Liability for Misrepresentation in a Prospectus

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  1. Liability for Misrepresentation in a Prospectus
  2. Liability

WHO IS LIABLE – Company, directors, selling security holders, officers who signed prospectus, underwriters, and the experts all may be liable for a misrepresentation in the prospectus. Policy- have everyone liable to give incentive to be careful.

  • Selling Securityholders:

o (a) have to get company to agree to sell your shares under prospectus o (b) understand that you’re liable for misrepresentation under that prospectus

  • POLICY: Why have everyone liable? To give incentive to be careful. Underwriters/Directors/Selling Secholders will be more careful if they’re going to be liable, Directors will actually read it.

o Prob – may have made it harder for high quality directors to serve on boards of public companies as they are worried about liability^ therefore, less competitive companies

s.130: sets out liab, damages and defences for liab

Recall: s.1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to state material fact that is required to be stated or that is necessary to make a statement not misleading in light of circumstances in which it was made.

  • Can be liable for not amending the prospectus to reflect a material change, but not for failing to report material FACT (Danier)
  • Option of Claims for Purchaser Upon Misrepresentation:
  1. CONTRACTUAL CLAIMS: Rescission (get money back)
  2. DAMAGES: statutory rights under 130 of OSA ^ 130(10): “these statutory rights are in addition to and not in derogation of any rights at common law”

o

o

  • Plaintiff must show: (a) purchase of the security offered under the prospectus, (b) that the purchase was made during the period of the distribution and (c) that there was a “misrepresentation” in the prospectus.
  • If they establish this, subject to some defences: plaintiff is entitled to rescission or damages
  1. TORT: (a) fraudulent misrepresentation (b) negligent misrepresentation (Hedley Byrne, Queen v. Cognos p. 153)

o

  • Fraudulent misrep: D made false statement knowingly or without belief in its truth or was recklessly careless whether it be true or false & P relied on the statement to his detriment
  • Negligent misrepresentation: Duty of Care based on a special relationship between representor and representee; rep was untrue, inaccurate or misleading; representor acted negligently in making misrep; representee relied, in a reasonable manner, on the misrep; AND reliance was detrimental (damages resulted)

Establishing a Claim for Damages for Misrepresentation:

In a document:

  1. Issuer is either
  2. Reporting issuer
  3. Any other issuer with a real and substantial connection to the jurisdiction any securities of which are publicly traded.
  4. Disclosure “document” contains a “misrepresentation” (which includes both misstatements and omissions) and
  5. The P “acquired or disposed of” a security during the period in which the document was released and before the time the misrepresentation was corrected.

OSA, s.130: Liability for misrepresentation in prospectus

  1. Liability for misrepresentation in prospectus: Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,
  • (a) the issuer or a selling security holder on whose behalf the distribution is made;
  • (b) each underwriter of the securities who is required to sign the certificate required by section 59;
  • (c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;
  • (d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and
  • (e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),
  • or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter.
  1. Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER – STRICT LIABILITY (+ under (7) showing that the diminution in value wasn’t from misrep)

No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation.

  1. Idem: No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves,
  • (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;
  • (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;
  • (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;
  • (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert,
  • (i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or
  • (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or
  • (e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true.
  1. Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it,
  • (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or
  • (b) believed there had been a misrepresentation.
  1. Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,
  • (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or
  • (b) believed there had been a misrepresentation.

o Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that

  1. Limitation re underwriters: No underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter.
  2. Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.
  3. Joint and several liability: All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be just and equitable.
  4. Limitation re amount recoverable: In no case shall the amount recoverable under this section exceed the price at which the securities were offered to the public.
  5. No derogation of rights: The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law.

Section 1(1) Misrepresentation

“misrepresentation” means, (a) an untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made; (“presentation inexacte des faits”)

Kerr v. Danier (SCC, 2007), 157

Ratio: Only have to report material CHANGES post-filing, not material facts. A forecast can be the subject of misrepresentation, P does not have to prove reliance, deemed

Facts: Danier began distributing shares under a final prospectus in 1998. Sold for $11.25/share. Forecast of sales (FOFI) contained a warning that “there is no guarantee that such Forecast will be achieved in whole or in part”. After prelim, but before final, had a sale that didn’t go great. Did an internal (not required) review of the numbers, and realized they were lagging behind. Chose not to issue press release, because they believed target would be met by the end of the quarter. Then had a Victoria Day sales promotion, and it did not go well. After final, but before end of distribution, Q4 revenues were lower than forecast. Issued a revised forecast to the OSC. They then issued a press release/material change report and the stock price went down on the date of the announcement. Actual revenues were not that far off of estimate by the end of the year. Danier’s shareholders that lost $ sued to get back $ they lost, and said that it was a misrepresentation for Danier not to include the initial information about lagging behind (saying it was necessary to make the forecast not misleading under (b) of the misrep definition

Decision: In December 2005: ON CA: reversed trial decision. Don’t have to do an amendment for material fact (trial judge didn’t give suff deference to business judgment rule – fact that directors were wrong wasn’t the issue). Leave given to SCC. In 2007: SCC: dismissed the appeal, upheld ON CA’s decision.

