Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

Facts

The plaintiffs, shareholders of IMAX, are suing with respect to a decline in the price of their shares that they argue was caused by alleged misrepresentations in IMAX’s 2005 Form 10-K, in its 2005 Annual Report and in press releases issued in February and March of 2006. The plaintiffs allege that IMAX misrepresented the 2005 financial results reported in those documents as having been prepared in accordance with GAAP and further allege that, as a result, IMAX’s estimated earnings per share as reported in those documents was also misrepresented.

The plaintiffs assert common law causes of action for negligence, negligent misrepresentation, “reckless” misrepresentation and conspiracy in addition to a statutory cause of action for misrepresentations affecting the secondary market under Part XXIII.1 of the OSA.

The Certification Decision

The plaintiffs sought certification of a global class for the common law claims of negligent misrepresentation, “reckless” misrepresentation, negligence simpliciter and conspiracy and with respect to their statutory claims for secondary market liability under the OSA. As discussed in the following section, the primary certification issues were whether the plaintiffs could establish a duty of care and whether the pleadings properly disclosed a cause of action for misrepresentation given that the plaintiffs had not pled individual reliance on the misrepresentation. The IMAX Defendants opposed the certification of the common law claims but did not oppose certification of the statutory cause of action under the OSA in the event that the Court decided to grant leave to proceed on the OSA claims.

The duty of care and reliance issues

In addressing the plaintiffs’ common law misrepresentation claim, Justice van Rensburg considered whether the claim properly asserted the cause of action as is set out in Queen v. Cognos Inc., [1993] 1 S.C.R. 87, namely whether (i) the defendants owed a duty of care to the plaintiffs based on a “special relationship”; (ii) the defendants made an untrue, inaccurate or misleading representation; (iii) the misrepresentation was made negligently; (iv) the plaintiff reasonably relied on the misrepresentation; and (v) the plaintiffs suffered damages as a result of the misrepresentation. As noted above, only elements (i) and (iv) – the existence of a special relationship and reasonable reliance – were the subject of dispute in this motion.

With respect to these two disputed issues, the plaintiffs argued (i) that IMAX and the individual defendants owed a duty of care to the investing public in releasing its disclosure documents and (ii) that the efficient market theory could be used to establish that by the act of purchasing or acquiring IMAX securities the plaintiffs relied on the misrepresentation.

While acknowledging that there is a “special relationship” between the defendants and the plaintiffs, the defendants relied on Menegon v. Philip Services Corp., [1999] O.J. No. 4080 (S.C.), arguing that in the circumstances the duty of care should be limited or precluded for policy reasons, i.e. that the imposition of such a duty would lead to indeterminate liability and would conflict with the statutory remedy under the OSA. Justice van Rensburg rejected the defendants’ argument. Relying on Mondor v. Fisherman,[2001] O.J. No. 4620 (S.C.) and Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, she determined that it was not “plain and obvious” that the policy reasons asserted by the defendants precluded a claim of misrepresentation from proceeding at the certification stage. She found that a duty of care may have been owed in the circumstances, as the intended recipients of the documents containing the misrepresentation were the investing public, including the plaintiffs and proposed class members, and that IMAX issued the documents for the purpose of attracting and informing shareholders.Importantly, Justice van Rensburg refused to limit or restrict the alleged duty of care based on concerns of indeterminate liability and determined that the common law causes of action did not conflict with the statutory remedy contained in Part XXIII.1 of the OSA.

With respect to the second issue (reliance), the defendants argued that the plaintiffs’ assertion that reliance was established by the act of purchasing or acquiring IMAX securities was insufficient as there was no pleading that the proposed class members individually relied on the misrepresentations in making their investment decisions. The defendants maintained that the “efficient market” theory put forward by the plaintiffs was akin to the American “fraud on the market” theory, which is not recognized in Canada.

