentation or the failure to make timely disclosure,
(d) deliberately avoided acquiring knowledge that, if acquired, would have made the person aware of the misrepresentation or the failure to make timely disclosure, or
(e) was grossly negligent in authorizing, permitting or acquiescing in or knowingly influencing the release of the document, the making of the public oral statement, or the failure to make timely disclosure.
Factors to be Considered
(4) In determining whether an investigation was reasonable, or whether any person has been grossly negligent, regard must be had to all of the circumstances, including
(a) the nature of the responsible issuer,
(b) the knowledge, experience and function of the person,
(c) the office held if the person was an officer,(d) the presence or absence of another relationship with the responsible issuer if the person was a director,
(e) the reasonableness of reliance on the responsible issuer's disclosure compliance system and on the responsible issuer's officers, employees and others whose duties should have given them knowledge of the relevant facts,
(f) the time period within which disclosure was required to be made,
(g) in the case of a misrepresentation, the role and responsibility of the person in the preparation and release of the document or the making of the public oral statement containing the misrepresentation or the ascertaining of the facts contained in that document or public oral statement, and
Confidential Disclosure
Section 3(5) provides that persons are not liable for a failure to make timely disclosure in specified circumstances, if a confidential material change report has been filed with the Commission. The filing of confidential material change reports in appropriate circumstances is encouraged.
Forward-Looking Information
Section 3(6) provides that persons are not liable under the new right of action with respect to forward-looking information if, in specified circumstances, the forward-looking information contains reasonable cautionary language and there is a reasonable basis for the information. This "safe-harbour" is only available where the issuer's securities are traded on a published market. It is not available in connection with an initial public offering.
(h) in the case of a failure to make timely disclosure, the role and responsibility of the person involved in a decision not to disclose the material change.
Confidential Disclosure
(5) No person is liable under section 2 where there has been a failure to make timely disclosure if the material change was disclosed by the responsible issuer on a confidential basis to the commission and
(a) the responsible issuer had a reasonable basis for making the disclosure on a confidential basis,
(b) if the information contained in the confidential filing remains material, disclosure of the material change was made public promptly upon the end of the basis for confidentiality, and(c) the person or responsible issuer does not release a document or make a public oral statement that, due to the undisclosed material change, constitutes a misrepresentation,
provided that upon the material change becoming public, the responsible issuer promptly discloses the material change in the manner required under the Act.
Forward-Looking Information
(6) No person is liable under section 2 for a misrepresentation in forward-looking information if
(a) the person proves that,
Experts and Expert Reports
Section 3(7) requires a responsible issuer to obtain the written consent of an expert to disclosure by the issuer of a report, statement or opinion of the expert.
(i) the forward-looking information contained reasonable cautionary language proximate to the forward-looking information and, where reasonably practicable, an analysis of the sensitivity of the information to variations in the material factors or assumptions that were applied in reaching a conclusion or forecast contained in the forward-looking information, and
(ii) the person had a reasonable basis for the conclusion or forecast,(b) securities of the responsible issuer are traded on a published market, and
(c) the forward-looking information is not contained in the prospectus or securities exchange take over bid circular of the responsible issuer filed in connection with the initial public distribution of securities of the responsible issuer.
Experts and Expert Reports
(7) Where the report, statement or opinion of an expert is included, referred to or quoted from in a document or in a public oral statement, the written consent of the expert whose report, statement, or opinion is being used must be obtained by the responsible issuer, prior t
(a) filing of the document with the commission, or with a government or an agency of a government under applicable securities or corporate law, or any exchange under its by-laws, rules, or other regulatory instruments or policies,
(b) release of the document if the document has not already been filed with the commission or with a government or an agency of a government under applicable securities or corporate law, or any exchange under its by-laws, rules, or other regulatory instruments or policies, or(c) the person making the public oral statement.
Section 3(8) provides that persons, other than an expert, are not generally liable for misrepresentations in documents or public statements that are based on the authority or opinion of an expert if they did not believe or had no reasonable grounds to believe that there had been a misrepresentation. This section is similar to existing section 131(5)(c) of the Act.
Section 3(9) relieves experts from liability in certain circumstances, including when the expert proves that the responsible issuer did not obtain the expert's written consent to the use of the expert's report, statement or opinion, or when the expert reasonably believed, after investigation, that the public document fairly represented the report, statement or opinion, or when the expert, on becoming aware of an incorrect representation of the report, statement or opinion advised the Commission. This section is similar to sections 131(5)(d) and (6) of the Act.
