LITIGATION UNLEASHED - Stikeman Elliott

LITIGATION UNLEASHED 

A Guide to Ontario’s Proposed Secondary Market Liability Regime 

STIKEMAN ELLIOTT LLP 

CANADA’S GLOBAL LAW FIRM


A Guide to Ontario’s Proposed Secondary Market Liability Regime 

Prepared by the securities and litigation departments of Stikeman Elliott LLP, Litigation Unleashed is 

your guide to Ontario’s proposed statutory secondary market civil liability regime. Better known as 

“Bill 198”, Ontario’s legislation amends the Securities Act to make it easier for security holders to sue 

corporations, their directors, officers, advisors and spokespersons. In addition, the legislation gives 

the Ontario Securities Commission new authority to pursue cases of market manipulation and other 

forms of securities fraud, while increasing the maximum sanctions that the Commission can levy. 

Litigation Unleashed takes you through the legislation in simple, clear language. The key points are 

summarized in easy-to-read charts and the text of the amendments is included. 

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While every effort has been made to ensure the accuracy of this publication, it is a general overview only and does not constitute legal advice. 

For advice specific to your particular circumstances, please contact any office of Stikeman Elliott LLP. 

© Stikeman Elliott LLP July 2003

TABLE OF CONTENTS 

1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

1.1 WHAT IS BILL 198?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

1.2 PURPOSE OF THIS GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

1.3 CURRENT STATUS OF THE AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

1.4 ORGANIZATION OF THIS GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

2 THE NEW STATUTORY CIVIL LIABILITY REGIME: Who, when and how much? . . . . . 7 

2.1 OVERVIEW OF THE AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

2.1.1 Potential defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

2.1.2 Rights of action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

2.1.3 Leave of the court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

2.1.4 Defences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

2.1.5 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

2.2 CAUSES OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

2.2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

2.2.2 Documentary misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

2.2.3 Public oral misrepresentations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 

2.2.4 Failure to make timely disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 

2.2.5 Elements required to establish liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 

2.3 AVAILABLE DEFENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 

2.3.1 Due diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 

2.3.2 Safe harbour for forward-looking information . . . . . . . . . . . . . . . . . . . . . . . . . 19 

2.3.3 The plaintiff knew anyway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 

2.3.4 Material change confidentially disclosed to OSC . . . . . . . . . . . . . . . . . . . . . . . 20 

2.3.5 Reliance on experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 

2.3.6 Corrective action taken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 

2.3.7 Reliance on documents filed by other public companies . . . . . . . . . . . . . . . . . 21

2.4 DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 

2.4.1 The basic formulae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 

2.4.2 Proportionate liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 

2.4.3 Limiting damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 

2.5 OVERSIGHT OF STATUTORY CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 

3 THE OSC’S NEW POWERS: New offences, tougher sanctions . . . . . . . . . . . . . . . . . 27 

3.1 OVERVIEW OF ENFORCEMENT ALTERNATIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 

3.1.1 Enforcement options available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 

3.1.2 Violations recognized prior to the amendments . . . . . . . . . . . . . . . . . . . . . . . . 27 

3.1.3 New violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 

3.1.4 Making a misleading or untrue statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 

3.1.5 Market manipulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 

3.1.6 Fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 

3.2 SECTION 127 ENFORCEMENT SANCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 

3.2.1 Prior to the amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 

3.2.2 New sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 

3.2.3 Penalties and disgorgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 

3.3 SECTION 122 QUASI-CRIMINAL ENFORCEMENT SANCTIONS . . . . . . . . . . . . . . . . . . . 30 

4 TIPS: Preventive medicine, new rules, and responding to litigation . . . . . . . . . . . . . . . . . . . . 31 

4.1 ISSUERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 

4.2 DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 

4.3 AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 

4.4 ESTABLISHING DEFENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 

4.5 RESPONDING TO A FORMAL OR INFORMAL THREAT OF LITIGATION . . . . . . . . . . . . . 35 

5 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 

APPENDICES 

APPENDIX A: FULL TEXT OF THE MAJOR AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 39 

APPENDIX B: SUMMARY OF LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 

APPENDIX C: SUMMARY OF DEFENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 

APPENDIX D: CALCULATING DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 

APPENDIX E: LIMITS ON DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 

APPENDIX F: PROPOSED CORPORATE GOVERNANCE RULES . . . . . . . . . . . . . . . . . . . . . . . 75

1 INTRODUCTION 

1.1 What is Bill 198? 

Ontario’s recent Securities Act amendments are better known as “Bill 198”, after the legislation 

that is now officially called the Keeping the Promise for a Strong Economy Act (Budget Measures), 

2002. A more descriptive (and less political) title for the amendments might have been the 

Another Avenue for Shareholders to Sue Corporations and their Directors and Officers Act. The new 

legislation represents the Ontario legislature’s attempt to restore investor confidence, which is 

widely believed – though without any empirical evidence – to have been damaged by Enron, 

Worldcom and other recent U.S. and Canadian scandals. Bill 198 also constitutes part of 

Ontario’s response to the major U.S. legislative initiative known as the Sarbanes-Oxley Act. 

1.2 Purpose of this guide 

The purpose of this guide is to: 

• summarize the recent changes to the Securities Act; 

• highlight the possible implication of those changes for public companies and their 

officers, directors, major shareholders, influential persons and experts; 

• provide some practical tips for minimizing potential exposure to a successful lawsuit; and 

• summarize the corporate governance-related rules released for comment on 

June 27, 2003, by the OSC. 

We have sought to simplify this complex legislation as much as possible in order to supply 

you with a user-friendly reference source that draws your attention to the significant issues. 

In adopting this approach, we have consciously elected to avoid the often prolix and 

heavily qualified language normally associated with legal writing, with the necessary caveat 

that this guide needs to be read in that context. Instead, we have included a set of charts as 

a roadmap through the amendments for each capital market participant affected. Our 

corporate governance and securities litigation teams would be pleased to meet with you to 

help you design a customized response to this new legislation. 



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1.3 Current status of the amendments 

Although Bill 198 has been passed by the Ontario legislature, some of its measures – including 

the civil liability regime discussed below – are not yet in force. Moreover, a number of the 

provisions of Bill 198 are to be amended by Bill 41, a piece of legislation that has not yet been 

passed. In the discussion below, we collectively refer to all of these changes – whether passed, in 

force, or merely introduced into the legislature – as “the amendments”, and we have written 

about them as though they will come into force without further amendment. In addition, a 

number of related regulations remain in the planning stage. 

1.4 Organization of this guide 

The discussion is organized as follows: 

• This introduction (Part 1) 

• New statutory civil liability regime: who and when—and how much? (Part 2) 

• The OSC’s new powers (Part 3) 

• Preventive measures: tips on how to prevent and respond to litigation (Part 4) 

• Text of the legislation (Appendix A) 

• Charts illustrating liabilities, defences, damages formulae, and limits on damages 

(Appendices B, C, D and E) 

• Summary of the OSC’s proposed new corporate governance rules (Appendix F) 

6 LITIGATION UNLEASHED STIKEMAN ELLIOTT LLP

2 

THE 

NEW STATUTORY CIVIL LIABILITY REGIME: 

Who, when and how much? 

2.1 Overview of the amendments 

The following are brief descriptions of the most important aspects of the new liability regime, 

which are also summarized in the charts contained in the Appendices. 

2.1.1 Potential defendants 

The individuals and companies that may be exposed to liability by the 

amendments are described in the following chart (a fuller description is found 

in the Appendices): 

WHO? 

Responsible Issuer 

DESCRIPTION 

A “reporting issuer” or any other publicly-traded issuer with a “real and substantial 

connection to Ontario”, including a publicly-offered investment fund 

Director 

A director of either a “responsible issuer” or an “influential person” 

Officer 

An officer of either a “responsible issuer” or an “influential person” 

Investment Fund Manager 

Influential Person 

Expert 

Spokesperson 

A “person who has the power and exercises the responsibility to direct the affairs of an 

investment fund”. For the purpose of liability under the amendments, investment fund 

managers are generally classed as “influential persons” 

A “control person”, a “promoter”, an insider (who is not a director or senior officer of 

a responsible issuer) or an investment fund manager (if the responsible issuer is an 

investment fund) 

A “person or company whose profession gives authority to a statement made in a 

professional capacity by the person or company including, without limitation, an 

accountant, actuary, appraiser, auditor, engineer, financial analyst, geologist or lawyer” 

A person with “actual, implied or apparent authority to speak on behalf of a 

responsible issuer” or “on behalf of an influential person” 

2.1.2 Rights of action 

The Securities Act currently provides a statutory cause of action only to investors who 

purchase securities sold to them pursuant to a prospectus, offering memorandum or 

securities exchange take-over bid circular (commonly known as the “primary market”). 

The amendments will provide an additional statutory cause of action for investors who 

purchase or sell securities from third parties in the market (commonly known as the 

“secondary market”) by granting a right of action for: 



7

• a misrepresentation made by or on behalf of a responsible issuer in its disclosure 

documents or in public oral statements; and 

• a responsible issuer’s failure to make timely disclosure of a material change. 

In contrast to the common law cause of action for negligent misrepresentation, 

which requires each plaintiff to prove that it relied to its detriment on the alleged 

misrepresentation, the amendments will create a statutory right of action “without regard 

to whether” the purchaser or seller of securities relied on the alleged misrepresentation. 

That is, reliance is not required and not relevant. 

2.1.3 Leave of the court 

Although the amendments speak of a statutory “right” of action, the prospective 

plaintiff can commence a proceeding under these provisions only with the leave of the 

court. Leave will be granted only if the court is satisfied that: 

• the action is being brought in good faith; and 

• there is a “reasonable possibility” that the action will be resolved 

in favour of the plaintiff. 

2.1.4 Defences 

While the amendments create statutory causes of action, they also create a number of 

defences that may preclude liability or limit damages in certain situations. These 

defences, discussed in more detail in Section 2.3 below, include: 

• due diligence; 

• properly qualified forward-looking information; 

• plaintiff knew of material change or misrepresentation; 

• material change was confidentially disclosed to the OSC; 

• reasonable reliance on an expert; 

• corrective action taken; and 

• reasonable reliance on representations contained in a third party’s public filing. 

2.1.5 Damages 

The amendments include a set of formulae for the calculation of damages arising 

from a misrepresentation or failure to make timely disclosure of a material change. 

It is noteworthy that the amendments limit damages available under the new rights 

of action by providing for proportionate (i.e. not joint and several) liability and an 

overall cap on damages for specific categories of defendants in certain circumstances. 


2.2 Causes of action 

2.2.1 Introduction 

Investors will now have a statutory right of action where they acquired or disposed of 

securities while there was an uncorrected misrepresentation in a document or a public 

oral statement or while there was a failure to make timely disclosure of a material 

change as required by the Securities Act. 

This statutory right of action does not prevent an investor from suing for fraudulent 

or negligent misrepresentation or on any other basis that might be allowed for under 

the common law or under any other statutory scheme (e.g. a claim for oppression). 

Such alternative approaches could be taken separately or possibly in tandem with a 

proceeding under the Act. Similarly, the limitations on damages specified in the 

amendments are not applicable to common law causes of action. 

The statutory rights of action created by the amendments are summarized in chart 

form as Appendix B. 

In considering issues of liability under the provisions discussed below, it should be 

remembered that the amendments define “responsible issuer” to include publicly offered 

investment funds and “influential person” to include an investment fund manager. 

Also, note that purchasers or sellers of derivative securities, such as options, and 

guaranteed securities, also can seek damages. 

2.2.2 Documentary misrepresentation 

MEANING OF “DOCUMENT” 

“Document” is defined in the amendments to mean any written communication 

(including electronic communications): 

• required to be filed with the OSC (or which is not required but nevertheless filed 

with the OSC), a government securities or corporate agency or a stock exchange or 

similar marketplace; or 

• the content of which could reasonably be expected to affect the market price or value 

of the security of the issuer. 

This is an extremely broad provision that could apply to press releases, content on 

websites and marketing materials, among other things. 

WHEN A DOCUMENTARY MISREPRESENTATION OCCURS 

A documentary misrepresentation occurs when any of the following releases a 

document containing a misrepresentation: 

• a responsible issuer; 



9

• an influential person; or 

• a person or company with actual, implied or apparent authority to act on 

behalf of a responsible issuer or on behalf of an influential person. 

WHO CAN SUE 

A documentary misrepresentation creates a statutory right of action for damages in 

favour of anyone who acquires or disposes of an issuer’s securities during the period 

between the document’s release and the public correction of the misrepresentation, 

even if the misrepresentation did not influence the person’s decision to acquire or 

dispose of the security. 

WHO CAN BE SUED 

Who can be sued depends on whether the document containing the misrepresentation 

was released by the responsible issuer or by an influential person (including, in each 

case, a person or company with actual, implied or apparent authority to act on its behalf). 

Where document released by responsible issuer 

In the case of a misrepresentation contained in a document released by or on behalf of a 

responsible issuer, the list of parties against whom a statutory right of action may exist 

is as follows: 

• the responsible issuer; 

• its directors at the time of release (whether or not they authorized, permitted or 

acquiesced in the release); 

• any of its officers who authorized, permitted or acquiesced in the release; 

• each influential person, and each director and officer of an influential person, who 

– knowingly influenced the responsible issuer, or any person or company acting 

on its behalf, to release the document; or 

– knowingly influenced a director or officer of the responsible issuer to 

authorize, permit or acquiesce in the release of the document; and 

• each expert, where 

– the misrepresentation is also contained in a report, statement or opinion 

made by the expert, 

– the document includes, summarizes or quotes from the report, 

statement or opinion of the expert, and 

– if the document was released by a person other than the expert, 

the expert consented in writing to the use of the report, statement or 

opinion in the document. 


Where document released by influential person 

In the case of a misrepresentation contained in a document that relates to a 

responsible issuer released by or on behalf of an influential person, there may exist a 

statutory right of action for damages against: 

• the responsible issuer, if any of its directors or officers (or, if an investment fund, 

its manager) authorized, permitted or acquiesced in the release of the document; 

• any director or officer of the responsible issuer who authorized, permitted or 

acquiesced in the release of the document; 

• the influential person; 

• any director or officer of the influential person who authorized, permitted or 

acquiesced in the release of the document; and 




– the document includes, summarizes or quotes from the report, statement or 

opinion of the expert, and 

– if the document was released by a person other than the expert, 



2.2.3 Public oral misrepresentation 

MEANING OF “PUBLIC ORAL STATEMENT” 

A public oral statement is defined for the purposes of the new amendments to mean 

“an oral statement made in circumstances in which a reasonable person would believe 

that information contained in the statement will become generally disclosed”. 

Interestingly, the use of the term “generally disclosed” in this manner may affect 

traditional interpretations of these words. It may be that they can no longer be 

equated with the issuance of a press release. 

WHEN PUBLIC ORAL MISREPRESENTATION OCCURS 

A public oral misrepresentation occurs when a public oral statement: 

• relates to the business or affairs of a responsible issuer; 

• is made by one of the following: 

– a person with actual, implied or apparent authority to speak on behalf of the 

responsible issuer, 

– an influential person, or 

– a person with actual, implied or apparent authority to speak on behalf of the 

influential person; and 

• contains a misrepresentation. 



11

WHO CAN SUE 

As in the case of documentary misrepresentation, any person or company who acquired 

or disposed of the responsible issuer’s securities during the period between the time of 

the public oral statement and the time when the misrepresentation was publicly 

corrected has a statutory right of action for damages. 