Although Justice van Rensburg acknowledged that no case asserting the “efficient market theory” has gone to trial, she held that, in this case, there was a conceivable claim based on the plaintiffs' pleading of the “efficient market theory” to establish reliance, i.e. instead of alleging individual reliance by each class member, the plaintiffs alleged that the market for IMAX’s shares was efficient – that the market price of the shares reflected all public information – and that the plaintiffs relied on the misrepresentations by purchasing the shares. In so deciding, Justice van Rensburg relied on Mondor v. Fisherman and Lawrence v. Atlas Cold Storage Holdings Inc., [2006] O.J. No. 3748 (S.C.J.),holding that the pleading disclosed a cause of action for misrepresentation notwithstanding the absence of an allegation of direct individual reliance by each class member. In so holding, Justice van Rensburg appears to have accepted that the “fraud on the market” or “efficient market” theory can be applied in Ontario, at least at the pleading or certification stage.

In respect of the plaintiff’s other common law claims, Justice van Rensburg found that the plaintiffs’ conspiracy and reckless (fraudulent) misrepresentation claims had been properly pled but that the negligence simpliciter claim was identical in substance to the negligent misrepresentation claim and therefore improper.

Size of the class

The plaintiffs sought to certify a global class consisting of all persons who acquired securities of IMAX during the proposed Class Period and who held some or all of those shares at the end of trading on August 9, 2006 when IMAX released its press release announcing the SEC investigation. The defendants opposed the certification of a global class on the grounds that it would be overinclusive inasmuch as it could include individuals (or entities) who did not know about or rely on the misrepresentation. The defendants also argued that the certification of a global class would create a conflict of laws issue, requiring an Ontario court to take jurisdiction over class members residing outside the province. In addition, they contended that the principles of order and fairness weighed against certification of a global class, particularly in light of a similar class proceeding that had been commenced in the United States.

In certifying a global class, Justice van Rensburg found that the issues raised by the pleading had a “real and substantial” connection to Ontario. She determined that the fact that a similar proceeding had been commenced (although not certified) in the United States was inconsequential to the Ontario action. Furthermore, she determined that any concern over conflict of laws issues was premature unless and until the defendants asserted reliance on laws of other jurisdictions in their statement of defence. In her view, it was appropriate to “wait and see” how the issues, if any, developed.

The Leave Decision

The Leave Decision focused on whether the plaintiffs should be granted leave to proceed with their statutory misrepresentation claim. Section 138.8 of the OSA requires that the Court grant leave where it is satisfied that (i) the plaintiffs have brought the claim in good faith and (ii) there is a reasonable possibility that the plaintiffs will be successful at trial.

As this was the first case to consider the leave requirements of section 138.8, Justice van Rensburg’s main task was to interpret and apply the leave requirement and set the thresholds that would apply to both branches of the test. All parties agreed that the leave requirement involved a preliminary consideration of the merits of the action.

Good faith

The IMAX Defendants took the position that the plaintiffs had a high onus to establish good faith, needing to establish (i) that the action has been brought for the benefit of the corporation and not for the plaintiffs’ benefit and (ii) that they have a reasonable belief in the merits of their claim. Justice van Rensburg rejected this characterization of “good faith” in favour of an alternative view according to which the plaintiffs were required only to establish that they brought the action in the honest belief that they have an arguable claim and for reasons that are consistent with the purpose of the statutory cause of action and not for an “oblique or collateral purpose.”

Justice van Rensburg found that the plaintiffs had brought the action to permit shareholders to recover damages and to hold the IMAX defendants accountable for the company’s alleged misrepresentations (while deterring others from doing the same) – all of which, she determined, was consistent with the statutory scheme for secondary market liability. Accordingly, Justice van Rensburg found that the plaintiffs had met the first branch of the test for leave to assert their statutory claim.

Reasonable possibility

With respect to the second branch of the leave test, i.e. whether there is a “reasonable possibility” that the action will be resolved in favour of the plaintiffs, all parties acknowledged that a preliminary consideration of the merits of the plaintiffs’ case was necessary. The plaintiffs contended that the threshold for a reasonable possibility of success at trial is met as long as there is some evidence which, if accepted by the court, is consistent with the allegation that a misrepresentation has been made. In contrast, the IMAX Defendants argued that the burden on the plaintiffs to meet this part of the leave test should be a heavy one given that the overall purpose of the leave requirement is to deter unmeritorious claims or “strike suits”. The defendants also argued that the plaintiffs must “overcome” the statutory defences asserted by the defendants – “reasonable investigation” and “expert reliance” (set out in subsections 138.4(6) and (11) of the OSA, respectively).

