Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House

Ontario to let investors sue over disclosure

Revised bill greatly broadens basis for shareholder action

Wojtek Dabrowski
Financial Post

November 23, 2004

The Ontario government yesterday introduced legislation to allow investors to sue companies and their officers and directors for false or misleading information in continuing disclosure.

Thus far, investors have only been able to sue based on misleading statements in a prospectus for a primary offering, despite government estimates that 90% of equity trading in Canada occurs after the initial public offering is completed.

The United States already has provisions that allow suits based on materially false and misleading statements in continuing disclosure. That has been a reason why many large interlisted Canadian companies, such as Nortel Networks Corp. and Biovail Corp., have seen lawsuits filed against them from the United States but not from Canada.

Observers expect the bill to become law. Secondary-market civil liability has received support from the Ontario and B.C. securities commissions, investor groups and, most recently, an all-party committee of the Ontario legislature.

The proposal's critics have raised the spectre of a tide of frivolous lawsuits that could tie up their resources and the courts.

Gerry Phillips, chairman of the management board of Cabinet and the Ontario minister responsible for securities regulation, said the proposal will help safeguard investors.

"The success of our marketplace depends not just on companies' ability to raise capital, but also on investors feeling confident that they are going to be protected," he said in an interview.

Mr. Phillips added that although he has heard concerns over the potential for meritless lawsuits, "I'm satisfied that we've built in the necessary protections for the companies but at the same time provided reasonable access for investors [who] have been harmed."

The Ontario Teachers' Pension Plan, which has sued Nortel in the United States over alleged false and misleading disclosure, yesterday praised the province's efforts. "I think it's an important step in maturing the capital markets," Robert Bertram, Teachers' executive vice-president of investments, said in an interview. "We're pleased to see it move ahead and would be interested in looking at the details."

While Ontario had already passed a law to allow class-actions over false and misleading continuing disclosure, that legislation was found to contain technical issues that needed to be addressed with amendments.

The bill introduced yesterday will deal with those issues, which mainly concern ensuring consistency with remedies available to primary-market investors. The secondary-market civil liability provisions can then be proclaimed.

The Civil Liability Coalition, a lobby group representing representing BCE Inc., Alcan Inc., EnCana Corp., Power Corp. and Bell Canada, has recently argued against implementing the provisions. While the coalition says it backs the right of investors to sue, it has tried to convince Ontario and British Columbia -- where similar legislation is also in the works -- that the governments risk creating an environment more favourable to class actions than the United States.

But a legal expert said yesterday that provisions contained in the proposed laws would discourage suits, both frivolous and meritorious alike.

"I have real doubts about ... the likelihood of that legislation being used very frequently," said Philip Anisman, a Toronto-based securities litigator. "The issue isn't whether the floodgates are going to open. The issue is whether there's going to be a trickle."

Mr. Anisman said the proposed laws are structured to require court approval -- and thus a full hearing -- before a case can proceed. Even then, a second hearing for the suit to be certified as a class action is needed, he added.

The upfront costs associated with this process "can be in the hundreds of thousands of dollars," Mr. Anisman said. "That in itself will be a significant deterrent to investors bringing class actions."

The Ontario legislation also caps the liability of a company or its officers or directors. In the case of companies, the limit sat at either 5% of market cap or $1-million, whichever is greater. For directors and officers, it is the greater of either $25,000 or 50% of annual compensation.

Mr. Anisman called the director/officer limit "a joke," adding "no one is going to bring a class action against directors for those amounts."