Who can be sued depends on whether the public oral statement was made by a 

person with authority to speak on behalf of the responsible issuer or by an 

influential person (including, in the latter case, a person with actual, implied or 

apparent authority to speak on its behalf). 

Where statement made on behalf of responsible issuer 

In the case of a public oral statement containing a misrepresentation about a 

responsible issuer made by a person with actual, implied or apparent authority to 

speak on behalf of the responsible issuer, the list of parties against whom a statutory 

right of action for damages may exist is as follows: 



acquiesced in the making of the public oral statement; 

• the person who made the public oral statement; 

• each influential person, and each director and officer of an influential person, 

who knowingly influenced either the person who made the public oral statement to 

make the public oral statement or a director or officer of the responsible issuer to 

authorize, permit or acquiesce in the making of the public oral statement; and 




– the public oral statement includes, summarizes or quotes from the report, 


– if the public oral statement was made by a person other than the expert, 



Where statement made by influential person 

In the case of a public oral statement containing a misrepresentation about a 

responsible issuer made by an influential person, or on its behalf by a person with 

actual, implied or apparent authority to do so, there may exist a statutory right of 

action for damages against: 

• the responsible issuer, if any of its directors or officers (or, if an investment 

fund, its manager) authorized, permitted or acquiesced in the making of 

the public oral statement; 



acquiesced in the making of the public oral statement; 

• the person who made the public oral statement; 

• the influential person; 

• any director or officer of the influential person who authorized, permitted or 

acquiesced in the making of the public oral statement; and 




– the public oral statement includes, summarizes or quotes from the report, 


– if the public oral statement was made by a person other than the expert, the 

expert consented in writing to the use of the report, statement or opinion in 

the public oral statement. 

Where a person making a public oral statement containing a misrepresentation about 

the responsible issuer has done so with apparent but not implied or actual authority 

of either an influential person or the responsible issuer to do so, only that person is 

potentially liable in respect of trades between the time of his or her public oral 

statement and the public correction of that statement. Nevertheless, any other person 

who could have been liable had the “rogue” spokesperson been fully authorized to 

make the misleading statement will still be potentially liable for any trades that took 

place after that other person became, or should reasonably have become, aware of the 

rogue spokesperson’s misrepresentation (and before the public correction). 

2.2.4 Failure to make timely disclosure 

WHEN FAILURE TO MAKE TIMELY DISCLOSURE OCCURS 

Failure to make timely disclosure occurs when the responsible issuer fails “to disclose a 

material change in the manner and at the time required” under the Securities Act. 

Under the Act, reporting issuers are generally required to disclose material changes 

forthwith by press release and a material change report. Confidential filings are 

permitted in certain circumstances for a limited period of time. 

WHO CAN SUE 

A person or company who acquires or disposes of the issuer’s securities between 

the time when the material change was required to be disclosed and its subsequent 

disclosure has a statutory right of action for damages. 



13


A right of action for failure to make timely disclosure exists against: 



acquiesced in the failure; 

• any influential person and any director or officer of an influential person who 

knowingly influenced the responsible issuer, or any person or company acting on its 

behalf, in the failure to make timely disclosure; and 

• any influential person and any director or officer of an influential person who 

knowingly influenced a director or officer of the responsible issuer to authorize, 

permit or acquiesce in the failure to make timely disclosure. 

2.2.5 Elements required to establish liability 

The plaintiff is required to establish a number of elements in order to establish liability. 

These elements will vary depending on the class of possible defendant and the nature of 

the claim. The following is a summary of the elements that a plaintiff needs to prove 

in order to establish liability for each type of defendant. In each case, potential liability 

is subject to the available defences discussed in Section 2.3 (which are also summarized 

in Appendix C). 

RESPONSIBLE ISSUERS 

Core documents and failures to make timely disclosure 

The responsible issuer will be potentially liable upon mere proof of the 

misrepresentation for any loss caused to an investor who traded securities of the 

reporting issuer during the period in which the misrepresentation contained in a 

“core document” remained publicly uncorrected. Similarly, it will be potentially 

liable upon mere proof of a failure to make timely disclosure of a material change. 

Essentially, core documents are those documents that are filed with the securities 

regulator in accordance with the issuer’s statutory obligation. These are: a prospectus, 

a take-over bid circular, an issuer bid circular, a directors’ circular, a rights offering 

circular, management’s discussion and analysis, an annual information form, an 

information or proxy circular, annual financial statements, interim financial statements 

and (in most cases, with the notable exception of directors) material change reports. 

Non-core documents and public oral statements 

The requirements for the plaintiff to establish liability of a responsible issuer related to 

disclosure in non-core documents and public oral statements are more onerous. The 

plaintiff must also demonstrate: 

• advance knowledge that the statement or document contained a misrepresentation; 

• deliberate avoidance of such knowledge; or 

• gross misconduct 


on the part of the issuer. Gross misconduct can be either an action or a failure to act “in 

connection with the failure to make timely disclosure”. The amendments specify a list of 

criteria for deciding whether conduct is “gross misconduct”. See Section 2.3.1 below. 

DIRECTORS 

Core documents 

Directors will be potentially liable upon mere proof of the misrepresentation for any 

loss caused to an investor who traded securities of the responsible issuer during the 

period in which a misrepresentation contained in a core document remained 

publicly uncorrected. 

Material change reports are not considered core documents for directors. 

Non-core documents, public oral statements and failure to make timely disclosure 

The requirements for the plaintiff to establish liability of a director related to disclosure 

in non-core documents and public oral statements are more onerous. The plaintiff must 

also demonstrate: 

• advance knowledge of the misrepresentation; 



on the part of the director. 

With respect to a failure to make timely disclosure of a material change, knowledge of 

the director must have been as of the time the failure to disclose first occurred, and 

must be knowledge of the change and that it was a material change. Deliberate 

avoidance of knowledge relates to the period of time leading up to the time the failure 

first occurred. 

OFFICERS 

Core documents and failure to make timely disclosure 

Plaintiffs asserting a claim against officers of the responsible issuer with respect to core 

documents must establish, in addition to proving the existence of the 

misrepresentation, that the officers authorized, permitted or acquiesced in the release of 

the core document in order to establish liability for the losses suffered during the 

relevant period. Similarly, a plaintiff must prove that an officer authorized, permitted 

or acquiesced in the failure to make timely disclosure of a material change. 

Non-core documents and public oral statements 

The requirements for the plaintiff to establish liability of an officer related to disclosure 

in non-core documents and public oral statements are more onerous. The plaintiff must 

also establish: 

• advance knowledge of the misrepresentation; 



15



on the part of the officer. 

INFLUENTIAL PERSONS 

Who they are 

An influential person can be a “control person”, a “promoter” or an insider other than an 

insider who is a director or “senior officer” of an issuer. “Control person” is defined in the 

amendments as a person or company who holds a sufficient number of voting rights 

attached to all outstanding voting securities of an issuer to affect materially the control of the 

issuer. There is a presumption that this is the case where the person’s or company’s holding 

exceeds 20% of the voting rights attached to all outstanding voting securities of an issuer. 

Note that the provision, including the presumption for holdings in excess of 20%, also 

applies to any persons or companies acting in concert (“by virtue of an agreement, 

arrangement, commitment or understanding”), where such persons or companies hold in 

total a sufficient number of voting rights to materially affect control of the issuer. 

Core documents 

Influential persons and their officers and directors who “knowingly influence”: 


• any person acting on behalf of the responsible issuer; or 

• a director or officer of the responsible issuer 

to release the core document (in the first two cases) or to authorize, permit or acquiesce 

in the release of the core document (in the third case), are potentially liable for 

misrepresentations contained in the core document. 

Non-core documents, public oral statements and failure to make timely disclosure 

The requirements for the plaintiff to establish liability of an influential person or its 

directors and officers for a misrepresentation made in a non-core document or public 

oral statement released by the issuer, or the issuer’s failure to make timely disclosure of 

a material change, are more onerous. The plaintiff must establish: 

• advance knowledge of a misrepresentation or failure to disclose 

a material fact; 



on the part of an influential person. 


Documents and public oral statements of an influential person 

In addition, influential persons may also be held liable if the plaintiff establishes that they 

(or a person or company on their behalf) released a document or made a public oral 

statement that “relates to a responsible issuer and that contains a misrepresentation”. Any 

director or officer of an influential person who “authorized, permitted or acquiesced” in the 

release of such a document or the making of the public oral statement may be liable as well. 

However, in all these cases, the plaintiff must also establish that the influential person, 

director or officer: 

• had advance knowledge of the misrepresentation; 

• deliberately avoided obtaining such knowledge; or 

• engaged in gross misconduct. 

EXPERTS 

Experts are potentially liable where: 

• a core or non-core document containing a misrepresentation, or 

• a public oral statement containing a misrepresentation 

is released or made by the issuer (or a person with actual, implied or apparent 

authority to release the document or to speak on behalf of the issuer), if each of the 

following is also true: 

• the misrepresentation is also contained in a report, statement or opinion 

made by the expert; 

• the document or public oral statement includes, summarizes or quotes from the 

report, statement or opinion of the expert; and 

• the expert either released the document or made the statement itself or consented in 

writing to the use of the report, statement or opinion in the document or public 

oral statement. 

Experts cannot be held liable under these provisions for a failure to make timely disclosure. 

SPOKESPERSONS 

Spokespersons represent an additional category of potential defendants who do not fit 

into any of the other enumerated categories. They are potentially liable where they 

make a public oral statement relating to the responsible issuer while having actual, 

implied or apparent authority to speak on behalf of that issuer or an influential person. 

The plaintiff would have to prove, however, that the spokesperson: 

• knew, at the time that the public oral statement was made, that it contained 

the misrepresentation; 

• deliberately avoided acquiring such knowledge; or 



17

• was, through action or failure to act, guilty of gross negligence in connection 

with the release of the document or the making of the public oral statement that 

contained the misrepresentation. 

2.3 Available defences 

The amendments create a number of statutory defences which may, if established, protect a 

defendant from a finding of liability. These defences are set out in chart form in Appendix C. 

2.3.1 Due diligence 

Any defendant can avoid liability for a misrepresentation (or failure to make timely 

disclosure) by proving that, before the document was released, or the public oral 

statement was made (or the failure to make timely disclosure first occurred) it had 

“conducted or caused to be conducted a reasonable investigation” and that at the time 

of the release of the document or of the making of the statement (or of the failure to 

make timely disclosure), it “had no reasonable grounds to believe” that the document 

or public oral statement contained the misrepresentation (or that the failure to make 

timely disclosure would occur). 

The court’s determination of whether an investigation was “reasonable” is to be based 

on a number of factors set out in the amendments. These factors are the same criteria 

to be used by the court in deciding whether a defendant’s behaviour constituted 

“gross misconduct”, namely: 

• the nature of the responsible issuer; 

• the knowledge, experience and function of the person or company; 

• the office held, if the person was an officer; 

• the presence or absence of another relationship with the responsible issuer, if the 

person was a director; 

• the existence, if any, and the nature of any system designed to ensure that the 

responsible issuer meets its continuous disclosure obligations; 

• the reasonableness of reliance by the person or company on the responsible issuer’s 

disclosure compliance system and on the responsible issuer’s officers, employees and 

others whose duties would in the ordinary course have given them knowledge of the 

relevant facts; 

• the period within which disclosure was required to be made under the applicable law; 

• in respect of a report, statement or opinion of an expert, any professional standards 

applicable to the expert; 

• the extent to which the person or company knew, or should reasonably have known, 

the content and medium of dissemination of the document or public oral statement; 

• in the case of a misrepresentation, the role and responsibility of the person or 

company in the preparation and release of the document or the making of the public 

oral statement containing the misrepresentation or the ascertaining of the facts 

contained in that document or public oral statement; and 


• in the case of a failure to make timely disclosure, the role and responsibility of the 

person or company involved in a decision not to disclose the material change. 

Disclosure compliance procedures designed to ensure that a matter that ought to be 

disclosed comes to the attention of management (and, where appropriate, the board of 

directors) in a timely manner may assist greatly in satisfying the requirements of this 

defence and are therefore highly recommended. 

2.3.2 Safe harbour for forward-looking information 

DOCUMENTS 

A person or company is not liable for a misrepresentation in forward-looking 

information in a document if: 

• the document contains “reasonable cautionary language” identifying the 

forward-looking information as such and identifying material factors that could 

cause actual results to differ materially from a conclusion, forecast or projection 

in the forward-looking information; 

• the document states the material factors or assumptions that were applied in 

drawing a conclusion or in making a forecast or projection set out in the 

forward-looking information; 

• the cautionary language and statement of material factors and assumptions applied 

appear proximate to the forward-looking information; and 

• the person or company had a reasonable basis for drawing the conclusions or making 

the forecast or projection. 

The amendments define “forward-looking information” as all “disclosure regarding 

possible events, conditions or results of operations, 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 whether as a forecast or projection”. 

The limitation on liability for forward-looking information extends to forwardlooking 

information contained in a prospectus, offering memorandum or circular 

(as defined in the Securities Act), with the exception of (i) financial statements, 

and (ii) forward-looking information in documents released in connection with 

an initial public offering. 

PUBLIC ORAL STATEMENTS 

In the case of a claim concerning public oral statements containing forward-looking 

information, the “cautionary language” requirement is satisfied where the person 

making the statement provides the following cautionary information: 

• that the oral statement contains forward-looking information; 

• that the actual results could differ materially from a conclusion, forecast or 

projection in the forward-looking information; and 



19

• that certain material factors or assumptions were applied in drawing a conclusion 

or making a forecast or projection included in the forward-looking information. 

Having done this, the person must then direct his or her listeners to additional 

information contained in a “readily-available document” or part of a document. 

For the purposes of the Act, a document filed with the OSC counts as a 

“readily-available document”. 

2.3.3 The plaintiff knew anyway 

No liability will attach to a defendant with respect to a misrepresentation or a failure to 

make timely disclosure if the defendant can prove that the plaintiff acquired or 

disposed of the issuer’s security (i) “with knowledge” that the document or public oral 

statement contained a misrepresentation or (ii) “with knowledge” of the material 

change, as applicable. 

2.3.4 Material change confidentially disclosed to OSC 

There is no liability for failing to make timely disclosure if: 

• the defendant proves that the material change was disclosed in a material change 

report filed with the OSC on a confidential basis; 

• the issuer had a reasonable basis for making the disclosure on a confidential basis; 

• public disclosure of the material change was made promptly when the basis for 

confidentiality ceased to exist; 

• no document was released and public oral statement was made during the 

confidential filing period that contained a misrepresentation due to the undisclosed 

material change; and 

• where the material change became publicly known in a manner other than the 

manner required under the Securities Act, the issuer publicly disclosed the material 

change promptly. 

2.3.5 Reliance on experts 

No liability will attach to a defendant with respect to any part of a document or public 

oral statement that includes, summarizes or quotes from a report, statement or opinion 

made by the expert if the expert has provided its written consent to the use of the 

report, statement or opinion. The defence is not available to the expert on whom 

reliance was placed. 

A defendant cannot use this defence if it knew or had reasonable grounds to believe 

that there was a misrepresentation or if the disclosure did not “fairly represent” the 

expert’s report, statement or opinion. 


2.3.6 Corrective action taken 

Potential defendants, other than responsible issuers, are not liable with respect to 

misrepresentations and failures to make timely disclosure made without their knowledge 

or consent if they take prompt corrective action by promptly advising the board of 

directors of the responsible issuer of the misrepresentation or failure and, if no correction 

or disclosure is made within two business days, promptly advising the OSC in writing of 

the misrepresentation or failure. Defendants who are prohibited by law or professional 

confidentiality rules from disclosing this information to the OSC are not required to 

make disclosure to the OSC in order to satisfy the defence. 