In interpreting this branch of the “leave” test, Justice van Rensburg held that the leave provision requires the plaintiffs to put forward evidence with respect both to the alleged misrepresentation and to the conduct of IMAX’s officers or directors in relation to it. However, Justice van Rensburg established a low threshold for a “reasonable possibility” – as requiring only “something more than a de minimis possibility or chance that the plaintiff will succeed at trial” – finding that the leave requirement was only meant to prevent an abuse of process or purely speculative claims.

In reviewing the evidence, Justice van Rensburg found that the plaintiffs had satisfied this “low threshold” against the IMAX Defendants (except for two outside directors).

Raising statutory defences at the leave stage

Justice van Rensburg also addressed the statutory defences asserted by the IMAX Defendants, namely the “due diligence defence” and the “expert reliance” defence. In doing so, Justice van Rensburg determined that to establish these defences at the leave stage, a defendant must submit evidence that would foreclose the plaintiffs’ reasonable possibility of success at trial.

The due diligence defence

The statutory “due diligence” defence requires a defendant to establish (i) that an investigation, reasonable in the circumstances, was undertaken; and (ii) the defendant had no reasonable grounds to believe that there was a misrepresentation. Justice van Rensburg found that the first branch of this defence involved a consideration of the systems in place at IMAX concerning revenue recognition, the roles of responsibilities of those involved in revenue recognition, and the oversight and assurance measures including the performance of audit functions by IMAX’s auditors. The second branch involved a consideration of the specific knowledge of each respondent and the knowledge someone in his or her position ought to have had. Importantly, Justice van Rensburg determined that the “business judgment rule” should not be “read in” to the “due diligence defence” because, in her view, reading in a standard of deference to a director’s decision would be both unnecessary and inconsistent with the scheme and purpose of the statutory scheme for secondary market liability.

After a review of the evidence, Justice van Rensburg held that the defendants had not submitted evidence of “due diligence” that would foreclose the reasonable possibility that the plaintiffs’ would be successful at trial.

Expert reliance defence

The IMAX Defendants also asserted the expert reliance defence on the basis that it was reasonable for them to rely on the advice of IMAX’s auditors. Justice van Rensburg questioned whether this defence was applicable, as in her view, the defence applies to statements that originate with an expert. In this case the alleged misrepresentations originated with IMAX, having appeared in IMAX’s continuous disclosure documents.

As a result, Justice van Rensburg rejected this defence and granted leave for the plaintiffs to proceed with their statutory cause of action against all of the defendants, with the exception of two who were directors of IMAX but had not been involved in the audit committee or the making of the alleged misrepresentation.

Going forward

The IMAX Defendants have sought leave to appeal and this is likely not the last word on these issues.

The first of these provisions, section 138.3 of the OSA, creates a statutory cause of action for secondary market liability claims in Ontario. However, a second key provision under Part XXIII.1 - section 138.8 - requires a plaintiff to obtain the court's leave and sets out the threshold that must be reached before such leave is granted:

1. No action may be commenced under section 138.3 without leave of the court granted upon motion with notice to each defendant. The court shall grant leave only where it is satisfied that,
   
   
   1. the action is being brought in good faith; and
   2. there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

The leave requirement and threshold essentially establish the courts as a "gatekeeper" for these types of potential cases. Section 138.8 further provides - in subsections that are central to the discussion that follows - that:

2. Upon an application under this section, the plaintiff and each defendant shall serve and file one or more affidavits setting forth the material facts upon which each intends to rely; and
3. The maker of such an affidavit may be examined on it in accordance with the rules of court.

IMAX

In IMAX, the first proceeding to be brought under Part XXIII.1 since it came into force at the end of 2005, the plaintiffs alleged that IMAX and certain of its directors were liable for allegedly misrepresenting financial results in a press release, and in respect of certain revenue recognition policies.

