SUPREME
COURT OF CANADA
Between:
Douglas
Kerr, S. Grace Kerr and James Frederick Durst
Appellants
v.
Danier
Leather Inc., Jeffrey Wortsman and Bryan Tatoff
Respondents
‑
and ‑
Ontario
Securities Commission
Intervener
Coram: McLachlin
C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and
Rothstein JJ.
Reasons
for Judgment:
(paras. 1 to
72):
|
Binnie J.
(McLachlin C.J. and Bastarache, LeBel, Deschamps, Fish, Abella, Charron and
Rothstein JJ. concurring)
|
______________________________
Kerr v.
Danier Leather Inc., [2007] 3 S.C.R. 331, 2007 SCC 44
Douglas Kerr,
S. Grace Kerr and James Frederick Durst Appellants
v.
Danier
Leather Inc., Jeffrey Wortsman and Bryan Tatoff Respondents
and
Ontario Securities Commission Intervener
Indexed
as: Kerr v. Danier Leather Inc.
Neutral
citation: 2007 SCC 44.
File
No.: 31321.
2007: March 20;
2007: October 12.
Present: McLachlin C.J.
and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and
Rothstein JJ.
on appeal from the court of appeal for ontario
Commercial law — Securities — Prospectus
misrepresentation — Company’s prospectus projecting results for fourth quarter
— Intra‑quarterly results lagged behind projection after prospectus filed
and before public offering closed — Intra‑quarterly results not disclosed
— Whether s. 130(1) of Securities Act requires company to disclose
“material facts” arising after prospectus filed — Whether change in company’s
results amounted to “material change” requiring disclosure — Whether forecast
contained implied representation of objective reasonableness — Whether Business
Judgment Rule has any application to disclosure requirements of Securities Act
— Securities Act, R.S.O. 1990, c. S.5, ss. 1, 57(1), 130(1).
Danier made an initial public offering of its shares
through a prospectus. The prospectus contained a forecast that included
Danier’s projected results for the fourth quarter of the fiscal year. An
internal company analysis prepared before its public offering closed showed
that Danier’s fourth quarter results were lagging behind its forecast. Danier
did not disclose its intra‑quarterly results before closing. The
appellants therefore brought a class proceeding for prospectus misrepresentation
under s. 130(1) of the Ontario Securities Act. The trial judge
found Danier liable for statutory misrepresentation. He concluded that the
prospectus impliedly represented that the forecast was objectively reasonable,
both on the date the prospectus was filed and on the date the public offering
closed. The poor fourth quarter results were material facts required by
s. 130(1) to be disclosed before closing. The implied representation that
the forecast was objectively reasonable, though true on the date the prospectus
was filed, was false on the closing date. The Court of Appeal, however,
reversed the trial judgment.
Held: The
appeal should be dismissed.
The Securities Act is remedial legislation and is
to be given a broad interpretation. It protects investors from the risks of an
unregulated market, and by its assurance of fair dealing and by the promotion
of the integrity and efficiency of capital markets it enhances the pool of
capital available to entrepreneurs. The Act supplants the “buyer beware” mind
set of the common law with compelled disclosure of relevant information. At
the same time, in compelling disclosure, the Act recognizes the burden it
places on issuers and sets the limits on what is required to be disclosed. When
a prospectus is accurate at the time of filing, s. 57(1) of the Act limits
the obligation of post‑filing disclosure to notice of a “material
change”, which the Act defines in s. 1 as “a change in the business,
operations or capital of the issuer that would reasonably be expected to have a
significant effect on the market price or value of any of the securities of the
issuer”. An issuer has no similar express obligation to amend a prospectus or
to publicize and file a report for the modification of material facts occurring
after a receipt for a prospectus is obtained that do not amount to a “material
change” within the meaning of the Act. A “material fact” is defined in the Act
more broadly than a “material change” and includes “a fact that significantly affects,
or would reasonably be expected to have a significant effect on, the market
price or value of . . . securities”. A change in intra‑quarterly
results is not itself a change in the issuer’s business, operations or capital
and, for that matter, does not necessarily signal that a material change has
occurred. Sales often fluctuate (as here) in response to factors that are
external to the issuer. The trial judge rightly found that Danier experienced
no material change. Consequently, no further disclosure was required and there
was no breach of s. 57(1). [32] [35] [46] [48]
If an issuer has fully complied with its regulatory
obligation under s. 57(1), it would be contrary to the scheme of the Act,
and to the intent of the Ontario legislature reflected therein, to find civil
liability against an issuer under s. 130(1) for failing to disclose post‑filing
information that does not amount to a material change. Imposition of civil
liability under s. 130(1) for an omission to do what the legislature as a
matter of policy has declined to require in s. 57(1) would simply be to
substitute the court’s view of policy for that adopted by the legislature. The
distinction between “material change” and “material fact” is deliberate and
policy‑based. Of course, if a material change arises during the period
of distribution, failure to disclose this change as required by s. 57(1)
could support an action under s. 130(1). In the case at bar, however, the
trial judge found that the intra‑quarterly results did not amount to a