2.3.7 Reliance on documents filed by other public companies 

There is no liability for an oral or documentary misrepresentation where the defendant 

proves that: 

• the misrepresentation was also contained in a document filed by or on behalf of 

another person or company, other than the responsible issuer, with the OSC or any 

other securities regulator in Canada, or with any stock exchange, without having 

been subsequently corrected, prior to the defendant’s repetition of the 

misrepresentation, by filing a correction with the relevant regulator or exchange; 

• the defendant’s document or public oral statement contained a reference identifying 

the document that was the source of the misrepresentation; and 

• when the document was released or the public oral statement was made, the person 

or company did not know and had no reasonable grounds to believe that the 

document or public oral statement contained a misrepresentation. 

The amendments refer to this as derivative information. 

2.4 Damages 

Under the amendments, persons who acquire or dispose of an issuer’s securities while there is an 

uncorrected misrepresentation, or a failure to disclose a material change on a timely basis, may 

recover damages. The damages available are limited in three ways: 

• The damages must be calculated in accordance with the formulae set out in the amendments. 

• The court is required to fix the proportionate share of those damages payable by each defendant 

found liable, recovery against each defendant being limited, subject to certain exceptions, to its 

respective share of the total damages assessed for all plaintiffs after applying the formulae. 

• The amount payable by each particular defendant found liable may be further limited, 

again subject to certain exceptions, to various liability limits specific to each 

category of defendant. 

These three limitations are discussed in the following subsections. 



21

2.4.1 The basic formulae 

The amendments set out two basic formulae for the computation of damages. One 

formula applies to plaintiffs who acquired securities during the period of an uncorrected 

misrepresentation or failure to disclose a material change and paid too much as a result. 

The other formula applies to plaintiffs who sold their securities during such a period for 

too little. (For example, in the first case, the acquisition price may have been too high 

as a result of an overly optimistic misrepresentation, while in the second, the disposition 

price may have been too low as a result of an excessively pessimistic one.) 

WHERE AN ACQUIRING PLAINTIFF PAID TOO MUCH 

Where security holders paid too much for their securities during the period of an 

uncorrected misrepresentation or failure to disclose a material change, the relevant 

concepts are as follows: 

• The purchase period: the period between the occurrence of the misrepresentation or 

failure to disclose a material change and its correction; 

• The ten trading day period: the period immediately after the correction of the 

misrepresentation or failure to disclose a material change; 

• Purchase price: symbolized in the formulae below as P; 

• Actual disposition price: the price at which the plaintiff actually sold its securities 

subsequent to the correction of the misrepresentation or failure to disclose a material 

change (ADP); and 

• Benchmark price: the trading price during the ten trading day period (BP). 

Subject to the damages limits discussed in Section 2.4.3 below, damages (D) are 

determined by reference either to plaintiff’s actual loss (P – ADP) or to a more 

objective loss figure, calculated as (P – BP). The damages formulae provided for under 

the amendments where an investor purchases securities during the purchase period are 

as follows: 

• For securities disposed of during the ten trading day period after the correction is 

made public, D = P – ADP (i.e. plaintiff’s actual loss) 

• For securities disposed of thereafter, D = P – the greater of BP and ADP (i.e. the 

lesser of the objective loss and the plaintiff’s actual loss) 

• For securities not disposed of at all, D = P – BP (i.e. the objective loss) 

WHERE A SELLING PLAINTIFF RECEIVED TOO LITTLE 

There is also a parallel set of calculations for cases in which security holders sold their 

securities for too low a price during the period of an uncorrected misrepresentation or 

failure to disclose a material change. The applicable concepts in such a case are virtually 

identical to those that apply in the first type of case. To put it briefly, selling security 

holders who repurchase the securities within the ten trading day period can recover 

their actual loss, i.e. the shortfall between the price at which the securities were sold and 


the price paid to repurchase them. Those who repurchase the securities after the ten 

trading day period can recover the lesser of their actual loss and the objective loss (the 

latter being defined as the shortfall between the price at which the securities were sold 

and the benchmark price set out above). Those investors who do not repurchase the 

securities following a correction can recover the objective loss. In all cases, these 

potential recoveries are subject to the damages limits discussed in Section 2.4.3 below. 

WHERE LOST VALUE WAS CAUSED BY AN EXTRANEOUS FACTOR 

In either case, the defendant is not responsible for paying damages with respect to lost 

value that it can prove was unrelated to the misrepresentation or failure to make timely 

disclosure of a material change. 

These formulae are set out in chart form in Appendix D. 

2.4.2 Proportionate liability 

After assessing the damages payable in favour of the plaintiffs pursuant to the formulae 

set out in the amendments, the court hearing the matter is next required to determine 

the portion of those damages that corresponds to each defendant’s respective 

responsibility for the damages. Thus, it would be expected that the court would assign 

a percentage of liability to each defendant found liable. 

Consequently, the amendments contemplate that each defendant would be required 

only to pay up to that portion of the plaintiffs’ aggregate damage award fixed by the 

judge, subject to the further liability limits discussed below. 

This constitutes a departure from the concept of joint and several liability usually 

applied by judges in assessing damages at common law. A judge typically fixes the 

relative proportion of liability for each defendant. He or she also normally allows the 

plaintiff to recover the full amount of the plaintiffs’ aggregate damage award from any 

of the defendants, thereby exposing each defendant found liable to any degree to the 

risk that it will have to pay the entire judgment and then seek to recover the 

contribution of their respective shares from other co-defendants. In the event that 

some of the defendants found liable are not creditworthy, the “deep pocket” defendant 

can be left exposed to pay amounts well in excess of its share. 

This “proportionate liability” limitation on defendants’ liability to pay the 

aggregate amount of damages assessed in favour of the plaintiffs will not be 

available to any defendant, other than the responsible issuer, that “authorized, 

permitted or acquiesced in the making of the misrepresentation or the failure to 

make timely disclosure of a material change”. Such a defendant would be liable 

to pay the full amount of damages assessed in favour of the plaintiff, as calculated by 

the formulae. In such circumstances, the paying defendant may seek to recover a 

contribution from the other defendants in accordance with their respective shares 

of liability and subject to their individual liability limits discussed below. 



23

2.4.3 Limiting damages 

In addition to the limitations inherent in the formulae and the fixing of proportionate 

liability discussed above, damages available pursuant to the new statutory rights of action as 

against individual defendants are, absent knowledge, subject to specific liability limits. 

The amendments do not limit or affect damages that might be available under common 

law claims, nor do they purport to affect the application of joint and several liability 

with respect to such claims. 

WHERE THERE WAS NO KNOWLEDGE 

Absent knowledge on the part of a defendant of the misrepresentation or failure to 

make timely disclosure of a material change (at the time of the misrepresentation or 

failure to make timely disclosure), the following liability limits apply with respect to the 

new statutory rights of action: 

• for a responsible issuer or an influential person who is not an individual, the 

greater of 5% of the responsible issuer’s market capitalization and $1 million; 

• for directors and officers of responsible issuers and influential persons who are 

individuals, the greater of $25,000 and 50% of the prior 12 months’ compensation 

received by them from the responsible issuer and its affiliates; 

• for directors and officers of an influential person, the greater of $25,000 

and 50% of the prior 12 months’ compensation received from the influential person 

and its affiliates; 

• for persons that made public oral statements with actual, implied or apparent 

authority that attracted liability (excluding the responsible issuer, its directors and 

officers, influential persons, directors and officers of influential persons or experts) 

the greater of $25,000 and 50% of the prior 12 months’ compensation received from 

the responsible issuer and its affiliates; and 

• for experts, the greater of $1,000,000 and the prior 12 months’ revenues received 

from the issuer and its affiliates. 

These limits are set out in chart form in Appendix E. 

WHERE THERE WAS KNOWLEDGE 

If the plaintiff can establish knowledge of either the misrepresentation or failure to 

make disclosure of a material change by a defendant, these caps on damages cease to 

be available. 

PRECAUTIONS 

Because the extent of damages that can be recovered will in many cases depend on 

whether knowledge can be established, it can be expected that a disproportionate 

number of proceedings will be commenced with allegations that at least some of 

the defendants knowingly breached their disclosure obligations. Therefore, at all 


stages of the proceeding, including at the application for leave to commence the 

proceeding, a key evidentiary issue will be the subjective knowledge of the named 

defendants. Individual defendants may need separate counsel, and may be able to 

greatly enhance their positions on this key issue by the precautions of taking notes 

and maintaining files with respect to their involvement with the issuer. In addition, 

draft minutes for meetings attended should be reviewed in detail when circulated 

and clarifications should be suggested in writing on a timely basis. 

2.5 Oversight of statutory claims 

In the United States, the availability of class proceedings on behalf of secondary market investors 

has encouraged what are sometimes called strike suits. A strike suit typically takes the form of a 

class proceeding commenced strategically at the drop of an issuer’s stock price with a view to 

“economic intimidation”. It is intended to compel the issuer into a quick settlement. 

The amendments have been drafted with a view to curtailing the risk of a proliferation of 

strike suits in Ontario. The following provisions reflect this: 

• The plaintiff can commence a proceeding only with leave of the court. 

• The court will grant permission only if the plaintiff satisfies it that 

– the action is being brought in good faith, and 

– there is a reasonable possibility that the plaintiff will succeed. 

• The leave hearing to commence a proceeding will thus involve the consideration of affidavit 

evidence from both the plaintiffs and the defendants as part of a preliminary merits test. 

• Parties who swear affidavits in support of their position on the motion for leave to commence a 

proceeding may be cross-examined. 

• The costs of bringing a motion for leave to commence a proceeding, including the 

potentially burdensome costs of extensive cross-examinations, may act as a partial check 

against frivolous claims. 

• The court has the power to award costs against an unsuccessful plaintiff (although the amount 

of these costs remains at the court’s discretion). 

• The court must approve any settlement reached or discontinuance, as appropriate in the 

circumstances. 

• The plaintiff must notify the OSC at each stage and the OSC will have opportunities to 

intervene. For example: 

– a copy of the application for leave to proceed and any supporting affidavits must be 

filed with the OSC at the time application is filed with court, 

– if leave is granted to proceed, the plaintiff must issue a press release and file it with 

the OSC, and 

– the plaintiff must file the statement of claim with the OSC when it is filed with 

the court. 



25

3 

THE 

OSC’S NEW POWERS: 

New offences, tougher sanctions 

In addition to the creation of the statutory rights of action described above, the amendments 

create additional offences under the Securities Act which may be prosecuted by the OSC and 

increase the availability of sanctions for non-compliance with the Securities Act. 

3.1 Overview of enforcement alternatives 

3.1.1 Penalties and disgorgement 

In its mandate to enforce requirements of the Securities Act and to protect the integrity of 

the capital markets, the OSC has at least three distinct enforcement routes: 

• Section 122: gives the Ontario Court of Justice a quasi-criminal jurisdiction to consider 

offences under the Securities Act; 

• Section 127: the OSC enforcement staff’s most commonly used enforcement route, 

which provides an OSC panel with administrative jurisdiction to conduct hearings and 

make determinations regarding non-compliance with the Securities Act as well as a variety 

of remedies; and 

• Section 128: the least-used enforcement route, which allows OSC enforcement staff to 

bring a quasi-civil proceeding before the Ontario Court of Justice seeking a declaration 

that there has been a breach of securities law. 

In addition to the enforcement remedies contained in the Securities Act, the Criminal Code 

contains provisions that are available in serious cases to prosecute wrongdoers for such 

crimes as conspiracy, market manipulation and fraud. 1 

3.1.2 Violations recognized prior to the amendments 

Prior to the amendments, s. 122 proceedings could be commenced for the offences of: 

• making a materially misleading or untrue statement to the OSC or to staff of the OSC, 

• making materially misleading or untrue statements in documents required to be 

furnished or filed under Ontario securities law with the OSC, or 

• contravening Ontario securities law (the “basket clause”). 

Prior to the amendments, s. 127 allowed the OSC to make orders where a person or 

company was found to have either: 

• failed to comply with Ontario securities law; or 

• acted in a manner inconsistent with the public interest (even though he, she or it had 

complied with Ontario securities law). 

Prior to the amendments, s. 128 allowed the OSC to apply to the Court for a declaration 

that a person or company has not, or is not, complying with Ontario securities law. 

1 

Criminal Code, ss. 380(1), 380(2) and 382. 



27

3.1.3 New violations 

The amendments give the OSC three new express violations on which to base a 

prosecution before the court under s. 122 or s. 128, or a proceeding before the 

Commission under s. 127: 

• making a materially misleading or untrue statement that would reasonably be 

expected to have a significant effect on the market price or value of a security; 

• market manipulation; or 

• securities fraud. 

Prior to these amendments, which came into force April 7, 2003, most s. 127 enforcement 

proceedings involving the conduct specifically caught by the new offences might have been 

proceeded with under the OSC’s general jurisdiction to remedy misconduct that was 

contrary to the public interest, or potentially for violating the law or making a misleading or 

untrue statement in a filed document or to the OSC. 

3.1.4 Making a misleading or untrue statement 

THE PROVISION (s. 126.2) 

Under this new provision, it is an offence for a person or company to make a statement 

that the person or company knows or reasonably ought to know: 

• is misleading or untrue or is missing a fact that is required to be stated or that is 

necessary to make the statement not misleading; and 

• would reasonably be expected to have a significant effect on the market price or value 

of a security. 

Section 126.2 applies to all statements, whether written or oral. 

DIRECTORS’ AND OFFICERS’ OFFENCES 

Where an issuer is alleged to have made a misleading or untrue statement, any director 

or officer who authorized, permitted or acquiesced in the making of the statement may 

be the subject of proceedings, whether or not any proceeding has been commenced 

against the company. 

3.1.5 Market manipulation 

THE PROVISION (s. 126.1 (a)) 

It is an offence under this new provision for a person or company to “directly or 

indirectly, engage or participate in any act, practice or course of conduct relating to 

securities or derivatives of securities that the person or company knows or reasonably 

ought to know results in or contributes to a misleading appearance of trading activity 

in, or an artificial price for, a security or derivative of a security”. 



Where an issuer has committed the offence of market manipulation, any director or 

officer who has authorized, permitted or acquiesced in that conduct may also be held 

liable, whether or not any proceeding has been commenced against the company. 

3.1.6 Fraud 

THE PROVISION (s. 126.1 (b)) 

It is a violation of this new provision for a person or company to “directly or indirectly, 

engage or participate in any act, practice or course of conduct relating to securities or 

derivatives of securities that the person or company knows or reasonably ought to know 

perpetrates a fraud on any person or company”. 

PROVING CLAIMS 

Unlike the typical criminal standard for proving fraud, the fraud offence requires only 

that the respondent/accused have performed some act “either directly or indirectly” that 

he or she knows or reasonably ought to have known would dishonestly negatively 

impact another person. 

This means that a party may be guilty of “fraud” even though it had not known that 

the conduct in question was fraudulent. This negligent fraud concept is unusual and 

appears to depart from the common law requirement that an individual must have 

knowledge of the wrongdoing for a finding of fraud. 


Where an issuer has committed the offence of fraud, any director or officer who has 

authorized, permitted or acquiesced in that conduct may also be held liable, whether or 

not any proceeding has been commenced against the company. 

