Despite their interconnectedness, Canadian and American capital markets are subject to regulatory regimes that differ from an institutional and substantial perspective. In Canada, the provinces and territories have jurisdiction to regulate securities. Each province has a governmental authority charged with the enactment and enforcement of rules pertaining to securities. While there is no national securities commission as in the US with the Securities and Exchange Commission, regulation is highly harmonized at the national level.
Canadian securities laws have been greatly influenced by the US’s disclosure-based model. However, until the 2000s, Canadian securities legislation did not provide for a statutory liability regime for the secondary market akin to Rule 10b-5 in the US. Investors had to rely on common law and civil law regimes to recover damages caused by misstatements and other failures to comply with disclosure requirements. Under these regimes the need to prove reliance ‘put meaningful redress out of reach for many who were harmed by dubious disclosure practices’ as the Supreme Court of Canada recognized. To address this shortcomings, a harmonized secondary market statutory liability regime was implemented by the provinces over fifteen years ago.
The goal of the new regime is to deter violations of continuous disclosure obligations rather than to provide compensation to investors. This policy choice was meant to avoid the adverse consequences of a compensatory regime such as opportunistic litigation (‘strike suits’). Thus, the regime is the product of an intricate set of provisions that seek to limit its scope. It also imposes a set of strict procedural requirements, including the need to obtain the court’s leave in order to commence an action.
The statutory liability regime has proved elusive. From a doctrinal perspective, the arcane drafting of the provisions has raised a host of questions with respect to its procedural and substantive dimensions. Further compounding the interpretative challenges, case law has essentially resulted from decisions at the leave stage. From a policy perspective, the effectiveness of the regime remains debated in light of the low volume of cases filed over the last fifteen years.
Against this backdrop, the recent decision of the Ontario Court of Appeal in Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v. Barrick Gold Corporation (Barrick Gold) deserves particular attention. The case springs from the disclosure of information by Barrick Gold with respect to the construction of Pascua-Lama, an important gold mining project in the high Andes of Chile and Argentina. Relying on the statutory liability regime, plaintiff argued that Barrick Gold made misrepresentations to the market by communicating untrue statements of material fact or omitting to state a material fact regarding the conduct of the project.
At the leave stage, two issues were raised by defendants. The first concerned the ‘public correction’ criterion that conditions the investor’s right of action. In a nutshell, where an issuer releases a document that contains a misrepresentation, the person has a right of action for damages if she acquired or disposed of the issuer’s security between the time when the document was released and the misrepresentation contained in the document was publicly corrected. In the absence of public correction, there should be no cause of action.
In its decision, the Court of Appeal challenged the role of public correction as a safeguard against unmeritorious litigation identified by the motion judge. The Court of Appeal refused to recognize that the public correction was a sine qua non condition for establishing cause of action. For the Court, the crux of the matter rested on the demonstration of a misrepresentation.
In contrast with the Court of Appeal’s opinion, my paper ‘Barrick Gold Corporation: A New Source of Instability for the Secondary Market Liability Regime in Canada?’ argues that the public correction requirement is a relevant instrument in the prevention of strike suits. Further, it argues that the discussion on the role of public correction gains in being reframed in light of the purpose of the regime. The objective is to encourage issuers, directors and officers to comply with disclosure obligations without exposing them to unlimited or undeterminable liability. Using this lens, the public correction requirement can be seen as providing an incentive to issuers to publicly and rapidly correct any misrepresentation, so as to limit the size of the class of investors who can claim damages under the statutory regime.
The second issue concerned the approach to determine the existence of a public correction. The Court of Appeal rejected a purely semantic and mechanical approach, favoring a contextual approach. Thus, where the alleged public correction does not clearly reveal the existence of the alleged misrepresentation, there is a need for a reasoned consideration of evidence of the context in which the alleged public corrections was made and how the alleged public corrections would be understood in the secondary market. While the contextual approach is more compatible with the deterrence goal, the comment criticizes the criteria proposed to conduct the analysis which requires to ask ‘whether the alleged public correction was reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement’. The comment argues that where a plaintiff alleges that an issuer has misstated a material fact or omitted to disclose a material fact, the focus of this inquiry should be on materiality as generally defined in Canadian securities law. This is so because the implicit allegation is that the ‘total mix' of information has been contaminated by the misstatement or the omission. Thus, the perspective should be that of the reasonable investor vis-à-vis the information that allegedly constitutes public correction.
Barrick Gold is a significant milestone in the evolution of the secondary market statutory liability regime in Canada. It introduces a novel interpretation of the conditions to establish a cause of action that does away with the public correction requirement. This interpretation underestimates the role of public correction that serves both to deter strike suits and enhance compliance with disclosure obligations. While the decision provides important guidance for assessing the existence of a public correction, the criteria proposed to conduct the analysis departs from the concept of materiality, raising coherence issues with the disclosure regime.
Stéphane Rousseau is a Full Professor and incumbent of the Chair in Governance and Business Law at the Faculty of Law, Université de Montréal.