(8) No person, other than an expert, is liable under section 2 with respect to any part of a document or public oral statement that purports to be made on the authority of an expert and which includes, refers to or quotes from a report, statement or opinion made by the expert, if the person proves that
(a) the person did not believe and had no reasonable grounds to believe that there had been a misrepresentation in the part of the document or public oral statement purporting to be made on the authority of the expert,
(b) the person did not believe and had no reasonable grounds to believe that the part of the document or public oral statement did not fairly represent the report, statement or opinion made by the expert, and
(c) the written consent of the expert to the use of the expert's report, statement or opinion was obtained by the responsible issuer prior to the release of the document, or the making of the public oral statement, as required by subsection (7).
(9) No expert is liable under section 2 with respect to any part of a document or public oral statement that purports to be made on the authority of the expert, and that includes, refers to or quotes from a report, statement or opinion made by the expert, if the expert proves that
(a) written consent of the expert to the use of the report, statement, or opinion made by the expert was not obtained by the responsible issuer prior to the release of the document, or the making of the public oral statement, as required by subsection (7), or
(b) the misrepresentation contained in the part of the document or public oral statement that purports to be made on the authority of the expert is attributable to a failure to fairly represent the report, statement or opinion made by the expert, and(i) the expert, after reasonable investigation, believed and had reasonable grounds to believe that the part of the document or public oral statement fairly represented the report, statement or opinion, made by the expert, or
Section 4-Limits on Damages
Where Corrective Action Taken
Section 4(1) provides that certain persons, other than the responsible issuer, are not liable if they were not aware of a misrepresentation or failure to make timely disclosure, and took steps to correct it once they became aware of it
(ii) on becoming aware that the part of the document or public oral statement did not fairly represent the report, statement or opinion made by the expert, the expert, unless prohibited by law or by professional confidentiality rules from doing so, as soon as practicable advised the commission in writing of the use to which the expert's report, statement or opinion had been made and that the expert would not be responsible for that part of the document or public oral statement.
4. Limits on Damages
Where Corrective Action Taken
(1) No person, other than the responsible issuer, is liable under section 2 in respect of a misrepresentation or a failure to make timely disclosure that was made without the knowledge or consent of the person for any loss or damage incurred by the plaintiff after
(a) the person became aware of a misrepresentation or failure to make timely disclosure,
(b) the person promptly notified the board of directors of the responsible issuer of the misrepresentation or the failure to make timely disclosure, and
(c) if no correction of the misrepresentation or no correction of the failure to make timely disclosure was made by the responsible issuer within two days after the notification under paragraph (b), the person (unless prohibited by law or by professional confidentiality rules) promptly and in writing notified the commission of the misrepresentation or failure to make timely disclosure.
Calculation of Damages
Sections 4(2) and (3) set out the method for calculating damages resulting from a misrepresentation or failure to make timely disclosure. In general the amount of damages will be determined on the basis of actual loss if the trade takes place during a specified period and otherwise by reference to a benchmark price.
Calculation of Damages
(2) In an action under section 2 in respect of a misrepresentation or failure to make timely disclosure, if the plaintiff acquired or disposed of the specified securities on or before the 10th trading day after the public correction of the misrepresentation or the correction of the failure to make timely disclosure, the plaintiff is not entitled to recover more than the plaintiff's actual loss, calculated taking into account the result of hedging or other risk limitation transactions undertaken by the plaintiff.
(3) In an action under section 2 in respect of a misrepresentation or failure to make timely disclosure, a plaintiff, other than a plaintiff described in subsection (2), is not entitled to recover more than the aggregate of commissions paid in respect of the original acquisition or disposition and the lesser of,
(a) where the plaintiff has subsequently acquired or disposed of the specified securities, the plaintiff's actual loss, which must be calculated taking into account any hedging or other risk limitation transactions undertaken by the plaintiff, and
(b) a loss amount calculated on the basis of the difference between the price paid or received by the plaintiff at the time of the initial transaction in which the plaintiff acquired or disposed of the specified securities in question and(i) where the specified securities trade on a published market, the market price of the specified securities on the principal market for the specified securities during the 10 trading days following the public correction of the misrepresentation or the correction of the failure to make timely disclosure, or
(ii) if there is no published market, then another amount that a court may deem just.
Loss Not Caused by Misrepresentation or Failure to Make Timely Disclosure
Section 4(4) establishes that a plaintiff is not entitled to recover from a defendant any loss not caused by the misrepresentation or failure to make timely disclosure.