  • In May 2004, ON TJ held that Danier and its officers were liable for statutory misrep in prospectus relating to an earning’s forecast^poor revenue was a material FACT that Danier was required to disclose.

Implications:

  • Issuers do not have an obligation to update prospectus to reflect material facts, only material changes: Issuers do not have an obligation to update a prospectus to reflect material facts after filing and do not have civil liability for failing to do so. To impose civil liability where an issuer has complied with the Act would be contrary to the securities legislative framework. Need only to report material changes, not material facts.
  • Purchasers do not have to prove reliance, reliance is deemed if it was misrep at time of purchase:

The plaintiff does not have to prove reliance. Instead, the plaintiff is deemed to have relied on the misrepresentation if it was a misrepresentation at the time of the purchase. It also may apply to secondary market purchases as well, since securities are offered under the prospectus during the period of distribution.

o **HE SAYS SCC APPLIES BJR, and says they won’t interfere with business judgment, but they actually don’t ^ they disagree that the BJR applies (only part of ON CA judgment they don’t uphold) (they actually say that business judgment has nothing to do with disclosure ^ you’re obligated to provide certain disclosure and you cannot “business judgment” your way out of that. The business judgment rule does NOT apply to limit statutory disclosure obligations if an obligation to make disclosure otherwise exists.

o Also note: and “include an omission to make a statement not misleading” is meant to capture “half-truths. ”

3.4.8.2 Damages

UNDER STATUTORY ACTION: Purchaser would claim diminution of security as a result of misleading nature [1]

Section 130(8): J&S Liability: all defendants jointly and severally liable for the whole, but they can seek contribution from each other unless the court denies that right to contribution (if not “just & equitable”)

Section 130(7): Defence of showing that SH loss was not from misrepresentation: defendant is not liable for all or portions of damage if diminution is not the result of the misrepresentation, but onus is on D to prove (almost impossible)

  • Section 130(2): also not liable if you show they knew about the misrep
  • Section 130(9): Can only recover what was spent: the most you can recover is what you spent (what securities were offered to public for), no opportunity costs
  • Section 130(6): Proportionate for Underwriters: if more than one, underwriter only responsible for portion underwritten by them (total public offering price of their part)
  • Section 130(1)(d): Experts only liable for Expertised Portion: experts only responsible for expertised portion (so if giving tax opinion, then only liable for that)

o Would have to show under 130(4) that you did your due diligence

o Joint and Several Liability if you ARE liable under expert portion

POLICY:

  1. Investor protection: j_will be more careful if you’re fully liable (also with J&S liability ^ you’re liable so shouldn’t put the burden on the plaintiff to sue different people to get the $)
  • Between two innocent people (expert and buyer, one has to lose money, going to be expert, you can get it back from them)
  1. but also need efficient capital markets ^ which is why we have defences
  • Absent defences, who is going to play?
  • How are we going to get underwriters to sell securities if they’ll be liable for any misrep in any prospectus for hundreds of millions of dollars when they only make 2 million? (if they don’t play, we don‘t need investor protection b/c no one’s selling securities)

3.4.8.3 Defences

POLICY -Why do we have defences?

  • Defences are rooted in the concept of efficient capital markets – you cannot be leaning so hard toward investor protection that it doesn’t work. Can’t hold them to absolute standard, b/c won’t play ^ but if you say you have an obligation to be CAREFUL ^ that sounds reasonable (due diligence is so that someone will be CAREFUL)
  • *It’s hard to get good directors when we over-regulate everything to death, hard to balance

Defences

Defendants can avoid liability by showing that:

  1. The person purchasing the securities had knowledge of the misrepresentation.
  2. He or she did not consent to the filing of the prospectus or that consent was withdrawn, with reasonable general notice of the withdrawal and the reason for it, prior to the purchase of the securities by the purchaser.
  3. The statement was not made by him or her and her or she had no reason to believe, and did not believe, that it was a misrepresentation.
  4. He or she conducted a reasonable investigation to produce reasonable grounds for a belief that there was no misrepresentation and he or she did not believe there had been a misrepresentation: due diligence defence.
  5. the depreciation in the value of the security was not caused by the misrepresentation.

s.130: Defences

  1. Issuer OR security holder: “Strict” Liability (no Due Diligence Defence, tho, J&S Liability, has options i or v above)
  • Even if innocent mistake in misrep, who should suffer b/c of it? Issuer, not investor, you should have known everything, investor has cleaner hands than you, unless they knew, you had all info
  • Thus, the issuer/selling securityholder only has two defences (both extremely hard to prove) and NO due diligence:

o Section 130(2) and (7)

■ (2) Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER –

STRICT LIABILITY (+ under (7) showing that the diminution in value wasn’t from misrep)

• No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation.

