|Ontario to let investors sue over
Revised bill greatly
broadens basis for shareholder action
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
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
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
"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
Mr. Anisman called the director/officer limit "a joke," adding "no one is
going to bring a class action against directors for those amounts."