3.2 Section 127 enforcement sanctions 

3.2.1 Prior to the amendments 

Prior to the amendments, the sanctions under a s. 127 proceeding included prohibiting 

a respondent from: 

• trading in securities in Ontario; 

• acting as a director or officer of a corporation in Ontario; or 

• being registered to trade in or give advice with respect to the trading of securities in Ontario. 

An unsuccessful respondent in a s. 127 proceeding could also be: 

• reprimanded; 

• ordered to resign their position as officer or director of an issuer; and 



29

• ordered to pay the OSC’s costs of the investigation and the costs of or 

related to the hearing. 

3.2.2 New sanctions 

The amendments also give the OSC two new administrative sanctions under a 

s. 127 proceeding. It may: 

• levy an “administrative penalty” of up to $1 million (for each violation of securities 

law); and 

• order the disgorgement of profits made as a result of a violation of securities law. 

The amendments, which came into force April 7, 2003, give the Minister of Finance 

of Ontario the right to establish guidelines respecting the allocation of money received 

by the OSC under these sanctions or pursuant to settlement agreements arrived at with 

the Commission. 

3.2.3 Penalties and disgorgement 

Fines and disgorgement are not, strictly speaking, new sanctions. There is a history of 

settlement agreements between OSC enforcement staff and respondents that have 

resulted in orders of this sort. What is new is the OSC’s authority to impose fines or 

disgorgement in the absence of a settlement agreement. 

3.3 Section 122 quasi-criminal enforcement sanctions 

Under s. 122 of the Securities Act, the OSC can assume the role of prosecutor and has the 

authority to charge a person or company contravening Ontario securities law with an offence that 

is prosecuted before the provincial courts pursuant to the Provincial Offences Act. A finding of guilt 

under s. 122 can lead to a penalty of imprisonment. The prerequisite for a s. 122 proceeding is 

that there must have been an express breach of an Ontario securities laws. It is not sufficient 

for there to have been “conduct contrary to the public interest”. 

Under a s. 122 proceeding, the amended court sanctions include: 

• a maximum court-imposed fine of up to $5 million; and/or 

• a maximum jail term of five years less a day (which is, notably, one day short of the time 

required for the constitutional protections of a jury trial). 

Section 127 proceedings are significantly more common than s. 122 prosecutions because 

findings of securities law breaches are likely easier to obtain for OSC staff in an administrative 

setting (with a lower burden of proof) than in the quasi-criminal setting of a s. 122 proceeding. 


4 TIPS: 

Preventive medicine, new rules and responding to litigation 

4.1 Issuers 

On April 7, 2003, rule-making authority was conferred on the OSC with respect to the 

establishment of various Sarbanes-Oxley-type standards and procedures, and the OSC was 

also granted the power to initiate reviews of continuous disclosure practices. 

The OSC has released for public comment some “made in Canada” Sarbanes-Oxley-type 

standards and procedures. These standards and procedures propose to: 

• require fully independent audit committees, with their composition, qualifications (including 

financial literacy) and responsibilities prescribed by the OSC; 

• require audit firms to be members in good standing of the new Canadian Public 

Accountability Board; and 

• require certification from the CEO and CFO with respect to annual and interim financial 

statements and other filings, as well as with respect to the reasonableness of internal controls. 

For further information, see Appendix F. 

The new statutory rights of action created by the amendments are subject to a number of 

defences. Public companies and those associated with them can enhance the possibility that they 

will be able to rely on these defences by adopting and carefully following individually designed 

compliance procedures, in addition to those needed to make the certifications that will now be 

required by law. Of course, improved compliance will also make litigation less likely, thus 

creating a “virtuous circle”. 

Compliance procedures may include the steps outlined in the following paragraphs. 

CORPORATE DISCLOSURE POLICY 

Each public company should establish, or review and enhance, a corporate disclosure policy 

to provide a process for disclosure and promote an understanding of the legal requirements 

among its directors, officers and employees. The policy should: 

• be practical and individually tailored; 

• be regularly updated; 

• comply with National Policy 51-201 of the Canadian Securities Regulators; and 

• address the following matters: 

– materiality decisions, 

– analysts’ reports, 

– earnings announcements, 



31

– analyst calls and meetings, 

– prohibiting selective disclosure, 

– the use of electronic media (including e-mail, chat rooms and bulletin boards), 

– postings on the corporate website, 

– the use of forward–looking information, 

– the involvement of the board and/or board committees, 

– dealing with unintentional selective disclosure, 

– reacting to rumours, 

– authorized spokespersons, 

– “quiet periods”, and 

– unless covered in the insider trading policy, trading restrictions. 

In addition, educational seminars may be desirable. 

DISCLOSURE COMPLIANCE SYSTEM 

Each public company should review and improve, or develop, a disclosure compliance system 

and procedures designed to seek to ensure that material information concerning the company’s 

affairs is brought to the attention of those in charge of its public disclosure. These procedures 

should seek to ensure the correctness of disclosure documents, as well as press releases, website 

postings and other corporate disclosures, including speeches and other oral presentations. These 

procedures may include, for example: 

• questionnaires; 

• due diligence sessions; 

• internal certification requirements; 

• de-briefings; 

• involvement of or review by experienced legal counsel; 

• the involvement of a board-level disclosure committee; 

• circulation to directors of all disclosures; and 

• the investigation of allegations made by “whistle-blowers”. 

Procedures will vary substantially by issuer, to reflect each issuer’s operations, and should be as 

practical as possible. In many cases, there may be procedures already in place, but they may not 

have been documented. Among other things, all significant proposed acquisitions, restructurings 

or dispositions, as well as other material corporate decisions, intellectual property developments, 

changes in union relationships, legal proceedings, and signings or terminations of significant 

contracts should be reviewed, perhaps more rigorously than in the past, for disclosure purposes. 

This may perhaps lead to more frequent confidential material change reports at an earlier stage. 

Again, education and training may be desirable. 


Disclosure procedures should strive to: 

• familiarize company personnel with material change reports and the confidential material 

change report process, which may be used substantially more now than has been the case in 

the past; 

• develop or improve the process for enabling officers and directors to notify the board 

promptly so as to facilitate quick corrective action to rectify incorrect disclosure as soon as 

possible, so as to minimize both personal and corporate liability; 

• institute a process for dealing with forward-looking information of all types, so as to seek to 

ensure that it is reasonably based and contains appropriate cautionary language and key 

assumptions; 

• formalize procedures to improve management’s discussion and analysis in response to recent 

regulatory and other developments, and to deal with non-GAAP financial measures such as 

EBITDA and cash available for distribution (especially in the case of REITs, royalty trusts 

and income funds), etc.; 

• define the roles and responsibilities of directors and committees by setting out “charters” or 

mandates, which should be carefully designed to satisfy required obligations while seeking to 

avoid increasing liability; and 

• develop a process to review expert reports that are to be relied upon, including those of 

auditors, tax advisors, actuaries, engineers or geologists. 

All procedures, if developed, should be complied with, or else you may be worse off 

than if you had not developed them. That is why they need to be practical and achievable 

for your organization. 

INSIDER TRADING POLICIES 

Public companies should re-assess and update their insider trading policies to seek to ensure 

compliance with insider trading restrictions and proper reporting of insider transactions, 

especially in light of the new Internet-based SEDI procedures. 

4.2 Directors and officers 

Directors and officers can further protect themselves against potential liability for breach of 

continuous disclosure obligations by being duly diligent, including by: 

• asking individuals who are responsible for ensuring compliance with continuous disclosure 

requirements about the steps they have taken to ensure the accuracy of information contained 

in documents to be disclosed or statements to be made public; 

• dealing with complaints as they happen and overseeing any investigation where it appears that 

controls have failed; 

• streamlining and scripting public oral statements to protect against inadvertent 

misrepresentations; 



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• having counsel review the existing D&O liability insurance policy for adequacy of coverage 

with respect to personal liability of directors and officers, seeking to ensure that: 

– directors and officers are entitled to select counsel under the terms of the policy, 

– directors’ and officers’ legal and other costs in defending a claim are covered by the 

policy and that these costs are advanced by the insurer during the defence of the 

action, and 

– coverage is afforded to “innocent” officers and directors in circumstances where 

allegations of fraud or intentional wrongdoing are levelled against the reporting 

issuer and only certain of its officers and directors; 

• retaining counsel to provide independent legal advice on issues as the circumstances require; 

• reviewing and, if necessary, correcting minutes of meetings; and 

• taking notes and maintaining files with respect to their involvement with the issuer at all 

stages of the proceeding commenced under the statutory liability regime, including at the 

application for leave to commence the proceeding, a key evidentiary issue will be the 

subjective knowledge of the named defendants. Individual defendants may be able to greatly 

enhance their positions on this key issue if they maintain appropriate records. 

4.3 Auditors 

Auditors can seek to reduce the likelihood of attracting liability by complying with the 

standards articulated by their professional regulatory bodies. The Canadian Institute of 

Chartered Accountants has included a new section in its Handbook entitled “The Auditor’s 

Responsibility to Consider Fraud and Error in an Audit of Financial Statements”. The section 

details new procedural requirements, including the following: 

• to ask management about its assessment of the risk that the financial statements may be 

materially misstated as a result of fraud, about controls they have implemented, and whether 

they are aware of any fraud, suspected fraud or material errors; 

• to consider whether matters relating to internal controls should be discussed with the audit 

committee at the planning stage of the audit; 

• when assessing inherent and control risks, to assess how the financial statements might be 

materially misstated as a result of fraud or error (the new standard also requires the auditor, as 

part of the risk assessment, to consider whether fraud risk factors are present); 

• if fraud risk factors are identified as being present, to address them when designing audit 

procedures (the identified factors, and the auditor’s responses, should be documented); and 

• to obtain additional written representations from the appropriate level of management, 

including: 

– that management has disclosed to the auditor all significant facts relating to any 

frauds or suspected frauds, and 

– that management believes the effects of unadjusted errors accumulated by the 

auditor are immaterial, both individually and in the aggregate. 


4.4 Establishing defences 

Proper compliance with disclosure obligations will not necessarily prevent the initiation of 

litigation, but demonstrated and clearly documented compliance procedures, if complied with, 

are likely to go a long way towards establishing the defences discussed above. 

4.5 Responding to a formal or informal threat of litigation 

In the face of a formal or informal threat of litigation, it is imperative that immediate steps be 

taken to ensure that the appropriate response is prepared and that, where appropriate, remedial 

or protective steps are taken. 

The immediate next steps which we recommend in the face of any threat of litigation 

are as follows: 

• Notify the whole board of directors of the claim asserted; 

• Review the risk management issues and make timely notification to liability insurers 

(for issuer, directors and officers); 

• Consider whether a press release and/or material change report are appropriate 

or required; 

• Consider whether any regulatory compliance requirement is triggered; 

• Ensure that documents which may be relevant are collected and not destroyed 

(despite the company’s document retention policy, if any); 

• Notify outside counsel where appropriate to obtain objective advice regarding 

immediate steps; and 

• Assess whether separate counsel are required for some or all defendants. 



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5 CONCLUSION 

Whether, by allowing for greater regulatory oversight and investor-driven enforcement through 

new statutory rights of action, the amendments will in the long run encourage diligence at the 

boardroom table, more stringent management oversight and increased confidence in our capital 

markets is impossible to know at this stage. However, it is unlikely that the basic human foibles 

that create the environment for financial statement manipulation, insider trading, market 

manipulation, misrepresentation and their ilk will disappear by government fiat, or at all. If 

care is not taken, however, there are now substantially greater opportunities for shareholder 

lawsuits to be brought and to succeed. 

As for the statutory civil liability regime, we can say with some confidence that one of the best 

defences to a shareholder lawsuit may well be the demonstration of efforts to meet the demands 

of this increased regulatory oversight through the implementation of procedures and standards 

that are designed to prevent misrepresentations and failures to make timely disclosure. 

Stikeman Elliott LLP’s corporate governance team has extensive experience in this area and can 

help directors, officers and public companies respond to the challenges the amendments create, by: 

• presenting educational and training seminars at the location of your choice to the 

audience of your choosing. Whether it be a board of directors, a group of senior executives, 

or your regulatory compliance personnel, we can provide specific guidance relevant to 

your circumstances; 

• providing legal advice to public companies and individuals (including “second opinions”); 

• vetting corporate governance and compliance procedures, in order to identify potential 

weaknesses and recommend practical improvements; 

• recommending new compliance and corporate governance procedures tailored to your 

business environment; and 

• assisting (on an “outsourced” basis) with ensuring adherence to newly adopted procedures 

(e.g. insider reporting). 

We recommend proactive use of our seminars and consultations, in the short term, as a means of 

reducing the likelihood that it will later prove necessary to hire outside counsel to defend an action. 

However, if regulatory proceedings or litigation threaten, our experienced team of securities and 

class action litigators is one of the best allies you can have. 



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Full Text of the Major Amendments 

APPENDIX 

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A 

Major amendments to the Securities Act (Ontario) 

This appendix includes the full text of two major additions to the Securities Act under the Bill 198 and Bill 41 amendments. 

These are (i) the new offences relating to fraud, market manipulation and misleading or untrue statements (sections 126.1 and 

126.2) and (ii) the sections establishing civil liability under the Act for secondary market disclosure (collectively, Part XXIII.1). 

It is important to note that at the time of writing none of these sections have been proclaimed in force. The text below 

reflects Bill 198 as we anticipate it will be amended by Bill 41. However, as Bill 41 has not yet been passed by the Ontario 

legislature, we caution readers that it is possible that the final version of the legislation will differ from what appears below. 

■ Section 126.1 

Fraud and market manipulation 

126.1 A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct 

relating to securities or derivatives of securities that the person or company knows or reasonably ought to know, 

(a) results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security or 

derivative of a security; or 

(b) perpetrates a fraud on any person or company. 

Section 126.2 

Misleading or untrue statements 

126.2 (1) A person or company shall not make a statement that the person or company knows or reasonably ought to know, 

(a) in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue 

or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; and 

(b) would reasonably be expected to have a significant effect on the market price or value of a security. 

(2) A breach of subsection (1) does not give rise to a statutory right of action for damages otherwise than under 

Part XXIII or XXIII.1. 