■ (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to

prove)

• In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.

  1. Experts (Joint and Several Liability, and only for expertised portions – has all defences from above available + 1)

• Experts are only liable for expertised portions, have a defence for DD, diminution in value, the “they knew”, did not consent, and statement not made by them (failure to fairly rep opinion)

o s. 130 (2) Again – showing they knew.

o (3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) – “reasonable grounds” – see below or above.

  • (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;
  • (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

o (4) Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it,

  • (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or
  • (b) believed there had been a misrepresentation.

• Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that

o (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.

  1. NON-EXPERTS (e.g. Due Dilig defence for everyone except the issuer and selling securityholder – e.g. Directors, officers)

Have defences that purchaser knew, due diligence, and depreciation not from misrep and also have separate defences for their liability of the EXPERTISED portions [2]

  • (3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) – “reasonable grounds”: No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves,

o (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;

o (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;

o (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

o (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert,

  • (i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or
  • (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or

o (e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true.

  • (5) Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,

o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

o (b) believed there had been a misrepresentation.

  • Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that
  • (7) depreciation wasn’t b/c of misrep

DUE DILIGENCE DEFENCE

Due Diligence : Standard of Reasonableness – s. 132

s.132: In determining what constitutes reasonable investigation or reasonable grounds for belief for the purposes of sections 130 and 131, the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case.

POLICY and Client Info: due diligence is a judgment call:

  • Difficult to tell your client what a “reasonable investigation” actually means, and there is little guidance in the OSA
  • Difficult to balance efficient markets and investor protection, this is the best we have. Just tell client there’s an obligation to be careful (not necessary to be right) and you’ll be judged in hindsight, so keep that in mind.

Escott v Barchris (USA, 1968), 163

Ratio: Attempts to define level of due diligence required, but really only says what is not acceptable ^ It does not matter whether you can read/ understand the prospectus; if you sign it, you are liable.

There is an overriding obligation to the public and the capital markets. I need to have a reasonable investigation to avoid a misrepresentation

Facts: BarChris was a construction company building bowling alleys. Alleys forced to shut, industry overbuilt. In the middle of financial troubles, BarChris sold debentures containing several misrepresentations in the registration statement and prospectus. Customer failures in payments were understated, company failed to state it was operating bowling alleys.

Decision:

  • Company liable, strict liability. Can only evade liability if they prove purchaser purchased with knowledge of misrepresentation. They could not, so liable.
  • Treasurer, CFO: liable. No evidence of due diligence. You cannot simply rely on experts, you need to do your level of due diligence.
  • President and Vice president found liable. Irrelevant whether they knew what they were signing; ought to know the facts, if not, liable.
  • Lead underwriter found liable—relied on its legal counsel to do the investigation. Lead underwriter not excused on the basis that it relied on its legal counsel. Underwriters need to make reasonable efforts to verify the data submitted to them.
  • Auditors also liable. Should have known BarChris was operating a bowling alley.
  • Outside director (lawyer): liable. Knew about some of the contracts that were not enforceable, and did not investigate others. Cannot simply ask management if prospectus is accurate—you cannot simply rely on management, founders, or anyone else to found a due diligence defence. Need a reasonable investigation of your own.
  • Counsel: young lawyer, liable. Seniority does not matter. Know your obligations and investigate. Implications:
  • What is not acceptable for due diligence: This case doesn’t actually define due diligence. It simply establishes what is not acceptable (only a guideline).

o No better way to say be careful than to be careful, and no way to define it other than be careful in that particular set of facts with that particular company. o POLICY: Integrity of capital markets needs you to be careful

• It does not matter whether you can read/ understand the prospectus. If you sign it, you are liable: In

this case, applied to President/VP. Even if you have limited education and cannot read or understand the prospectus, but you sign it, you will be liable if there is a misrepresentation

o McLean J. noted that “a check of matters easily verifiable [would not be] unreasonable”. Appears to have imposed a higher standard on directors who are also company counsel. o Underwriters argued they were entitled to rely on statements of officers of company. McLean noted that the purpose of making underwriters liable was investor protection. If they were allowed to escape liability on the basis of officers’ statements, “then the inclusion of underwriters among those liable.. .affords the investors no additional protection”.

