We have recently seen investors lose billions of investment dollars in the wake of the Enron and similar financial disasters in the U.S. In response to these financial disasters and related legislative reform in the U.S., the Government of Ontario has enacted Keeping the Promise for a Strong Economy Act (Budget Measures), 2002 (the "Budget Measures Act") (formerly Bill 198). It contains provisions amending the Ontario Securities Act.

Generally, the proposed amendments to the Ontario Securities Act are intended to bolster the protection of Ontario investors and improve investor confidence in the integrity of Ontario’s capital markets. In particular, the proposed amendments to the Ontario Securities Act harmonize Ontario securities and corporate law with the U.S. response and provide for new statutory offences such as fraud and market manipulation, tougher penalties for violations of the Ontario Securities Act, greater rule-making authority on the part of the Ontario Securities Commission ("OSC"), and civil liability for continuous disclosure.

On April 7, 2003, certain provisions of the Budget Measures Act came into force whereby general offences under the Ontario Securities Act, including insider trading offences, are now subject to maximum penalties increased from a fine of $1 million and imprisonment for two years to a fine of $5 million and imprisonment for five years less a day. If a person or company has not complied with Ontario securities law, the OSC may also, in the public interest, impose an administrative penalty of up to $1 million on a person or company for each failure to comply as well as order the disgorgement of any amounts obtained as a result of the non-compliance.

Greater rule-making authority on the part of the OSC means that it may require reporting issuers to establish an audit committee, a system of internal controls and procedures and require the chief executive officer and chief financial officer of the issuer to provide certifications related to such controls and procedures.

Of particular interest to public companies is the new regime creating statutory civil liability for continuous disclosure. When the remaining provisions of the Budget Measures Act come into force to amend the Ontario Securities Act (now incorporated as part of The Right Choices Act (Budget Measures), 2003), investors in the secondary market will be able to sue public companies and its directors and officers for a misrepresentation, whether written or oral, and for a failure to make timely disclosure.

Under the new statutory civil liability regime, the personal risk faced by directors, officers and others is increased. A private right of action will be available against:

  •     • an issuer;
  •     • each director and officer of the issuer at the time the misrepresentation was made;
  •     • the person making the public oral statement;
  •     • an influential person who knowingly influenced the issuer, director or officer ("influential person" means, in respect of an issuer, (a) a control person, (b) a promoter, (c) an insider who is not a director or senior officer of the issuer, or (d) an investment fund manager, if the issuer is an investment fund);
  • each director or officer of the influential person; and
  •     • each expert whose advice contained or consented to the misrepresentation or material non-disclosure ("expert" means a person or company whose profession gives authority to a statement made in a professional capacity by the person or company including, without limitation, an accountant, actuary, appraiser, auditor, engineer, financial analyst, geologist or lawyer).

An investor will have a right of action as long as he acquired or disposed of the issuer’s security during the period between the time when the document containing the misrepresentation was released, the public oral statement containing the misrepresentation was made, or when the material change was required to be disclosed, and the time when the document or public oral statement was publicly corrected and the material change has been disclosed, as the case may be.

It is important to determine whether a misrepresentation was made in a "core document". For the purposes of directors, influential persons and certain other parties, core documents include: the annual information form, a proxy circular, management’s discussion and analysis, and annual and interim financial statements. For an issuer and its officers, a core document also includes material change reports. If the misrepresentation is contained in a core document, the plaintiff does not have to prove reliance on the misrepresentation but only has to prove the existence of the misrepresentation. In other words, unlike in ordinary litigation where a plaintiff must prove reliance in order to be compensated, the proposed amendments to the Ontario Securities Act will allow an investor to recover damages without regard to whether that investor actually relied on the misrepresentation.

A defendant can, however, raise certain defences (including those listed below) and may be able to avoid liability if it can be established that in relation to a misrepresentation or a failure to make timely disclosure:

  •     • the plaintiff had knowledge of the misrepresentation or material change; or
  •     • the defendant conducted a reasonable investigation which concluded that there were no reasonable grounds to believe that the document or
  •     • public oral statement contained the misrepresentation or that a failure to make timely disclosure would occur (due diligence).

In determining whether an investigation (due diligence) was reasonable, the courts will consider certain circumstances, including:

  •     • the existence, if any, and the nature of any system to ensure that the issuer meets its continuous disclosure obligations; and
  •     • the reasonableness of reliance by the person or company on the issuer’s disclosure compliance system and on the issuer’s officers, employees and others whose duties would in the ordinary course have given them knowledge of the relevant facts.

    Therefore, in light of the new proposed statutory civil liability regime and the potential liability to directors and officers of issuers, it appears that an issuer should, at the very least, ensure that it has a corporate disclosure policy and compliance system dealing with the flow of material information to the public. Whether the release of information is by way of analysts’ conference calls, earnings guidance or the like, a disclosure committee can be established so that qualified individuals will have an opportunity to review all documents and statements prior to their release and thus make the appropriate disclosure decisions.