The defendants filed affidavits in response to the plaintiffs' motion for leave to commence the proceeding. On a motion to compel answers to questions refused during cross-examination on the defendants' affidavits, the scope of pre-certification examination under s. 138.8(3) emerged as a key issue. Justice van Rensburg held that:

... a question that is potentially relevant to the facts alleged in respect to the statutory claims set out in the proposed statement of claim and in the defences raised in the responding affidavits must be answered even if it might reveal some other potential issues of wrongdoing not currently contemplated by the statutory claim.

The defendants were therefore ordered to answer various questions they had refused to answer during the case.

In a more general observation respecting the statutory provisions in issue, Justice van Rensburg noted:

The challenge is that these are the first proceedings under Part XXIII.1 of the Act. The Act provides no guidance as to the interpretation of the threshold test and what type, quality and quantity of evidence a court is to consider in making a determination of the plaintiffs' good faith and the reasonable possibility of the plaintiffs' success at trial. We are left with what the statute prescribes - a mandatory requirement for each plaintiff and each proposed defendant to set out facts by affidavit, with the right to cross-examine the deponents of such affidavits. There is no indication in the statute that evidence put forward or examined upon must be restricted to what is in the public record. Indeed, the facts to support a due diligence defence are generally in the possession and control of the party asserting such a defence. There is no requirement in the statutory procedure for an affiant to attach documentary exhibits, but it is not unusual for exhibits to be attached to affidavits, and the parties in this case have attached extensive exhibits to their affidavits.

IMAX's motion for leave to appeal the order was dismissed by Justice Langdon who was "unable to find good reason to doubt the correctness of the decision." IMAX's counsel submitted that Justice van Rensburg had failed to abide by the canon of statutory interpretation requiring that statutory ambiguities be resolved by examining the purpose of the legislation and considering the efficacy of all the possible interpretations. Justice Langdon dismissed the argument as he found no ambiguity in the relevant statutory language.

Counsel further submitted that a more restrictive test than "semblance of relevance" should be applied to examinations under s. 138.8. Justice Langdon found that Justice van Rensburg was aware of the lack of interpretive guidance available and of her obligation to further the express legislative intent that cross-examination be in accordance with the rules of court. He reiterated that the established test for cross-examination on motions is that questions having a "semblance of relevance" to the issues raised in the pleadings and affidavits must be answered. He also observed that the Court maintains the discretion not to require questions to be answered when they are overbroad.

CV Technologies

The Superior Court revisited this issue in CV Technologies. In that case, a group of shareholders commenced a putative class proceeding against CV Technologies (CV) and certain of its officers and directors (and its former auditor) alleging that certain continuous disclosure documents, including certain financial statements from fiscal years 2006 and 2007, contained a misrepresentation. Among the putative causes of action was OSA s. 138.3.

The plaintiffs filed a number of affidavits in support of their motion for leave. CV filed two expert affidavits in opposition to the leave motion while the auditors filed no affidavits at all. The plaintiffs then brought a motion seeking to (i) compel each of the defendants to swear an affidavit in their own name in opposition to the leave motion or (ii) examine each of the defendants as a witness on a pending motion under Rule 39.03 of the Rules of Civil Procedure. There remained a question of whether certain commentary in van Rensburg J.'s reasons in IMAX should be interpreted to mean that all potential parties to a secondary market liability case must file affidavits.

The plaintiffs in CV Technologies argued that OSA s. 138.8(2) was unambiguous in compelling each defendant to swear and file an affidavit in opposition to the leave motion. Alternatively, they submitted that each defendant possessed evidence relevant to the leave motion and that an examination under Rule 39.03 was thus appropriate.

In dismissing the plaintiffs' motion, Justice Lax held that, in relation to the leave motion, while a defendant could file affidavits if he or she intended to lead evidence in opposition to that motion, OSA s. 138.8(2) does not require this. Justice Lax relied on (i) the interim and final reports on the Toronto Stock Exchange Committee on Corporate Disclosure (the "Allen Report") and (ii) the Canadian Securities Administrators' (CSA) draft legislation. Justice Lax noted that the Allen Report emphasized that the purpose of the secondary market liability legislation should be deterrence rather than compensation and that any such legislation should be structured to prevent "strike suits". The CSA draft legislation incorporated those concerns and characterized the proposed "gatekeeper" leave motion as an attempt "to ensure that unmeritorious litigation.is avoided or brought to an end early in the litigation process." Thus Justice Lax concluded that a primary purpose of the leave motion is to "protect defendants from coercive litigation and to reduce their exposure to costly proceedings", adding that its essence is to require putative plaintiffs "to demonstrate the propriety of their.claim before a defendant is required to respond." She added that as the plaintiffs bear the onus of satisfying both branches of the test for leave under s. 138.8(1), defendants are free to elect to lead no evidence in opposition to the leave motion if they prefer not to do so.