■ Part XXIII.1 

Civil Liability for Secondary Market Disclosure 

INTERPRETATION AND APPLICATION 

Definitions 

138.1 In this Part, 

“compensation” means compensation received during the 12-month period immediately preceding the day on which the 

misrepresentation was made or on which the failure to make timely disclosure first occurred, together with the fair market 

value of all deferred compensation including, without limitation, options, pension benefits and stock appreciation rights, 

granted during the same period, valued as of the date that such compensation is awarded; (“rémunération”) 

“control person” means, 

(a) a person or company who holds a sufficient number of the voting rights attached to all outstanding voting 

securities of an issuer, or 

(b) each person or company or combination of persons or companies acting in concert by virtue of an agreement, 

arrangement, commitment or understanding, which holds in total a sufficient number of the voting rights attached to 

all outstanding voting securities of an issuer, 

to affect materially the control of the issuer, and, where a person or company, or combination of persons or companies, holds 

more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer, the person or company, or 

combination of persons or companies, shall, in the absence of evidence to the contrary, be deemed to hold a sufficient number 

of the voting rights to affect materially the control of the issuer; (“personne qui a le contrôle”) 


A 

“core document” means, 

(a) where used in relation to, 

(i) a director of a responsible issuer who is not also an officer of the responsible issuer, 

(ii) an influential person, other than an officer of the responsible issuer or an investment fund manager where the 

responsible issuer is an investment fund, or 

(iii) a director or officer of an influential person who is not also an officer of the responsible issuer, other than an 

officer of an investment fund manager, 

a prospectus, a take-over bid circular, an issuer bid circular, a directors’ circular, a rights offering circular, management’s 

discussion and analysis, an annual information form, an information circular, annual financial statements and interim financial 

statements of the responsible issuer, 

(b) where used in relation to, 

(i) a responsible issuer or an officer of the responsible issuer, 

(ii) an investment fund manager, where the responsible issuer is an investment fund, or 

(iii) an officer of an investment fund manager, where the responsible issuer is an investment fund, 

a prospectus, a take-over bid circular, an issuer bid circular, a directors’ circular, a rights offering circular, management’s 

discussion and analysis, an annual information form, an information circular, annual financial statements, interim financial 

statements and a report required by subsection 75 (2) of the responsible issuer, and 

(c) such other documents as may be prescribed by regulation for the purposes of this definition; (“document essentiel”) 

“document” means any written communication, including a communication prepared and transmitted only in electronic form, 

(a) that is required to be filed with the Commission, or 

(b) that is not required to be filed with the Commission and, 

(i) that is filed with the Commission, 

(ii) that is filed or required to be filed with a government or an agency of a government under applicable securities or 

corporate law or with any stock exchange or quotation and trade reporting system under its by-laws, rules or regulations, or 

(iii) that is any other communication the content of which would reasonably be expected to affect the market price 

or value of a security of the responsible issuer; (“document”) 

“expert” means a person or company whose profession gives authority to a statement made in a professional capacity by the 

person or company including, without limitation, an accountant, actuary, appraiser, auditor, engineer, financial analyst, 

geologist or lawyer; (“expert”) 

“failure to make timely disclosure” means a failure to disclose a material change in the manner and at the time required under 

this Act; (“non-respect des obligations d’information occasionnelle”) 

“influential person” means, in respect of a responsible issuer, 

(a) a control person, 

(b) a promoter, 

(c) an insider who is not a director or senior officer of the responsible issuer, or 

(d) an investment fund manager, if the responsible issuer is an investment fund; (“personne influente”) 

“issuer’s security” means a security of a responsible issuer and includes a security, 

(a) the market price or value of which, or payment obligations under which, are derived from or based on a security 

of the responsible issuer, and 

(b) which is created by a person or company on behalf of the responsible issuer or is guaranteed by the responsible 

issuer; (“valeur mobilière d’un émetteur”) 

“liability limit” means, 

(a) in the case of a responsible issuer, the greater of, 

(i) 5 per cent of its market capitalization (as such term is defined in the regulations), and 

(ii) $1 million, 



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(b) in the case of a director or officer of a responsible issuer, the greater of, 

(i) $25,000, and 

(ii) 50 per cent of the aggregate of the director’s or officer’s compensation from the responsible issuer and its affiliates, 

(c) in the case of an influential person who is not an individual, the greater of, 

(i) 5 per cent of its market capitalization (as defined in the regulations), and 

(ii) $1 million, 

(d) in the case of an influential person who is an individual, the greater of, 

(i) $25,000, and 

(ii) 50 per cent of the aggregate of the influential person’s compensation from the responsible issuer and its affiliates, 

(e) in the case of a director or officer of an influential person, the greater of, 

(i) $25,000, and 

(ii) 50 per cent of the aggregate of the director’s or officer’s compensation from the influential person and its affiliates, 

(f) in the case of an expert, the greater of, 

(i) $1 million, and 

(ii) the revenue that the expert and the affiliates of the expert have earned from the responsible issuer and its 

affiliates during the 12 months preceding the misrepresentation, and 

(g) in the case of each person who made a public oral statement, other than an individual referred to in clause (d), (e) 

or (f), the greater of, 

(i) $25,000, and 

(ii) 50 per cent of the aggregate of the person’s compensation from the responsible issuer and its affiliates; (“limite 

de responsabilité”) 

“management’s discussion and analysis” means the section of an annual information form, annual report or other document 

that contains management’s discussion and analysis of the financial condition and results of operations of a responsible issuer 

as required under Ontario securities law; (“rapport de gestion”) 

“public oral statement” means an oral statement made in circumstances in which a reasonable person would believe that 

information contained in the statement will become generally disclosed; (“déclaration orale publique”) 

“release” means, with respect to information or a document, to file with the Commission or any other securities regulatory 

authority in Canada or a stock exchange or to otherwise make available to the public; (“publication”, “publier”) 

“responsible issuer” means, 

(a) a reporting issuer, or 

(b) any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded; 

(“émetteur responsable”) 

“trading day” means a day during which the principal market (as defined in the regulations) for the security is open for trading. 

(“jour de Bourse”) 

Application 

138.2 This Part does not apply to, 

(a) the purchase of a security offered by a prospectus during the period of distribution; 

(b) the acquisition of an issuer’s security pursuant to a distribution that is exempt from section 53 or 62, except as may 

be prescribed by regulation; 

(c) the acquisition or disposition of an issuer’s security in connection with or pursuant to a take-over bid or issuer bid, 

except as may be prescribed by regulation; or 

(d) such other transactions or class of transactions as may be prescribed by regulation. 


A 

LIABILITY 

Liability for secondary market disclosure: Documents released by responsible issuer 

138.3 (1) Where a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of 

a responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of 

the issuer’s security during the period between the time when the document was released and the time when the 

misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company 

relied on the misrepresentation, a right of action for damages against, 

(a) the responsible issuer; 

(b) each director of the responsible issuer at the time the document was released; 

(c) each officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document; 

(d) each influential person, and each director and officer of an influential person, who knowingly influenced, 

(i) the responsible issuer or any person or company acting on behalf of the responsible issuer to release the document, or 

(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the release of the document; and 

(e) each expert where, 

(i) the misrepresentation is also contained in a report, statement or opinion made by the expert, 

(ii) the document includes, summarizes or quotes from the report, statement or opinion of the expert, and 

(iii) if the document was released by a person or company other than the expert, the expert consented in writing 

to the use of the report, statement or opinion in the document. 

Public oral statements by responsible issuer 

(2) Where a person with actual, implied or apparent authority to speak on behalf of a responsible issuer makes a public 

oral statement that relates to the business or affairs of the responsible issuer and that contains a misrepresentation, a 

person or company who acquires or disposes of the issuer’s security during the period between the time when the public 

oral statement was made and the time when the misrepresentation contained in the public oral statement was publicly 

corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for 

damages against, 


(b) the person who made the public oral statement; 

(c) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the making of the 

public oral statement; 

(d) each influential person, and each director and officer of the influential person, who knowingly influenced, 

(i) the person who made the public oral statement to make the public oral statement, or 

(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the making of the public oral 

statement; and 

(e) each expert where, 


(ii) the person making the public oral statement includes, summarizes or quotes from the report, statement or 

opinion of the expert, and 

(iii) if the public oral statement was made by a person other than the expert, the expert consented in writing to 

the use of the report, statement or opinion in the public oral statement. 

Influential persons 

(3) Where an influential person or a person or company with actual, implied or apparent authority to act or speak on 

behalf of the influential person releases a document or makes a public oral statement that relates to a responsible issuer and 

that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period 

between the time when the document was released or the public oral statement was made and the time when the 

misrepresentation contained in the document or public oral statement was publicly corrected has, without regard to whether 

the person or company relied on the misrepresentation, a right of action for damages against, 

(a) the responsible issuer, if a director or officer of the responsible issuer, or where the responsible issuer is an 

investment fund, the investment fund manager, authorized, permitted or acquiesced in the release of the document or 

the making of the public oral statement; 



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(b) the person who made the public oral statement; 

(c) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the release of the 

document or the making of the public oral statement; 

(d) the influential person; 

(e) each director and officer of the influential person who authorized, permitted or acquiesced in the release of the 

document or the making of the public oral statement; and 

(f) each expert where, 


(ii) the document or public oral statement includes, summarizes or quotes from the report, statement or opinion 

of the expert, and 

(iii) if the document was released or the public oral statement was made by a person other than the expert, the expert 

consented in writing to the use of the report, statement or opinion in the document or public oral statement. 

Failure to make timely disclosure 

(4) Where a responsible issuer fails to make a timely disclosure, a person or company who acquires or disposes of the issuer’s 

security between the time when the material change was required to be disclosed in the manner required under this Act and 

the subsequent disclosure of the material change has, without regard to whether the person or company relied on the 

responsible issuer having complied with its disclosure requirements, a right of action for damages against, 


(b) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the failure to make 

timely disclosure; and 

(c) each influential person, and each director and officer of an influential person, who knowingly influenced, 

(i) the responsible issuer or any person or company acting on behalf of the responsible issuer in the failure to 

make timely disclosure, or 

(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the failure to make 

timely disclosure. 

Multiple roles 

(5) In an action under this section, a person who is a director or officer of an influential person is not liable in that capacity 

if the person is liable as a director or officer of the responsible issuer. 

Multiple misrepresentations 

(6) In an action under this section, 

(a) multiple misrepresentations having common subject matter or content may, in the discretion of the court, be 

treated as a single misrepresentation; and 

(b) multiple instances of failure to make timely disclosure of a material change or material changes concerning 

common subject matter may, in the discretion of the court, be treated as a single failure to make timely disclosure. 

No implied or actual authority 

(7) In an action under subsection (2) or (3), if the person who made the public oral statement had apparent authority, but 

not implied or actual authority, to speak on behalf of the issuer, no other person is liable with respect to any of the responsible 

issuer’s securities that were acquired or disposed of before that other person became, or should reasonably have become, aware 

of the misrepresentation. 

Burden of proof and defences: Non-core documents and public oral statements 

138.4 (1) In an action under section 138.3 in relation to a misrepresentation in a document that is not a core document, or 

a misrepresentation in a public oral statement, a person or company is not liable, subject to subsection (2), unless the plaintiff 

proves that the person or company, 

(a) knew, at the time that the document was released or public oral statement was made, that the document or public 

oral statement contained the misrepresentation; 

(b) at or before the time that the document was released or public oral statement was made, deliberately avoided 

acquiring knowledge that the document or public oral statement contained the misrepresentation; or 


A 

(c) was, through action or failure to act, guilty of gross misconduct in connection with the release of the document or 

the making of the public oral statement that contained the misrepresentation. 

Same 

(2) A plaintiff is not required to prove any of the matters set out in subsection (1) in an action under section 138.3 in 

relation to an expert. 

Failure to make timely disclosure 

(3) In an action under section 138.3 in relation to a failure to make timely disclosure, a person or company is not liable, 

subject to subsection (4), unless the plaintiff proves that the person or company, 

(a) knew, at the time that the failure to make timely disclosure first occurred, of the change and that the change was 

a material change; 

(b) at the time or before the failure to make timely disclosure first occurred, deliberately avoided acquiring knowledge 

of the change or that the change was a material change; or 

(c) was, through action or failure to act, guilty of gross misconduct in connection with the failure to make timely disclosure. 

Same 

(4) A plaintiff is not required to prove any of the matters set out in subsection (3) in an action under section 138.3 in relation to, 

(a) a responsible issuer; 

(b) an officer of a responsible issuer; 

(c) an investment fund manager; or 

(d) an officer of an investment fund manager. 

Knowledge of the misrepresentation or material change 

(5) A person or company is not liable in an action under section 138.3 in relation to a misrepresentation or a failure to 

make timely disclosure if that person or company proves that the plaintiff acquired or disposed of the issuer’s security, 

(a) with knowledge that the document or public oral statement contained a misrepresentation; or 

(b) with knowledge of the material change. 

Reasonable investigation 

(6) A person or company is not liable in an action under section 138.3 in relation to, 

(a) a misrepresentation if that person or company proves that, 

(i) before the release of the document or the making of the public oral statement containing the 

misrepresentation, the person or company conducted or caused to be conducted a reasonable investigation, and 

(ii) at the time of the release of the document or the making of the public oral statement, the person or company 

had no reasonable grounds to believe that the document or public oral statement contained the misrepresentation; or 

(b) a failure to make timely disclosure if that person or company proves that, 

(i) before the failure to make timely disclosure first occurred, the person or company conducted or caused to be 

conducted a reasonable investigation, and 

(ii) the person or company had no reasonable grounds to believe that the failure to make timely disclosure would occur. 

Factors to be considered by court 

(7) In determining whether an investigation was reasonable under subsection (6), or whether any person or company is 

guilty of gross misconduct under subsection (1) or (3), the court shall consider all relevant circumstances, including, 

(a) the nature of the responsible issuer; 

(b) the knowledge, experience and function of the person or company; 

(c) the office held, if the person was an officer; 

(d) the presence or absence of another relationship with the responsible issuer, if the person was a director; 

(e) the existence, if any, and the nature of any system designed to ensure that the responsible issuer meets its 

continuous disclosure obligations; 

(f) the reasonableness of reliance by the person or company on the responsible issuer’s disclosure compliance system 

and on the responsible issuer’s officers, employees and others whose duties would in the ordinary course have given 

them knowledge of the relevant facts; 



45

A 

(g) the period within which disclosure was required to be made under the applicable law; 

(h) in respect of a report, statement or opinion of an expert, any professional standards applicable to the expert; 

(i) the extent to which the person or company knew, or should reasonably have known, the content and medium of 

dissemination of the document or public oral statement; 

(j) in the case of a misrepresentation, the role and responsibility of the person or company in the preparation and 

release of the document or the making of the public oral statement containing the misrepresentation or the ascertaining 

of the facts contained in that document or public oral statement; and 

(k) in the case of a failure to make timely disclosure, the role and responsibility of the person or company involved in 

a decision not to disclose the material change. 

Confidential disclosure 

(8) A person or company is not liable in an action under section 138.3 in respect of a failure to make timely disclosure if, 

(a) the person or company proves that the material change was disclosed by the responsible issuer in a report filed on 

a confidential basis with the Commission under subsection 75 (3); 

(b) the responsible issuer had a reasonable basis for making the disclosure on a confidential basis; 

(c) where the information contained in the report filed on a confidential basis remains material, disclosure of the 

material change was made public promptly when the basis for confidentiality ceased to exist; 

(d) the person or company or responsible issuer did not release a document or make a public oral statement that, due 

to the undisclosed material change, contained a misrepresentation; and 

(e) where the material change became publicly known in a manner other than the manner required under this Act, 

the responsible issuer promptly disclosed the material change in the manner required under this Act. 

Forward-looking information 

(9) A person or company is not liable in an action under section 138.3 for a misrepresentation in forward-looking 

information if the person or company proves all of the following things: 

1. The document or public oral statement containing the forward-looking information contained, proximate 

to that information, 

i. reasonable cautionary language identifying the forward-looking information as such, and identifying material 

factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forwardlooking 

information, and 

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

forecast or projection set out in the forward-looking information. 

2. The person or company had a reasonable basis for drawing the conclusions or making the forecasts and projections 

set out in the forward-looking information. 

Same 

(9.1) The person or company shall be deemed to have satisfied the requirements of paragraph 1 of subsection (9) with respect 

to a public oral statement containing forward-looking information if the person who made the public oral statement, 

(a) made a cautionary statement that the oral statement contains forward-looking information; 

(b) stated that, 

(i)the actual results could differ materially from a conclusion, forecast or projection in the forward-looking 


(ii) certain material factors or assumptions were applied in drawing a conclusion or making a forecast or 

projection as reflected in the forward-looking information; and 

(c) stated that additional information about, 

(i)the material factors that could cause actual results to differ materially from the conclusion, forecast or projection 

in the forward-looking information, and 

(ii) the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection 

as reflected in the forward-looking information, 

is contained in a readily-available document or in a portion of such a document and has identified that document or that 

portion of the document. 