Limits on Total Liability
Section 4(5) establishes that the total liability resulting from a misrepresentation or failure to make timely disclosure must not exceed certain specified amounts unless the plaintiff proves that the defendant knowingly influenced the misrepresentation or failure to make timely disclosure. The amounts are specified in the Rules.
Section 4(6) establishes that the amount awarded to each plaintiff, where there are multiple plaintiffs, will be allocated by the court in accordance with each plaintiff's proportionate share of total losses.
Section 5-Proportionate Liability
Sections 5(1) and 5(2) provide that liability of defendants will be proportionate to their respective fault except in the case of defendants found to have been aware of a misrepresentation or a failure to make timely disclosure. For those defendants, traditional joint and several liability would apply.
Losses Not Caused by Misrepresentation or Failure to Make Timely Disclosure
(4) In an action under section 2 in respect of a misrepresentation or failure to make timely disclosure, a plaintiff must not recover any portion of the plaintiff's loss that the defendant proves was not caused by the misrepresentation or the failure to make timely disclosure.
Limits in Total Liability
(5) The total liability of a person in an action under section 2 in respect of a misrepresentation or a failure to make timely disclosure must not exceed the amount prescribed for the purposes of this section unless in the case of a person, other than a responsible issuer, the plaintiff proves that the person authorized, permitted or acquiesced in the making of the misrepresentation or failure to make timely disclosure while knowing that it was a misrepresentation or a failure to make timely disclosure or influenced the making of the misrepresentation or the failure to make timely disclosure while knowing that it was a misrepresentation or a failure to make timely disclosure.
(6) Where the total losses suffered by all plaintiffs in an action under section 2 is greater than the total liability of all persons under subsection (5), the damages awarded to each plaintiff will be the percentage of the total award that is the plaintiff's proportionate share of the total losses.
5. Proportionate Liability
(1) In an action under section 2, where damages have been caused or contributed to by the fault or neglect of two or more defendants, the court will determine each defendant's responsibility for the damage or loss incurred by all plaintiffs in the action, expressed as a percentage of all defendants' responsibility, and each defendant will be liable to the plaintiffs only for that percentage of the aggregate amount of damages awarded to the plaintiffs.
Section 6-Power of the Commission
While it is not intended that the Commission be a plaintiff under the civil remedies regime, this section provides the Commission with the authority to intervene in any civil action brought under Part 16.1.
Section 7-No Derogation from Other Rights
The provisions of Part 16.1 are intended to supplement existing common law rights of both plaintiffs and defendants.
Section 8-Limitation Period
The limitation period under this provision is similar to that applicable to prospectus liability under existing section 140 of the Act. However, unlike section 140 of the Act, the limitation period for the new civil remedy is not related to a plaintiff's knowledge of the facts giving rise to the cause of action.
(2) Despite subsection (1), if, in an action under section 2 in respect of a misrepresentation or a failure to make timely disclosure, a court determines that a particular defendant (other than the responsible issuer) authorized, permitted or acquiesced in the making of the misrepresentation or the failure to make timely disclosure while knowing it to be a misrepresentation or a failure to make timely disclosure, that defendant will be liable jointly and severally with each other defendant, other than the responsible issuer, in respect of whom the court has made a similar determination, for the aggregate amount of damages awarded in the action.
6. Power of the Commission
The commission may intervene in an action brought under this Part.
7. No Derogation from Other Rights
The right of action for damages and the defences to an action for damages conferred by this Part are in addition to and without derogation from any other rights or defences the plaintiff or defendant may have in an action brought other than under this Part.
8. Limitation Period
An action under section 2 in respect of a misrepresentation or a failure to make timely disclosure must not be commenced more than 3 years after,
(a) in the case of a misrepresentatio
(i) the date on which the public oral statement containing the misrepresentation was made, or
(ii) the date on which the document containing the misrepresentation was released, or
(b) in the case of a failure to make timely disclosure, the date on which the disclosure was required by the Act.
Section 9-Notice to Commission
This section provides the Commission with notice of an action commenced under Part 16.1 to enable it to determine whether to intervene in the action.
9. Notice to Commission
A person commencing an action under this Part must send written notice to the commission within 7 days of filing the statement of claim or other originating document in a court in the Province.
Part 16.2-Civil Liability
Section 1-Costs
Section 1 provides for costs to be awarded to the prevailing party (plaintiff or defendant) in a representative action. Accordingly, the "no-cost" provisions of the Class Proceedings Act(British Columbia) would not apply to Securities Act actions.
Part 16.2 - Civil Liability - Cost Rules
1. Costs
Despite the Class Proceedings Act (British Columbia), the prevailing party in a civil proceeding under the Act is entitled to costs determined by a court in accordance with applicable rules of civil procedure.