Justice Lax clarified Justice van Rensburg's statement in IMAX that OSA s. 138.8(2) contains a "mandatory requirement for each plaintiff and each proposed defendant to set out the facts by affidavit with the right to cross-examine", stating that the motion in IMAX concerned a different section of the OSA, that Justice van Rensburg's statements concerning s. 138.8(2) were obiter dicta, and that IMAX should be confined to the facts of that case, in which each of the defendants had elected to swear and file affidavits.

As to the proposed examinations under Rule 39, Justice Lax explained that the plaintiffs could not circumvent her interpretation of s. 138.8(2) by relying on Rule 39 and that the proposed examinations are "neither contemplated by the Securities Act nor by the principles governing examinations under this rule." Accordingly, Justice Lax denied the plaintiffs' request to examine each of the defendants under Rule 39.

The decision is important because it limits the ability of plaintiffs' counsel to conduct fishing expeditions of defendants of their choosing to help build a case prior to establishing that their case has sufficient merit to be granted leave. This ruling means that the defendants avoid the expense and inconvenience of extensive documentary and oral discoveries at an early stage.

The plaintiffs have sought leave to appeal Justice Lax's decision. Stikeman Elliott acts for the proposed defendants CV Technologies and the named officers and directors in the CV Technologies case.

Court Authorization

Similar to the Ontario requirement for leave, an action in Quebec may not be brought without prior authorization of the court. In order to determine whether to grant authorization, the court must find that the action "is in good faith" and that there is a reasonable possibility it will be resolved in favour of the plaintiff. Unlike Ontario, however, which prescribes specific limitation periods for the commencement of proceedings of three years from the date of the statement of misrepresentation (or non-disclosure) or six months after the issuance of the news release announcing that leave has been granted, Quebec's Bill 19 allows any interested party to request the court to perempt the authorization if an action is not commenced within three months of the authorization being awarded. 

Cause of Action

Bill 19 identifies four situations that may lead to a cause of action. These consist of situations where:

• the issuer or a representative of the issuer releases a document containing a misrepresentation;
• a representative of the issuer makes a public oral statement relating to the issuer's business or affairs, which contains a misrepresentation;
• an influential person or representative of the influential person releases a document or makes a public oral statement relating to the issuer, which contains a misrepresentation; or
• the issuer fails to make timely disclosure of a material change.

Persons Potentially Liable

Also similar to Ontario, Quebec's Bill 19 provides for a number of potential defendants.  These include:

• the issuer, its directors and officers who authorized, permitted or acquiesced in the release of the document or the making of the public statement containing the misrepresentation, or in the failure to make timely disclosure of a material change;
• an "influential person", which includes a control person, promoter, an insider who is not a director or officer of the issuer, or an investment fund manager if the issuer is an investment fund, who knowingly influenced the misrepresentation or failure to make timely disclosure, or who authorized, permitted or acquiesced in the misrepresentation if it was made by the influential person or representative;
• an expert, which includes, inter alia, accountants, engineers, financial analysts and geologists whose report, statement or opinion contained the misrepresentation, who was quoted in the offending document or statement and who consented in writing to the use of the report, statement or opinion;
• in the case of a public oral statement, the person who made the statement.