A 

Same 

(9.2) For the purposes of clause (9.1) (c), a document filed with the Commission or otherwise generally disclosed shall be 

deemed to be readily available. 

Exception 

(10) Subsection (9) does not relieve a person or company of liability respecting forward-looking information in a financial 

statement required to be filed under this Act or forward-looking information in a document released in connection with an 

initial public offering. 

Expert report, statement or opinion 

(11) A person or company, other than an expert, is not liable in an action under section 138.3 with respect to any part of a 

document or public oral statement that includes, summarizes or quotes from a report, statement or opinion made by the expert 

in respect of which the responsible issuer obtained the written consent of the expert to the use of the report, statement or 

opinion, if the consent had not been withdrawn in writing before the document was released or the public oral statement was 

made, if the person or company proves that, 

(a) the person or company did not know and had no reasonable grounds to believe that there had been a 

misrepresentation in the part of the document or public oral statement made on the authority of the expert; and 

(b) the part of the document or oral public statement fairly represented the report, statement or opinion made by 

the expert. 

Same 

(12) An expert is not liable in an action under section 138.3 with respect to any part of a document or public oral statement 

that includes, summarizes or quotes from a report, statement or opinion made by the expert, if the expert proves that the written 

consent previously provided was withdrawn in writing before the document was released or the public oral statement was made. 

Release of documents 

(13) A person or company is not liable in an action under section 138.3 in respect of a misrepresentation in a document, 

other than a document required to be filed with the Commission, if the person or company proves that, at the time of release 

of the document, the person or company did not know and had no reasonable grounds to believe that the document would 

be released. 

Derivative information 

(14) A person or company is not liable in an action under section 138.3 for a misrepresentation in a document or a public 

oral statement, if the person or company proves that, 

(a) the misrepresentation was also contained in a document filed by or on behalf of another person or company, other 

than the responsible issuer, with the Commission or any other securities regulatory authority in Canada or a stock 

exchange and was not corrected in another document filed by or on behalf of that other person or company with the 

Commission or that other securities regulatory authority in Canada or stock exchange before the release of the 

document or the public oral statement made by or on behalf of the responsible issuer; 

(b) the document or public oral statement contained a reference identifying the document that was the source of the 

misrepresentation; and 

(c) when the document was released or the public oral statement was made, the person or company did not know and 

had no reasonable grounds to believe that the document or public oral statement contained a misrepresentation. 

Where corrective action taken 

(15) A person or company, other than the responsible issuer, is not liable in an action under section 138.3 if the 

misrepresentation or failure to make timely disclosure was made without the knowledge or consent of the person or company 

and, if, after the person or company became aware of the misrepresentation before it was corrected, or the failure to make 

timely disclosure before it was disclosed in the manner required under this Act, 

(a) the person or company promptly notified the board of directors of the responsible issuer or other persons acting 

in a similar capacity of the misrepresentation or the failure to make timely disclosure; and 



47

A 

(b) if no correction of the misrepresentation or no subsequent disclosure of the material change in the manner required 

under this Act was made by the responsible issuer within two business days after the notification under clause (a), the 

person or company, unless prohibited by law or by professional confidentiality rules, promptly and in writing notified 

the Commission of the misrepresentation or failure to make timely disclosure. 

DAMAGES 

Assessment of damages 

138.5 (1) Damages shall be assessed in favour of a person or company that acquired an issuer’s securities after the release of 

a document or the making of a public oral statement containing a misrepresentation or after a failure to make timely disclosure 

as follows: 

1. In respect of any of the securities of the responsible issuer that the person or company subsequently disposed of on or 

before the 10th trading day after the public correction of the misrepresentation or the disclosure of the material change in 

the manner required under this Act, assessed damages shall equal the difference between the average price paid for those 

securities (including any commissions paid in respect thereof) and the price received upon the disposition of those securities 

(without deducting any commissions paid in respect of the disposition), calculated taking into account the result of hedging 

or other risk limitation transactions. 

2. In respect of any of the securities of the responsible issuer that the person or company subsequently disposed of after 

the 10th trading day after the public correction of the misrepresentation or the disclosure of the material change in the 

manner required under this Act, assessed damages shall equal the lesser of, 

i. an amount equal to the difference between the average price paid for those securities (including any commissions 

paid in respect thereof) and the price received upon the disposition of those securities (without deducting any 

commissions paid in respect of the disposition), calculated taking into account the result of hedging or other risk 

limitation transactions, and 

ii. an amount equal to the number of securities that the person disposed of, multiplied by the difference between the 

average price per security paid for those securities (including any commissions paid in respect thereof determined on a 

per security basis) and, 

A. if the issuer’s securities trade on a published market, the trading price of the issuer’s securities on the principal 

market (as those terms are defined in the regulations) for the 10 trading days following the public correction of the 

misrepresentation or the disclosure of the material change in the manner required under this Act, or 

B. if there is no published market, the amount that the court considers just. 

3. In respect of any of the securities of the responsible issuer that the person or company has not disposed of, assessed 

damages shall equal the number of securities acquired, multiplied by the difference between the average price per security 

paid for those securities (including any commissions paid in respect thereof determined on a per security basis) and, 

i. if the issuer’s securities trade on a published market, the trading price of the issuer’s securities on the principal 

market (as such terms are defined in the regulations) for the 10 trading days following the public correction of the 

misrepresentation or the disclosure of the material change in the manner required under this Act, or ii. if there is no 

published market, the amount that the court considers just. 

Same 

(2) Damages shall be assessed in favour of a person or company that disposed of securities after a document was released 

or a public oral statement made containing a misrepresentation or after a failure to make timely disclosure as follows: 

1. In respect of any of the securities of the responsible issuer that the person or company subsequently acquired 

on or before the 10th trading day after the public correction of the misrepresentation or the disclosure of the material 

change in the manner required under this Act, assessed damages shall equal the difference between the average price 

received upon the disposition of those securities (deducting any commissions paid in respect of the disposition) and 

the price paid for those securities (without including any commissions paid in respect thereof), calculated taking 

into account the result of hedging or other risk limitation transactions. 

2. In respect of any of the securities of the responsible issuer that the person or company subsequently acquired 

after the 10th trading day after the public correction of the misrepresentation or the disclosure of the material change 

in the manner required under this Act, assessed damages shall equal the lesser of, 

i. an amount equal to the difference between the average price received upon the disposition of those securities 

(deducting any commissions paid in respect of the disposition) and the price paid for those securities (without 


A 

including any commissions paid in respect thereof), calculated taking into account the result of hedging or other 

risk limitation transactions, and 

ii. an amount equal to the number of securities that the person disposed of, multiplied by the difference between 

the average price per security received upon the disposition of those securities (deducting any commissions paid 

in respect of the disposition determined on a per security basis) and, 

A. if the issuer’s securities trade on a published market, the trading price of the issuer’s securities on the 

principal market (as those terms are defined in the regulations) for the 10 trading days following the public 

correction of the misrepresentation or the disclosure of the material change in the manner required under this 

Act, or 

B. if there is no published market, the amount that the court considers just. 

3. In respect of any of the securities of the responsible issuer that the person or company has not acquired, assessed 

damages shall equal the number of securities that the person or company disposed of, multiplied by the difference 

between the average price per security received upon the disposition of those securities (deducting any commissions 

paid in respect of the disposition determined on a per security basis) and, 

i. if the issuer’s securities trade on a published market, the trading price of the issuer’s securities on the principal 

market (as such terms are defined in the regulations) for the 10 trading days following the public correction of the 

misrepresentation or the disclosure of the material change in the manner required under this Act, or 

ii. if there is no published market, then the amount that the court considers just. 

Same 

(3) Despite subsections (1) and (2), assessed damages shall not include any amount that the defendant proves is 

attributable to a change in the market price of securities that is unrelated to the misrepresentation or the failure to make 

timely disclosure. 

Proportionate liability 

138.6 (1) In an action under section 138.3, the court shall determine, in respect of each defendant found liable in the 

action, the defendant’s responsibility for the damages assessed in favour of all plaintiffs in the action, and each such 

defendant shall be liable, subject to the limits set out in subsection 138.7 (1), to the plaintiffs for only that portion of 

the aggregate amount of damages assessed in favour of the plaintiffs that corresponds to that defendant’s responsibility 

for the damages. 

Same 

(2) Despite subsection (1), where, in an action under section 138.3 in respect of a misrepresentation or a failure to make 

timely disclosure, a court determines that a particular defendant, other than the responsible issuer, authorized, permitted 

or acquiesced in the making of the misrepresentation or the failure to make timely disclosure while knowing it to be a 

misrepresentation or a failure to make timely disclosure, the whole amount of the damages assessed in the action may be 

recovered from that defendant. 

Same 

(3) Each defendant in respect of whom the court has made a determination under subsection (2) is jointly and severally 

liable with each other defendant in respect of whom the court has made a determination under subsection (2). 

Same 

(4) Any defendant against whom recovery is obtained under subsection (2) is entitled to claim contribution from any other 

defendant who is found liable in the action. 

Limits on damages 

138.7 (1) Despite section 138.5, the damages payable by a person or company in an action under section 138.3 is the lesser of, 

(a) the aggregate damages assessed against the person or company in the action; and 

(b) the liability limit for the person or company less the aggregate of all damages assessed after appeals, if any, 

against the person or company in all other actions brought under section 138.3, and under comparable legislation 

in other provinces or territories in Canada in respect of that misrepresentation or failure to make timely disclosure, 

and less any amount paid in settlement of any such actions. 



49

A 

Same 

(2) Subsection (1) does not apply to a person or company, other than the responsible issuer, if the plaintiff proves that the person 

or company authorized, permitted or acquiesced in the making of the misrepresentation or the failure to make timely disclosure while 

knowing that it was a misrepresentation or a failure to make timely disclosure, or influenced the making of the misrepresentation or 

the failure to make timely disclosure while knowing that it was a misrepresentation or a failure to make timely disclosure. 

PROCEDURAL MATTERS 

Leave to proceed 

138.8 (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, 

(a) the action is being brought in good faith; and 

(b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. 

Same 

(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. 

Same 

(3) The maker of such an affidavit may be examined on it in accordance with the rules of court. 

Same 

(4) A copy of the application for leave to proceed and any affidavits filed with the court shall be sent to the Commission 

when filed. 

Notice 

138.9 A person or company that has been granted leave to commence an action under section 138.3 shall, 

(a) promptly issue a news release disclosing that leave has been granted to commence an action under section 138.3; 

(b) send a written notice to the Commission within seven days, together with a copy of the news release; and 

(c) send a copy of the statement of claim or other originating document to the Commission when filed. 

Restriction on discontinuation, etc., of action 

138.10 An action under section 138.3 shall not be discontinued, abandoned or settled without the approval of the court given 

on such terms as the court thinks fit including, without limitation, terms as to costs, and in determining whether to approve 

the settlement of the action, the court shall consider, among other things, whether there are any other actions outstanding 

under section 138.3 or under comparable legislation in other provinces or territories in Canada in respect of the same 

misrepresentation or failure to make timely disclosure. 

Costs 

138.11 Despite the Courts of Justice Act and the Class Proceedings Act, 1992, the prevailing party in an action under section 

138.3 is entitled to costs determined by a court in accordance with applicable rules of civil procedure. 

Power of the Commission 

138.12 The Commission may intervene in an action under section 138.3 and in an application for leave under section 138.8. 

No derogation from other rights 

138.13 The right of action for damages and the defences to an action under section 138.3 are in addition to, and without 

derogation from, any other rights or defences the plaintiff or defendant may have in an action brought otherwise than under 

this Part. 


A 

Limitation period 

138.14 No action shall be commenced under section 138.3, 

(a) in the case of misrepresentation in a document, later than the earlier of, 

(i) three years after the date on which the document containing the misrepresentation was first released, and 

(ii) six months after the issuance of a news release disclosing that leave has been granted to commence an action 

under section 138.3 or under comparable legislation in the other provinces or territories in Canada in respect of 

the same misrepresentation; 

(b) in the case of a misrepresentation in a public oral statement, later than the earlier of, 

(i) three years after the date on which the public oral statement containing the misrepresentation was made, and 


under section 138.3 or under comparable legislation in another province or territory of Canada in respect of the 

same misrepresentation; and 

(c) in the case of a failure to make timely disclosure, later than the earlier of, 

(i) three years after the date on which the requisite disclosure was required to be made, and 


under section 138.3 or under comparable legislation in another province or territory of Canada in respect of the 

same failure to make timely disclosure. 



51

Summary of Liabilities 

B 

APPENDIX

B-1 SUMMARY OF LIABILITIES 

CLAIMS AGAINST: 

TYPE OF CLAIM: 

MISREPRESENTATION 

– Core Document 

– Released by Issuer 


Plaintiff proves it acquired or disposed of securities between release and correction 

of misrepresentation 

Defences: Issuer made a Reasonable Investigation, Plaintiff knew of misrepresentation, 

Forward-Looking Information, Reliance on Experts, Derivative Information 

Director of 




Defences: Director made a Reasonable Investigation, Plaintiff knew of misrepresentation, 

Forward-Looking Information, Reliance on Experts, Corrective Action, Derivative Information 

Officer of 



of misrepresentation, and that the officer authorized, permitted or acquiesced in 

the release 

Defences: Officer made a Reasonable Investigation, Plaintiff knew of misrepresentation, 

Forward-Looking Information, Reliance on Experts, Corrective Action, 

Derivative Information 



of misrepresentation, and that the influential person knowingly influenced issuer to release 

or director or officer of issuer to authorize, permit or acquiesce in the release 

Defences: Influential Person made a Reasonable Investigation, Plaintiff knew of 

misrepresentation, Forward-Looking Information, Reliance on Experts, Corrective Action, 


Director or Officer of 



of misrepresentation, and that the director or officer of influential person knowingly 

influenced issuer to release or director or officer of issuer to authorize, permit or 

acquiesce in the release 

Defences: Director or Officer made a Reasonable Investigation, Plaintiff knew of 

misrepresentation, Forward-Looking Information, Reliance on Experts, 

Corrective Action, Derivative Information 

Expert 


of misrepresentation, misrepresentation is also in a report made by expert, document 

incorporates report, expert consented in writing to its use 

Defences: Expert made a Reasonable Investigation, Plaintiff knew of misrepresentation, 

Forward-Looking Information, Corrective Action, Derivative Information, 

Withdrawal of Consent 

Spokesperson 

Not relevant 


SUMMARY OF LIABILITIES 

B-2 


CLAIMS AGAINST: MISREPRESENTATION – Non-Core Document 

– Released by Issuer 



of misrepresentation, and that issuer either knew of misrepresentation at time of release or 

deliberately avoided acquiring knowledge or was guilty of gross misconduct 

Defences: Plaintiff knew of misrepresentation, Reasonable Investigation, 

Forward-Looking Information, Reliance on Experts, Release without issuer’s 

knowledge, Derivative Information 

Director of 



of misrepresentation, and that the director either knew of misrepresentation at time of 

release or deliberately avoided acquiring knowledge or was guilty of gross misconduct 

Defences: Plaintiff knew of misrepresentation, Director made a Reasonable Investigation, 

Forward-Looking Information, Corrective Action, Reliance on Experts, Release without 

director’s knowledge, Derivative Information 

Officer of 


Plaintiff proves it acquired or disposed of securities between release and correction of 

misrepresentation, and that the officer authorized, permitted or acquiesced in the release, 

and that officer either knew of misrepresentation at time of release or deliberately avoided 

acquiring knowledge or was guilty of gross misconduct 

Defences: Plaintiff knew of misrepresentation, Officer made a Reasonable Investigation, 