Feit v. Leasco

Ratio: Underwriters’ gatekeeper role ^therefore has obligation to challenge issuer’s disclosure and go beyond automatic reliance on what issuer presents

Standards for inside vs. outside directors ^ inside directors expected to make more complete investigation and have more extensive knowledge of facts than outside directors

Facts: Takeover of Reliance Insurance by Leaseco. Leasco offered shares and warrants in exchange for shares of Reliance. Registration statement failed to disclose amount of Reliances’ “surplus surplus” which consisted of liquid assets of an insurance company which were available for use in non-regulated enterprises. An action was brought against Leaseco and its directors.

Decision: Court, reiterated the views of McLean J. in BarChris, noting that “a completely independent and duplicate investigation is not required…[but] the defendants were expected to examine those documents which were readily available”.

Implications:

  • Different directors may be held to different standards for due diligence:

o Inside Directors vs. Outside: “Inside directors with intimate knowledge of corporate affairs… will be expected to make a more complete investigation and have more extensive knowledge of facts supporting or contradicting inclusions in the registration statements than outside directors ”.

o Underwriter “Gatekeeper”: The underwriter “is a gatekeeper of the public interest” and

therefore also has an obligation to challenge the issuer’s disclosure and go beyond automatically reliance on what the issuer presents

YBM Magnex (OSC)

Standard of due diligence^should be ongoing, but only to the extent of tying up lose ends. Threshold of materiality ^ must be considered in light of all facts available

Facts: YBM issued a prospectus noting, in its discussion of risk factors, the risk of doing business in Eastern Europe, but did not mention specific investigations against its directors for criminal behaviour over there.

Decision: Commission held that YBM failed to disclose that it was “subject to unique risks”.

Implications:

  • Threshold for materiality – in light of all facts available: Materiality must also be considered in light of all the facts available to the persons responsible for the assessment, exercise of judgment and reasonable diligence.
  • Due diligence should not be ongoing , only tying up loose ends: Due diligence should be ongoing following the filing of a preliminary prospectus, but only to the extent that “the remaining work only consists of tying up loose ends” When further significant investigations are required, this is not the proper process. A course of conduct must be completed before an underwriter can affirm that to the best of its knowledge, information and belief, the document contains full, true and plain disclosure.
  1. Limitation Period & Common Law Rights
  • Statutory civil right is in addition to and not in derogation of any other right. This preserves the common law rights of action which may be of value given limitation periods.
  • For example, rescission is limited to 180 days from the date of the transaction, BUT LIABILITY FOR MISREP UNDER STATUTE HAS NO BAR!!!!!!

Jones v Deacon

Implications: Why misrepresentations are all so scary, and why you need to take it seriously^Court found that sale of securities is so fundamental to our law, that is NEVER statute-barred, and it forever voidable at the instance of the purchaser

Facts: Deacon Hodgson was an investment dealer. In 1980, created private company called Bachova investments to invest in oil business. Offered or sale shares of Bachova without a prospectus, without properly relying on a private placement exemption. Hodgson Bought the shares in 1982, and in 1986… Jones was charged with fraud in Australia (the buyer). As part of that fraud case, which has nothing to do with bachova investment, Cam Deacon was ordered to fly down to Australia to testify against Jones (completely unrelated). As part of Cam’s testimony, Jones was put in prison in Australia, 4 yrs after he bought securities. Jones in Australia, pissed, nothing to do. Buys securities act. Looks at investment 4 years ago, realizes that investment in Bachova was against the rules. Cam never gave me prospectus, and never properly relied on exemption, I want my $ back. From prison, brought action against Hodgson in Ontario.

  • Three year limitation: Was no prospectus, no proper compliance on exemption ^ but 3 year statute of limitations period. Deacon said ha ha, too bad, statute barred. Jones ->Idon’t think this is ever statute barred

Decision: court found that the sale of securities (our general rule that no person shall trade w/o being registered, distrib w/o prospectus, etc.) is so fundamental to our law, that it is never statute-barred, and it is forever voidable at the instance of the purchaser -fright now this is the law! (never been appealed)

Implications:

  • Sale of securities is never statute barred!!!: When you combine fact that there is no statute bar and these exemptions are so flaky, want to cry b/c it’s real money. Whether you’re liable or not b/c you told them I don’t know, doesn’t help client relations if you lose. 

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