Burden of Proof

The plaintiff is not required to prove that there was reliance on the document or statement containing the misrepresentation or on the issuer having complied with its timely disclosure obligations. Unless the defendant is an expert or the misrepresentation was contained in a core document (prospectus, take-over bid circular, etc.), the plaintiff must prove that the defendant knew of the misrepresentation or deliberately avoided such knowledge, or was guilty of gross fault in connection with the release of the document or of the public oral statement. With respect to a failure to disclose, unless the defendant is the issuer, its officers, an investment fund manager or its officers, the plaintiff must prove that the defendant knew that a material change report should have been filed or deliberately avoided such knowledge, or was guilty of gross fault in the failure to make timely disclosure. In determining "gross fault", the court will consider a number of factors that are substantially similar to those to be considered in Ontario for determining "gross misconduct". They include, inter alia: the nature of the issuer, the knowledge, experience and function of the defendant, and the reasonableness of reliance on the disclosure compliance system.

Defences

Bill 19 contains a number of defences to an action for civil liability similar to those found in Ontario's Bill 198.  These include:

• that the plaintiff knew of the misrepresentation or material change;
• that the defendant conducted a reasonable investigation and had no reasonable grounds to believe that a misrepresentation or failure to make timely disclosure would occur;
• that the misrepresentation was also contained in a document filed by, or on behalf of, a third person, other than the issuer, with the Autorité des marchés financiers or the securities commission of another province, providing that the misrepresentation was not corrected in another filed document, the document or statement contained the reference to the source of the misrepresentation and the defendant did not know and had no reasonable grounds to believe there was a misrepresentation;
• that a misrepresentation or failure to disclose a material change that was made without the defendant's knowledge or consent was followed by corrective action in the form of notification to the board of directors of the issuer and possibly notification to the Autorité des marchés financiers. This defence is not available to an issuer;
• in the case of a public oral statement, that a defendant other than the person who made the statement did not become, or should not reasonably have become aware of the misrepresentation before the plaintiff acquired or disposed of the issuer's security and that the person who made the public oral statement had no authority other than apparent authority to do so;
• with respect to a forward-looking document or statement, that reasonable cautionary language was included in the statement along with a statement of the material factors or assumptions applied. The statement or document must contain certain qualifiers in order for the defendant to rely on this defence.  Futher, this defence is not available with respect to a statement or information required to be filed under the Securities Act or regulations;
• non-experts who rely on expert reports, statements or opinions may rely on a lack of knowledge or reasonable grounds to believe there was a misrepresentation in the relied report and that the report of the expert was fairly represented in the document or statement;
• an expert may rely on having withdrawn his or her report, statement or opinion in writing before the document containing the misrepresentation was released or the statement made;
• that a defendant was unaware and had no reasonable grounds to believe that a document containing a misrepresentation would be released; and
• that the issuer filed a material change report on a confidential basis, made the material change known when the basis for confidentiality ceased to exist, did not release a document or statement containing a misrepresentation and, if the material change became publicly known in some other way, promptly disclosed it.

Damages and Liability Cap

Damages under Bill 19 are assessed based on calculations that rely on the price of the securities bought or sold, and the average price of the security once the material change has been disclosed. Damages do not include changes in the value of the security due to market forces unrelated to misrepresentations or the failure to make timely disclosure.  Much like Ontario, Bill 19 also includes liability limits. They are:

• in the case of the issuer or an influential person that is not a natural person, the greater of 5% of its market capitalization and $1,000,000;
• in the case of a natural person other than an expert, the greater of 50% of the aggregate of that person's compensation from the issuer and its affiliates and $25,000 or, if the person is a director or officer of an influential person, the greater of 50% of the aggregate of that person's compensation from the influential person and its affiliates and $25,000;
• in the case of an expert, the greater of the revenue that the expert and affiliates of the expert earned from the issuer and its affiliates in the year preceding the misrepresentation and $1,000,000.

The liability limits are available unless the plaintiff proves that the defendant, other than the issuer, authorized, permitted or acquiesced in the release of the document or making of the public oral statement containing the misrepresentation, or failed to make timely disclosure, while knowing it to be a misrepresentation or a failure to make timely disclosure.

Implementation and transition

As stated above, Bill 19 came into force on November 9, 2007.

Background

Forward-looking information is defined under the Securities Act as "disclosure regarding possible events, conditions or results that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented as either a forecast or a projection."