Forward-Looking Information, Reliance on Experts, Release without officer’s knowledge, 




misrepresentation, and that the director or officer knowingly influenced issuer to release or 

director or officer of issuer to authorize, permit or acquiesce in the release and that director 

or officer either knew of misrepresentation at time of release or deliberately avoided 

acquiring knowledge or was guilty of gross misconduct 

Defences: Plaintiff knew of misrepresentation, Influential Person made a Reasonable 

Investigation, Forward-Looking Information, Reliance on Experts, Release without 

Influential Person’s knowledge, Corrective Action, Derivative Information 




misrepresentation, and that the director or officer knowingly influenced issuer to release or 

director or officer of issuer to authorize, permit or acquiesce in the release, and that director 

or officer of influential person either knew of misrepresentation at time of release or 


Defences: Plaintiff knew of misrepresentation, Director or Officer made a Reasonable 

Investigation, Forward-Looking Information, Reliance on Experts, Release without director’s 

or officer’s knowledge, Corrective Action, Derivative Information 

Expert 


misrepresentation, misrepresentation is also in a report, made by expert, document 

incorporates report, expert consented in writing to its use 


Forward-Looking Information, Release without expert’s knowledge, Corrective Action, 

Derivative Information, Withdrawal of Consent 

Spokesperson 

Not relevant 



55



CLAIMS AGAINST: MISREPRESENTATION – Non-core Document 

– Released by Influential Person 



misrepresentation, and that a director or officer of issuer authorized, permitted or 

acquiesced in the release (or where issuer is investment fund, manager authorized, permitted or 

acquiesced in release) 

Plaintiff proves issuer either knew of misrepresentation at time of release or deliberately 

avoided acquiring knowledge or was guilty of gross misconduct 


Forward-Looking Information, Reliance on Experts, Release without issuer’s knowledge, 


Director of 



misrepresentation, and that the director authorized, permitted or acquiesced in the release 

Plaintiff proves director either knew of misrepresentation at time of release or deliberately 



Forward-Looking Information, Reliance on Experts, Release without director’s knowledge, 


Officer of 



misrepresentation, and that the officer authorized, permitted or acquiesced in the release 

Plaintiff proves officer either knew of misrepresentation at time of release or deliberately 







misrepresentation 

Plaintiff proves influential person either knew of misrepresentation at time of release or 



Investigation, Forward-Looking Information, Reliance on Experts, Release without Influential 

Person’s knowledge, Corrective Action, Derivative Information 



B-3 




CLAIMS AGAINST: MISREPRESENTATION – Non-core Document 

– Released by Influential Person 



Plaintiff proves director or officer either knew of misrepresentation at time of release or 





Expert 


misrepresentation, misrepresentation is also in a report, statement or opinion made by expert, 

document incorporates report, statement or opinion, expert consented in writing to its use 




Spokesperson 

Not relevant 



57

B-4 



CLAIMS AGAINST: MISREPRESENTATION – Public Oral Statement 

by Issuer 



misrepresentation in statement, the statement relates to business or affairs of issuer, and is 

made by a person with actual, implied or apparent authority to speak for issuer 

Plaintiff proves issuer either knew of misrepresentation at time of statement or deliberately 


Defences: Plaintiff knew of misrepresentation, Reasonable Investigation, Forward-Looking 

Information, 

Reliance on Experts, Release without issuer’s knowledge, Derivative Information 

Director of 





Director authorized, permitted or acquiesced in making the statement 

Plaintiff proves director either knew of misrepresentation at time of statement or deliberately 





Officer of 





Officer authorized, permitted or acquiesced in making the statement 

Plaintiff proves officer either knew of misrepresentation at time of statement or deliberately 









Influential Person knowingly influenced the person who made the statement to make it or a 

director or officer of the issuer to authorize, permit or acquiesce in making the statement 

Plaintiff proves Influential Person either knew of misrepresentation at time of statement or 


Defences: Plaintiff knew of misrepresentation, Influential Person made a Reasonable Investigation, 

Forward-Looking Information, Reliance on Experts, Release without Influential Person’s knowledge, 




B-4 


CLAIMS AGAINST: MISREPRESENTATION – Public Oral Statement 

by Issuer 






Director or officer of Influential Person knowingly influenced the person who made the 

statement to make it or the director or officer of the issuer to authorize, permit or acquiesce in 

making the statement 

Plaintiff proves director or officer of Influential Person either knew of misrepresentation at time 

of statement or deliberately avoided acquiring knowledge or was guilty of gross misconduct 

Defences: Director or Officer made a Reasonable Investigation, Plaintiff knew of 

misrepresentation, Forward-Looking Information, Reliance on Experts, Release without 

director’s or officer’s knowledge, Derivative Information 

Expert 


misrepresentation in statement, the statement relates to business or affairs of issuer, 

and is made by a person with actual, implied or apparent authority to speak for issuer, 

misrepresentation is also in a report, made by expert, statement incorporates report, 

expert consented in writing to its use 




Spokesperson 


misrepresentation in statement, and that the statement relates to business or affairs 

of issuer 

Plaintiff proves person either knew of misrepresentation at time of statement or 


Defences: Plaintiff knew of misrepresentation, Forward-Looking Information, 

Other Person made a Reasonable Investigation, Reliance on Experts, Release without 

person’s knowledge, Corrective Action, Derivative Information 



59



CLAIMS AGAINST: MISREPRESENTATION – Public Oral Statement by 




of misrepresentation in statement, and that the statement relates to business or affairs 

of issuer 

Plaintiff proves issuer either knew of misrepresentation at time of statement or deliberately 



Forward-Looking Information, Reliance on Experts, Release without issuer’s knowledge, 


Director of 




of issuer 

Director authorized, permitted or acquiesced in making the statement 

Plaintiff proves director either knew of misrepresentation at time of statement or 





Officer of 




of issuer 

Plaintiff proves director or officer either knew of misrepresentation at time of statement or 








Plaintiff proves influential person either knew of misrepresentation at time of release or 







B-5 




CLAIMS AGAINST: MISREPRESENTATION – Public Oral Statement by 



misrepresentation in statement, and that the statement relates to business or affairs of issuer 

Director or officer authorized, permitted or acquiesced in making the statement 

Plaintiff proves director or officer either knew of misrepresentation at time of statement or 





Expert 

Plaintiff proves it acquired or disposed of securities between release of statement and 

correction of misrepresentation, misrepresentation is also in a report, made by expert, 

statement incorporates report, expert consented in writing to its use 




Spokesperson 



of issuer 

Plaintiff proves person either knew of misrepresentation at time of statement or 


Defences: Plaintiff knew of misrepresentation, Other Person made a Reasonable 

Investigation, Forward-Looking Information, Reliance on Experts, Release without person’s 

knowledge, Corrective Action, Derivative Information 



61

B-6 



CLAIMS AGAINST: MISREPRESENTATION – Issuer’s Failure to Make Timely 

Disclosure of a Material Change 


Plaintiff proves it acquired or disposed of securities between time when material change 

had to be disclosed and later disclosure 

Defences: Issuer made a Reasonable Investigation, Plaintiff knew of failure to make timely 

disclosure, Reliance on Experts, Confidential Disclosure of material change had been 

made to OSC 

Director of 



had to be disclosed and later disclosure, and that the director authorized that, permitted or 

acquiesced in the failure 

Plaintiff proves director knew of change at time failure to disclosure occurred and that it was 

material, or the director deliberately avoided acquiring knowledge, or the director was 

guilty of gross misconduct 

Defences: Director made a Reasonable Investigation, Plaintiff knew of failure to make timely 

disclosure, Reliance on Experts, Corrective Action, Confidential Disclosure of material 

change had been made to OSC 

Officer of 


Plaintiff proves it acquired or disposed of securities between time when material 

change had to be disclosed and later disclosure, and that the officer authorized, 

permitted or acquiesced in the failure 

Defences: Officer made a Reasonable Investigation, Plaintiff knew of failure to make 

timely disclosure, Reliance on Experts, Corrective Action, Confidential Disclosure of 

material change had been made to OSC 



had to be disclosed and later disclosure, and that the Influential Person knowingly 

influenced the issuer to fail to make timely disclosure or a director of officer of the issuer 

to authorize, permit or acquiesce in the failure to make timely disclosure 

Where Influential Person is not a fund manager, the plaintiff proves the Influential Person 

knew of change at time failure to disclosure occurred and that it was material, or the 

director or officer deliberately avoided acquiring knowledge, or was guilty of gross 

misconduct 

Defences: Reasonable Investigation if a fund manager, Plaintiff knew of failure to make 

timely disclosure, Reliance on Experts, Corrective Action, Confidential Disclosure of 

material change had been made to OSC 




had to be disclosed and later disclosure, and that the director or officer knowingly 

influenced the issuer to fail to make timely disclosure or a director of officer of the issuer 

to authorize, permit or acquiesce in the failure to make timely disclosure 

Where director or officer is not a director or officer of a fund manager, the plaintiff proves 

director or officer either knew of change at time failure to disclosure occurred and that it 

was material, the director or officer deliberately avoided acquiring knowledge or was guilty 

of gross misconduct 

Defences: Reasonable Investigation if director or officer of a fund manager, 

Plaintiff knew of failure to make timely disclosure, Reliance on Experts, Corrective Action, 

Derivative Information, Confidential Disclosure of material change had been made to OSC 

Expert 

Not relevant 

Spokesperson 

Not relevant 


Summary of Defences 

C 

APPENDIX

C 

SUMMARY OF DEFENCES 

NAME OF DEFENCE: DESCRIPTION: AVAILABLE FOR: AVAILABLE TO: 

Reasonable Investigation 

– Misrepresentation 

138.4(6)(a) and (7) 

Defendant proves that 

• before the release of the 

document or the making 

of the public oral 

statement containing the 

misrepresentation, the 

defendant conducted or 

caused to be conducted a 

reasonable investigation, 

and 

• at the time of the release 

of the document or the 

making of the public oral 

statement, the defendant 

had no reasonable 

grounds to believe that 

the document or public 

oral statement contained 

the misrepresentation 

Misrepresentation in core 

or non-core document 

released by or on behalf 

of issuer or influential 

person 

Misrepresentation in a 

public oral statement by 

or on behalf of issuer or 

influential person 

Issuer 

Directors of issuer 

Officers of issuer 


Directors and officers 

of influential persons 

Experts 

Spokespersons 

Court to consider other 

factors in 138.4(7) 

Reasonable Investigation 

– Timely Disclosure 

138.4(6)(b) and (7) 

Defendant proves that 

• before the failure to 

make timely disclosure 

first occurred, the 

defendant conducted or 

caused to be conducted 

a reasonable 

investigation, and 

Failure to make timely 

disclosure of material 

change 

Issuer 






• the defendant has no 

reasonable grounds to 

believe that the failure 

to make timely 

disclosure would occur 

Court to consider other 

factors in 138.4(7) 

Plaintiff’s Knowledge – 

Misrepresentation 

138.4(5)(a) 

Defendant proves that the 

plaintiff acquired or 

disposed of the issuer’s 

security with knowledge 

that the document or 

public oral statement 

contained a 


Misrepresentation in 

core or non-core 

document released by 

or on behalf of issuer 

or influential person 



by or on behalf of 

issuer or influential 

person 

Issuer 






Experts 

Spokespersons 



C 

NAME OF DEFENCE: DESCRIPTION : AVAILABLE FOR: AVAILABLE TO: 

Plaintiff’s Knowledge – 

Failure to Make Timely 

Disclosure of material 

change 

138.4(5)(b) 

Defendant proves that the 

plaintiff acquired or 

disposed of the issuer’s 

security with knowledge 

of the undisclosed 

material change 



change 

Issuer 






Forward-Looking 

Information – 

Documents 

138.4(9) and (10) 

If the misrepresentation 

is in forward-looking 

information 

in a document, defendant 

proves that 

• the document 

containing the forwardlooking 

information 

contained, proximate to 

the information, 






Issuer 






Experts 

– reasonable cautionary 

language identifying 

the forward-looking 

information as such 

and identifying 

material factors that 

could cause actual 

results to differ 

materially from a 

conclusion, forecast 

or projection in the 

forward-looking 


– a statement of the 

material factors or 

assumptions applied 

in drawing a 

conclusion or making 

a forecast or 

projection set out in 



• the defendant had a 

reasonable basis for 

drawing the conclusions 

or making the forecasts 

or projections set out in 



• the document in issue 

(i) is not released in 

connection with an 

initial public offering 

(including the 

prospectus of the 

responsible issuer filed 

in connection with a 

public distribution of 

securities) and (ii) is not 

a financial statement 

required to be filed 

under the Act. 



65

C 



Forward-Looking 

Information – 

Public Oral Statements 

138.4(9)(9.1)(9.2) 

If the misrepresentation is 

in forward-looking 

information contained in a 

public oral statement, the 

defendant proves that 

• the person making the 

statement 

– made a cautionary 

statement that the 

oral statement 

contains forwardlooking 

information, 

– stated that (i) the 

actual results could 

differ materially from 

a conclusion, 

forecast or projection 

in the forwardlooking 

information, 

and (ii) certain 

material factors or 

assumptions were 

applied in drawing a 

conclusion or making 

a forecast for 

projection as 

reflected in the 







Issuer 






Experts 

Spokespersons 

– stated that additional 

information about (i) 

the material factors 

that could cause 

actual facts to differ 

materially from the 

conclusion, forecast 

or projection and (ii) 

the material factors 

or assumptions that 

were applied in 

drawing a conclusion 

or making a forecast 

or projection as 

reflected in the 


information, is 

contained in a 

readily-available 

document or in a 

portion of such a 

document and has 

identified that 

document or the 

portion (138.4(9.1)), 

and 

• the defendant had a 


drawing the conclusion 

or making the forecast 

or prediction 

(138.4(9) para. 2) 



C 


Reliance on Experts 

138.4(11) 

The part of the document 

or public oral statement 

containing the 

misrepresentation is part 

of a report, statement or 

opinion made by an 

expert that the 

responsible issuer 

obtained the written 

consent of the expert to 

use, so long as the 

consent has not been 

withdrawn in writing 

before the document was 

released or the public oral 

statement made and 





person 





Issuer 






Spokespersons 

• the defendant did 

not know and had no 

reasonable grounds 

to believe that there 

had been a 

misrepresentation in that 

part of the document or 

public oral statement, 

and 

• that part of the 

document or public oral 

statement fairly 

represented the report, 

statement or opinion of 

the expert 

Corrective Action – 

Misrepresentation 

138.4(15) 

The misrepresentation 

was made without the 

knowledge or consent of 

the defendant and if, after 

the defendant became 

aware of the 

misrepresentation before 

it was corrected, 

• the defendant promptly 

notified the issuer’s 

board of directors or 

other persons acting in 

a similar capacity of the 

misrepresentation, and 










person 






Experts 

Spokespersons 

• if no correction of the 

misrepresentation was 

made by the issuer 

within two business 

days after the 

defendant’s notification, 

the defendant promptly 

and in writing notified 

the Commission of the 

misrepresentation, so 

long as the disclosure 

was not prohibited by 

law or by professional 

confidentiality rules 



67

C 



Corrective Action – 

Failure to Make Timely 

Disclosure 

138.4(15) 

