Ontario introduces long-awaited investor protection measures

(August 4, 2005) Investors burned by misleading public company statements could have a friend in the Ontario government. New legislation proclaimed this week will give stock market or secondary market investors the right to sue public companies that issue misleading financial reports, press releases and other disclosure documentation.

The government released a statement on Wednesday to announce that, beginning December 31, 2005, secondary market investors will have the statutory right to sue public companies operating in Ontario’s capital markets for misleading disclosure or failure to make timely disclosure.

Primary market investors, those who buy shares being sold to the public as part of an initial public offering, already have a right to sue if the information presented in a prospectus is false or misleading, or if the company omits important information. However, more than 90% of all equity trading in Canada occurs in the secondary market where investors generally buy shares from other investors.

The legislation was originally introduced by the former Conservative government back in 2002 and similar proposals have been under consideration since 1985. The Ontario legislature’s all-party Standing Committee on Finance and Economic Affairs endorsed implementing civil liability in its Five Year Review of the Securities Act report, tabled in the legislature on October 18, 2004.

Ross McKee, a partner with Blake, Cassels & Graydon LLP, says it remains to be seen whether or not lawsuits would succeed, for example, against experts like auditors who misrepresent company earnings results.

Even though a 1997 case, Hercules Management v. Ernst & Young, decided that individuals could not sue auditors for their financial statements, the new legislation, which holds experts liable for their reports, could potentially change the precedent.

“This does expose experts to liability for misrepresentations in their reports. We’re not quite sure yet about the exact application to auditor’s reports and financial statements, but certainly financial statements themselves are open to lawsuit.”

While the new legislation does pose new challenges for public companies, McKee says it includes built in provisions to safeguard against abusive class action lawsuits. “Actions can’t be brought without leave of the court, so the court needs to decide if the action has merit or not. Actions also can’t be settled without leave of the court,” he says.

Until now, the legal hurdle to prove misrepresentation required that complainants prove they relied on company statements in making their investments. “Most people don’t in fact read a lot of these documents, so they couldn’t say they directly relied on them. And of course, everyone’s case of reliance would be different,” says McKee. Since securities lawsuits are usually too prohibitively expensive for individual investors to pursue, the only recourse for many people in Canada has been to complain to the securities commissions.

Under the new legislation however, the law assumes all investors have, or could have relied on the public information provided by the company. “Rather than one person or a large shareholder who suffered a big loss being the only person who could bring a costly securities law action, this will make it possible for people to band together and bring class actions on their own.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com