To rely on the forward-looking information defence, the document or public oral statement in question is required to contain, "proximate" to the forward-looking information:

• reasonable cautionary language identifying the forward-looking information and the material factors (risk factors) that could cause actual results to differ from a conclusion, forecast or projection contained in it; and

• a statement of the material factors or assumptions that were applied in drawing a conclusion or making a forecast.

For public oral statements a person is deemed to have satisfied these requirements if he or she states that (i) the oral statement contains forward-looking information, (ii) actual results could differ materially from what is expected, (iii) certain factors or assumptions were applied in arriving at the forward-looking information, and (iv) that additional information about the material factors or assumptions that were applied in arriving at the forward-looking information and the material risk factors that may affect actual results is contained in a readily-available document. This means a document that is filed with the OSC or otherwise generally disclosed must contain the required cautionary statements and be identified for further reference. As well, to satisfy the forward-looking information defence for both documents and public oral statements, the person or company must have a reasonable basis for drawing the conclusions or making the forecasts or projections contained in the forward-looking information.

What the OSC says about the Defence

Recognizing that forward-looking information is both valuable and necessary "yet by its very nature carries a level of uncertainty," the Draft Policy states that the objective behind the forward-looking information defence is to avoid a "disclosure chill" on account of the risk of liability, while facilitating balanced and responsible disclosure about future prospects. The need for the OSC to provide clarification arises from the concern and confusion caused in the market by the specter of secondary market liability together with the technical aspects of the forward-looking information defence.

These technical aspects include the requirement that the cautionary language required to satisfy the defence be presented proximate to the forward-looking information itself and include a statement of both the relevant risk factors and the underlying assumptions. Depending on how these elements of the defence are interpreted and applied, it has the potential of rendering a disclosure document confusing, unwieldy and potentially of little use in conveying what is sought to be communicated to the reader.

In the Draft Policy, the OSC explains that it does not interpret the term "proximate" to require immediate juxtaposition of the cautionary language in every instance and where a disclosure document contains various threads of forward-looking information that are subject to common assumptions and risk factors, the proximity requirement may generally be satisfied by adding the required cautionary language either before or after the disclosure containing these threads. The OSC has also clarified that where particular assumptions and risk factors apply equally to multiple instances of forward-looking information, issuers should use their judgment in making cross-references to cautionary language in a manner that supports the principle underling the forward-looking information defence (namely, that an investor reading or hearing the information should be able to identify the forward-looking information, understand that it is being provided and be informed of the material assumptions and risk factors underlying or associated with it). In the OSC's view, these principles suggest that the more closely tied a particular risk factor or assumption is to a particular conclusion, forecast or projection, the more "proximate" it should be to the forward-looking information.

The OSC has also stated that in its view the reference to "material" risk factors requires the disclosure of only "significant and reasonably foreseeable" risk factors and does not require the issuer to anticipate and discuss every risk factor that could conceivably cause actual results to differ from expectations. Similarly, the requirement to state the assumptions underlying the forward-looking information is also subject to a materiality standard and does not require an exhaustive statement of every factor or assumption applied.

To satisfy the forward-looking information defence the person or company must also have a reasonable basis for drawing the conclusion or making the forecasts or projections contained in the forward-looking information. The OSC believes that the reasonableness of assumptions applied, inquiries made and the process followed in preparing and reviewing the information are all factors to be considered in determining what is a "reasonable basis" for this purpose.

With respect to the defence for misrepresentations in forward-looking information contained in public oral statements, the OSC states that the requirement that the person making the oral statement also make certain required cautionary statements (in order to be deemed to have satisfied the forward-looking information defence) should be interpreted pragmatically and is not meant to be exhaustive. This means, for example, that in appropriate circumstances these cautionary statements may be made by one person on behalf of another person who actually makes the statement containing the forward-looking information. Finally, the OSC has also expressed its view that it does not interpret the forward-looking information defence to impose a duty to update such information beyond what is currently required under Ontario securities law or otherwise.

The Draft Policy cautions that the guidance contained in it represents the views of the OSC only, which do not have the force of law. Notwithstanding this proviso, given the historic deference that courts have shown towards the OSC as a specialized regulatory body, the OSC's interpretation would conceivably be persuasive if not compelling before a court of law.