Securities Rules
Part 16.1
Section 1
The definition of "market capitalization" is added as a consequence of the term being used in connection with the limits on liability under the new civil remedy (see section 4(5) of Part 16.1)
The definition of "total compensation" is added as a consequence of the term being used in connection with the limits on liability under the new civil remedy (see section 4(5) of Part 16.1).
Section 2
This section sets out that a quarterly report under section 152 of the Rules is a core document in relation to the specified responsible persons.
The following amendments to theSecurities Rules will be made concurrently with the preceding amendments to the Act.
Part 16.1
1. In this part
"market capitalization" in respect of an issuer means the aggregate of
(a) in relation to its securities traded on a published market, an amount that is the sum of the products of multiplying the total number of outstanding securities of each class by the market price at which a security of the class traded, on the principal market on which the securities trade, during the 10 trading days before the day on which the misrepresentation was made or there was a failure to make timely disclosure, and
(b) in relation to its securities not traded on a published market, an amount equal to the fair market value of the securities, as determined by a court, as at the time of the making of the misrepresentation or the failure to make timely disclosure.
"total compensation" means cash compensation received during the twelve month period preceding the misrepresentation or failure to make timely disclosure together with the fair market value of all deferred compensation, including without limitation options, pension benefits and stock appreciation rights granted during the same period, valued as of the date that such compensation is awarded.
2. For the purpose of "core document" in section 1(1) of Part 16.1, a quarterly report of a responsible person is prescribed as a core document where used in relation t
(i) an officer of a responsible issuer,
(ii) an investment fund manager where the responsible issuer is an investment fund, or
(iii) an officer of an investment fund manager where the responsible issuer is an investment fund.
Section 3
This section identifies prospectus exemptions in relation to which the new civil remedy may be available to purchasers. It identifies a trade by a control person or by a creditor selling securities held as collateral for a debt.
Section 4
This section identifies take-over bids and issuer bids in relation to which the new civil remedy may be available to investors. It identifies normal course take-over bids and issuer bids made for not more than 5% of a class of securities and take-over bids and issuer bids made through the facilities of a recognized stock exchange, or in reliance on the exemption for bids with minimal connection to British Columbia.
Section 5
This section provides that where the written consent of an auditor or accountant is obtained by the responsible issuer, the consent must be in the form set out in section 106(3) of the Rules.
Section 6
This section sets out the maximum amount of damages for which specified defendants can be liable in an action under the new civil remedy.
3. For the purposes of the definition of "person who acquires or disposes of a specified security" in Part 16.1 of the Act, the exemptions from the prospectus requirement of the Act under sections 74(2)(12) of the Act and section 128(d) of the Rules are prescribed.
4. For the purposes of the definition of "person who acquires or disposes of a specified security" in Part 16.1 of the Act, the takeover bids under sections 98(1)(a), (b) and (e) of the Act and the issuer bids under sections 99(e), (f) and (h) of the Act are prescribed.
5. For the purposes of section 3(7) of Part 16.1 of the Act, the consents must comply with the form of consents set out in section 106(3) of the Rules.
6. For the purposes of section 4(5) of Part 16.1 of the Act the prescribed amount in relation to a misrepresentation or a failure to make timely disclosure, of
(a) a responsible issuer, must not exceed the greater of:
(i) 5% of its market capitalization, and
(ii) $1 million,(b) each director or officer of a responsible issuer, must not exceed the greater of:
(i) $25,000, and
(ii) 50% of the aggregate of the director's or officer's total compensation from the responsible issuer and its affiliates,(c) an influential person, where the influential person is not an individual, must not exceed the greater of:
(i) 5% of its market capitalization, and
(ii) $1 million,(d) an influential person where the influential person is an individual, must not exceed the greater of:
(i) $25,000, and
(ii) 50% of the aggregate of the influential person's total compensation from the responsible issuer and its affiliates,
(e) each director or officer of an influential person, must not exceed the greater of:
(i) $25,000, and
(ii) 50% of the aggregate of the director's or officer's total compensation from the influential person and its affiliates,(f) an expert, must not exceed the greater of:
(i) $1 million, and
(ii) the revenue that the expert and its affiliates have earned from the responsible issuer and its affiliates during the twelve months preceding the misrepresentation, and(g) each person, other than a person under subsections 4(a), (b), (c), (d), (e) or (f) who made the public oral statement, where the person is an individual, must not exceed the greater of
(i) $25,000, and
(ii) 50% of the aggregate of each person's total compensation from the responsible issuer and its affiliates.