The failure to make timely 

disclosure was made 

without the knowledge or 

consent of the defendant 

and if, after the defendant 

became aware of the 

failure to make timely 

disclosure before it was 

disclosed, 



change 






• the defendant promptly 

notified the issuer’s 

board of directors or 

other persons acting in a 

similar capacity of the 


disclosure, and 

• if no subsequent 

disclosure of the 

material change as 

required by the Act was 

made by the issuer 

within two business 

days after the 

defendant’s notification, 

the defendant promptly 

and in writing notified 

the Commission of the 

failure to disclose, so 

long as the disclosure 

was not prohibited by 

law or by professional 

confidentiality rules 



C 


Confidential Disclosure of 

Material Change to OSC 

138.4(8) 

The defendant not liable if 

• the defendant proves 

that the material change 

was disclosed by the 

issuer in a report filed on 

a confidential basis with 

the Commission under 

subsection 75(3) of the 

Act 



change 

Issuer 






• the issuer had a 


making the disclosure on 

a confidential basis 

• where the information 

contained in the 

confidential report 

remains material, 

disclosure of the material 

change was made public 

promptly when the basis 

for confidentiality ceased 

to exist 

• the defendant or issuer 

did not release a 

document or make a 


that, due to the 

undisclosed material 

change, contained a 


• where the material 

change became publicly 

known in a manner other 

than the manner 

required under the Act, 

the issuer promptly 

disclosed the material 

change in the manner 

required under the Act 

Withdrawal of Expert’s 

Consent 

138.4(12) 

Expert proves that the 

written consent 

previously provided for 

use of its report, 

statement or opinion was 

withdrawn in writing 

before the document was 

released or the public 

oral statement was made 










person 

Experts 



69

C 




138.4(14) 

The defendant proves that 

• the misrepresentation 

was also contained in a 

document filed by or on 

behalf of another person 

or company, other than 

the issuer, with the 

Commission or any 

other securities 

regulatory authority in 

Canada or a stock 

exchange and was not 

corrected in another 

document filed by or on 

behalf of that other 

person or company 

before the release of the 

document or the making 

of the public oral 

statement, 





person 





Issuer 






Experts 

Spokespersons 

• the document or public 

oral statement contained 

a reference identifying 

the document that was 

the source of the 


• when the document was 

released or the public 

oral statement was 

made, the defendant did 

not know and had no 


believe that the 

document or public oral 

statement contained a 


Release Without 

Knowledge 

138.4(13) 

If the document in which 

the misrepresentation is 

made is not one that is 

required to be filed with 

the Commission, the 

defendant proves that at 

the time of release of the 

document, the defendant 

did not know and had no 


believe that the document 

would be released 

Misrepresentation in noncore 

document released 

by or on behalf of issuer 


Issuer 






Experts 


Calculating Damages 

D 

APPENDIX

D 

CALCULATING DAMAGES 

Formula for calculating damages 

(depends on when or if securities sold (under Situation 1) 

or repurchased (under Situation 2)) 

Situation 

0-10 trading days after 

correction 

More than 10 trading 

days after correction 

Not sold/repurchased 

after correction 

(1) 

Securities purchased 

after a misrepresentation 

or failure to make timely 

disclosure of a material 

change and before the 

subsequent correction 

Damages equal: 

Purchase Price minus 

Actual Disposition Price 

Damages equal the 

lesser of: 


Actual Disposition Price 

-and- 


Benchmark Price 



Benchmark Price 

(2) 

Securities sold after a 

misrepresentation or 


disclosure of a material 

change and before the 

subsequent correction 


Actual Repurchase Price 

minus Sale Price 

Damages equal the 

lesser of: 

Actual Repurchase Price 

minus Sale Price 

-and- 

Benchmark Price minus 

Sale Price 


Benchmark Price minus 

Sale Price 

Concepts 

Situation (1) 

Purchase Price: Amount paid for the issuer’s securities purchased between the time of the 

misrepresentation or failure to disclose and the time of the correction. This is an average 

price and includes commissions. 

Actual Disposition Price: Amount received for the issuer’s securities sold after the 

correction. This is an average price and includes commissions. 

Situation (2) 

Sale Price: Amount received for the issuer’s securities sold between the time of the 

misrepresentation or failure to disclose and the time of the correction. This is an average 

price and excludes commissions. 

Actual Repurchase Price: Amount paid for the issuer’s securities repurchased after the 

correction. This is an average price and excludes commissions. 

Both situations 

Benchmark Price: The trading price of the issuer’s securities for the ten trading days 

following the correction. This will presumably be an average or weighted average price – 

the details are to be set out in the regulations. If there is no published market in the 

security, the Benchmark Price is to be fixed by the court at an amount it considers just. 

Damages awards are generally subject to the limits (absent knowledge, in some cases) set 

out in Appendix E. 


Limits on Damages 

E 

APPENDIX

E 

LIMITS ON DAMAGES 

CLAIMS AGAINST: 

LIMITS: 


• greater of 5% of market cap and $1,000,000 

Director of 

Responsible Issuer* 

• greater of $25,000 and 50% of aggregate of director’s compensation from the issuer 

and its affiliates in past 12 months 

Officer of 

Responsible Issuer* 

• greater of $25,000 and 50% of aggregate of officer’s compensation from the issuer 

and its affiliates in past 12 months 

Influential Person* 

• greater of 5% of market cap and $1,000,000, if not an individual 

• greater of $25,000 and 50% of aggregate of his or her compensation from the issuer 

and its affiliates, if an individual, in past 12 months 


Influential Person* 

• greater of $25,000 and 50% of the aggregate of the director’s or officer’s compensation 

from the Influential Person and its affiliates in past 12 months 

Expert* 

• greater of $1,000,000 and the revenue that the expert and the affiliates of the expert 

have earned from the issuer and its affiliates in past 12 months 

Spokesperson* 

• greater of $25,000 and 50% of the aggregate of the person‘s compensation from the 

issuer and its affiliates in past 12 months 

* Limits do not apply if the plaintiff proves the defendant authorized, permitted or acquiesced in the making of the misrepresentation or the failure 

to make timely disclosure while knowing that it was a misrepresentation or failure to make timely disclosure, or influenced the making of the 

misrepresentation or the failure while knowing that it was a misrepresentation or failure to make timely disclosure. See also the discussion of 

proportionate liability in section 2.4.2. above. 


Proposed Corporate Governance Rules 

APPENDIX 

F

F 

Highlights of new proposed rules concerning 

corporate governance 

On June 27, 2003, the OSC (together with the securities regulatory authorities of all other Canadian jurisdictions, except 

British Columbia) published three new proposed rules for comment. These proposed rules respond to recent financial 

reporting scandals in the U.S., including Enron and Worldcom, and in light of U.S. Sarbanes-Oxley developments. The 

proposed rules: 

• require CEO and CFO certification of disclosure in companies’ annual and interim filings (Multilateral Instrument 52-109); 

• regulate the role and composition of audit committees (Multilateral Instrument 52-110); and 

• support the work of the new Canadian Public Accountability Board in its oversight of auditors of public companies 

(Multilateral Instrument 52-108). 

The comment period for the proposed rules extends until September 25, 2003 and the rules are expected to take effect on 

January 1, 2004. 

The substance of the proposed rules can be summarized as follows: 

CEO/CFO Certification 

Reflecting recent U.S. developments, the first of the new rules will require CEOs and CFOs of all Canadian public companies 

personally to certify: 

• that, to their knowledge, the issuer’s annual or interim filings, as the case may be, do not contain any 

misrepresentations or omissions and that they fairly present in all material respects the issuer’s financial condition, 

results of operations and cash flows. Annual and interim filings include an issuer’s annual information form, annual 

and interim financial statements and annual and interim MD&A. “Fair presentation” is indicated in a companion policy 

to refer to, without limitation, (i) the selection and proper application of appropriate accounting policies, (ii) the 

disclosure of financial information that is informative and reasonably reflects the underlying transactions, and (iii) the 

inclusion of additional disclosure necessary to provide investors with a materially accurate and complete picture of the 

issuer’s financial condition, results of operations and cash flows; 

• that they have designed (or caused to be designed under their supervision) and implemented disclosure controls and 

procedures and internal controls to provide reasonable assurances that (i) material information relating to the issuer is 

made known to them, particularly during the applicable time, and that such information is disclosed within the time 

periods specified under applicable securities legislation, and (ii) the issuer’s financial statements are fairly presented in 

accordance with generally accepted accounting principles; 

• that they have evaluated the effectiveness of the issuer’s disclosure controls and procedures and internal controls, and that 

their conclusions about the effectiveness of such disclosure controls and procedures and internal controls are disclosed in 

the annual MD&A; 

• that all significant deficiencies and material weaknesses in the issuer’s internal controls and any fraud, whether or not 

material, involving management or employees having a significant role in the issuer’s internal controls have been disclosed 

to the issuer’s audit committee and auditors; and 

• that the annual MD&A or interim MD&A, as the case may be, discloses whether any significant changes in the internal 

controls or in other factors that could significantly affect them were made during the period covered by the filings, 

including any correction of significant deficiencies or material weaknesses in such controls. 

Under a transitional feature of the proposed rule, the second through fifth bulleted paragraphs (regarding disclosure and internal 

controls) would only be required to be certified commencing January 1, 2005, in order to give issuers time to develop such 

controls to the certification level. 

The proposed rules do not define “disclosure controls and procedures” and “internal controls”, nor do they include an equivalent 

of the recently released SEC rules regarding management reporting on internal controls and the external auditor’s attestation to 

that report. However, OSC Chair David Brown has recently stated that the OSC will assess such rules and consider implementing 

comparable requirements in Ontario, including a requirement for auditor attestation. 


F 

Issuers that comply with U.S. federal securities laws and promptly file their U.S. certificates in Canada would be exempt from 

the certification requirements unless their financial statements are prepared in accordance with Canadian generally accepted 

accounting principles and are not filed together with U.S. certificates under U.S. federal securities laws. Certain foreign issuers, 

certain issuers of exchangeable securities and certain issuers of guaranteed securities would also be exempt from the certification 

requirements. Exemptive relief could also be granted by securities regulators. 

The wording of the certification must be exactly as set out in the proposed rules. An officer providing a false certification 

potentially could be subject to quasi-criminal, administrative or civil proceedings under securities laws. 

Role and Composition of Audit Committees 

As recently stated by OSC Chair David Brown, “to address the inherent conflict of interest and dangers of permitting 

management to oversee the relationship between an issuer and its external auditors”, the participating jurisdictions are 

proposing that: 

• audit committees have a minimum of three directors; 

• each member be independent; 

• each member be financially literate; and 

• each issuer disclose whether or not there is an audit committee financial expert serving on its audit committee and, if 

not, why not. 

The definition of independent is the absence of any direct or indirect material relationship with the issuer. This includes a 

relationship that could, in the view of the board of directors, reasonably interfere with the exercise of a director’s independent 

judgment. Certain prescribed relationships will cause a person to be considered to have a material relationship with the issuer, 

including, among others, (i) being an employee or officer of the issuer or an affiliated or subsidiary entity, (ii) being employed 

by the external auditor, and (iii) being a partner or executive officer of an entity providing paid accounting, consulting, legal, 

investment banking, or financial advisory services to the issuer. Family relationships may also lead to disqualification. 

Financial literacy is defined as the ability to read and understand a set of financial statements that present a breadth and level 

of complexity of accounting issues comparable to the breadth and complexity of the issues that can reasonably be expected to 

be raised by the issuer’s financial statements. An individual’s financial literacy must therefore be determined in relation to the 

issuer in question. 

The definition of audit committee financial expert is virtually identical to that adopted in the U.S., namely a person who 

has (i) an understanding of financial statements and the accounting principles used by the issuer to prepare its financial 

statements, (ii) the ability to assess the general application of such accounting principles in connection with the accounting 

for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating financial statements that 

present a breadth and level of complexity of accounting issues that are generally comparable to the breath and complexity of 

issues that can reasonably be expected to be raised by the issuer’s financial statements, or experience actively supervising one 

or more persons engaged in such activities, (iv) an understanding of internal controls and procedures for financial reporting, 

and (v) an understanding of audit committee functions. 

The audit committee’s responsibilities would explicitly relate to the appointment, compensation, retention and oversight of 

the external auditor, as well as to the pre-approval of all non-audit services to be provided by the external auditor. Audit 

committees must also have a written charter, and establish procedures to deal with allegations of accounting impropriety. 

Small issuers (i.e., those whose securities do not trade on the TSX, NYSE, ASE, NASDAQ National Market, NASDAQ 

SmallCap Market, Pacific Exchange or a non-Canadian and non-U.S. marketplace) will be exempt from the composition 

requirements and from the disclosure requirements. However, they will be required to comply with the remainder of the rule. 

In recognition of the unique needs of controlled companies, the draft rule permits an independent director of a public 

company to be a member of the audit committee of an affiliated entity. Thus, independent directors of a parent company 

would be permitted to be members of the audit committee of a subsidiary and vice versa. 

The rule would not apply to investment funds, issuers of asset-backed securities, certain subsidiaries and certain foreign issuers. 



77

F 

Support of the Canadian Public Accountability Board 

Under Multilateral Instrument 52-108, financial statements of public companies can be audited only by a firm that is in good 

standing with the Canadian Public Accountability Board (“CPAB”). Good standing is maintained by entering into and 

abiding by a “participation agreement” with the CPAB, under which the audit firm agrees to submit to CPAB oversight, 

including ongoing inspections. The initial application must also be approved. Because the Alberta and Manitoba commissions 

do not have the authority to make rules governing auditors, firms in those provinces are technically not required to enter into 

participation agreements, as the Instrument recognizes. 

In all participating provinces except Alberta and Manitoba, audit firms will be required to notify the audit committee of any 

reporting issuer by which it has been engaged to issue an auditor’s report, as well as (in many cases) the local securities regulator, 

in the event that it is sanctioned by the CPAB. This notification must occur within 5 business days of the imposition of the 

sanctions. However, in the case of less serious “quality control” deficiencies, the audit firm will have the opportunity to correct 

the problem within an agreed period without issuing a notification to clients. Comments are being sought as to whether 5 

business days is a sufficient time. 

Most foreign issuers reporting in jurisdictions in which Multilateral Instrument 52-108 is adopted will be deemed in 

compliance with the requirement to use only auditors in “good standing” if they comply with the regulations of their home 

jurisdictions. However, their auditors will be required to enter into participation agreements with the CPAB. The Notice and 

Request for Comments accompanying the Instrument specifically requests comments on this point, and suggests that the 

CPAB may enter into reciprocal arrangements with oversight bodies in other jurisdictions with respect to foreign audit firms. 

These three proposed rules are Canadian measures designed to restore investor confidence. The participating jurisdictions 

believe that they will be as robust as those implemented in the U.S., but have designed them to reflect the differences in 

Canadian markets, especially the significant number of controlled companies and the generally smaller size and resources of 

Canadian public companies. 


For more information, please call 

your usual Stikeman Elliott LLP contact 

or any of the following: 

William J. Braithwaite 

(416) 869-5654 

wbraithwaite@stikeman.com 

Mark E. Burton 

(613) 564-3467 

mburton@stikeman.com 

Bradley M. Davis 

(416) 869-5594 

bdavis@stikeman.com 

Peter F. C. Howard 

(416) 869-5613 

phoward@stikeman.com 

Katherine L. Kay 

(416) 869-5507 

kkay@stikeman.com 

Nathalie L. Mercure 

(416) 869-5658 

nmercure@stikeman.com 

Patrick J. O’Kelly 

(416) 869-5633 

pokelly@stikeman.com 

Simon Romano 

(416) 869-5596 

sromano@stikeman.com 

Edward J.Waitzer 

(416) 869-5587 

ewaitzer@stikeman.com

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