material change. [38‑39] [43]
The trial judge, having also found the forecast to be
objectively reasonable as of the filing date, erred in proceeding to test the
objective reasonableness of the forecast at the date of closing, and assessing
damages for its perceived deficiencies as of that later date. The forecast did
carry an implied representation of objective reasonableness rooted in the
language of the prospectus, but this implied representation extended only until
the prospectus was filed. [49] [51]
While forecasting is a matter of business judgment,
disclosure is a matter of legal obligation. The Business Judgment Rule is a
concept well developed in the context of business decisions but should not be
used to qualify or undermine the duty of disclosure. The disclosure
requirements under the Act are not to be subordinated to the exercise of
business judgment. It is for the legislature and the courts, not business
management, to set the legal disclosure requirements. The traditional
justifications for the rule are that judges are less expert than managers in
making business decisions. Moreover, business decisions often involve choosing
from amongst a range of alternatives. In order to maximize returns for
shareholders, managers should be free to take reasonable risks without having
to worry that their business choices will later be second‑guessed by
judges. These justifications — based on relative expertise, and on the need to
support reasonable risk‑taking — do not apply to disclosure
decisions. [54‑55] [58]
Finally, the appellant D submitted that even if the
appeal is unsuccessful no costs should be awarded against him having regard to
s. 31(1) of the Class Proceedings Act, 1992. However, there is no
error in principle that would justify intervening in the discretionary costs
order made against D by the Court of Appeal. Class actions have become a
staple of shareholder litigation. This case is a piece of Bay Street
litigation that was well run and well financed on both sides. Success would
have reaped substantial rewards for the representative plaintiff and his
counsel. The proper interpretation of s. 130(1) of the Securities Act has
from the outset been the time bomb ticking under this case. The respondents
attempted to have this issue determined in their favour on a motion for summary
judgment heard in December 2000 but were unsuccessful. The result was a very
expensive piece of shareholder litigation. There is no magic in the form of a
class action proceeding that should in this case deprive the respondents of
their costs. The language of s. 31(1) is permissive. [60] [66] [69]
Cases Cited
Referred to: Pezim
v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557; Shaw
v. Digital Equipment Corp., 82 F.3d 1194 (1996); H.L. v. Canada
(Attorney General), [2005] 1 S.C.R. 401, 2005 SCC 25; Maple Leaf Foods
Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177; Peoples Department
Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68; Re
Anderson, Clayton Shareholders’ Litigation, 519 A.2d 669 (1986); Gariepy
v. Shell Oil Co. (2002), 23 C.P.C. (5th) 393, aff’d [2004] O.J.
No. 5309 (QL); Moyes v. Fortune Financial Corp. (2002), 61 O.R.
(3d) 770.
Statutes and Regulations Cited
Budget Measures Act (Fall),
2004, S.O. 2004, c. 31, Sched. 34,
s. 6.
Class Proceedings Act, 1992, S.O. 1992, c. 6, s. 31.
Courts of Justice Act,
R.S.O. 1990, c. C.43, s. 131.
Securities Act, R.S.O.
1990, c. S.5, ss. 1 “material change”, “material fact”,
“misrepresentation”, 3.9, 56, 57, 58, 130, 138.1.
Supreme Court Act,
R.S.C. 1985, c. S‑26, s. 40 .
Authors Cited
Ontario. Ministry of Finance. Five Year Review
Committee. Five Year Review Committee Final Report: Reviewing the
Securities Act (Ontario). Toronto: Ministry of Finance, 2003.
Ontario Securities Commission. OSC Bulletin, vol. 6
#22/83, “Consolidation of Remarks of Peter J. Dey Concerning Disclosure Under
the Securities Act Made to Securities Lawyers in Calgary and Toronto on
June 7 and 9”, p. 2361, August 5, 1983.
Orkin, Mark M. The Law of Costs,
2nd ed., vol. I. Aurora, Ont.: Canada Law Book, 1987 (loose‑leaf
updated November 2006).
Toronto Stock Exchange. Committee on Corporate
Disclosure. Final Report: Responsible Corporate Disclosure: A Search for
Balance, 1997.
Underwood, Harry, and René Sorell. “Danier Leather
Inc. and the Duty to Update a Prospectus” (2006), 43 Can. Bus. L.J. 134.
Waddams, S. M. The Law of
Contracts, 4th ed. Toronto: Canada Law Book, 1999.
APPEAL from a judgment of the Ontario Court of Appeal
(Laskin, Goudge and Blair JJ.A.) (2005), 77 O.R. (3d) 321, 261 D.L.R.
(4th) 400, 205 O.A.C. 313, 11 B.L.R. (4th) 1, [2005] O.J. No. 5388 (QL),
reversing a judgment of Lederman J. (2004), 46 B.L.R. (3d) 167, 23
C.C.L.T. (3d) 77, [2004] O.J. No. 1916 (QL). Appeal dismissed.
George S. Glezos,
Peter R. Jervis, Karen W. Kiang and Jasmine T.
Akbarali, for the appellants.
Alan J. Lenczner,
Q.C., and Jaan Lilles, for the respondent Danier Leather Inc.
Benjamin Zarnett
and Jessica Kimmel, for the respondents Jeffrey Wortsman and Bryan
Tatoff.
Kelley McKinnon
and Jane Waechter, for the intervener.
The judgment of the Court was delivered by
Binnie J. —
I. Introduction
1
This appeal raises questions about the continuous disclosure obligations
of an issuer seeking to sell its shares to the public by a prospectus governed
by the Ontario Securities Act, R.S.O. 1990, c. S.5. Purchasers under a
prospectus are given a statutory right of action if the prospectus or any
amendment contains a misrepresentation against the issuer and officers of the
issuer who signed the prospectus.
2
The genesis of this case was the unseasonably warm weather in the spring
of 1998 across central and eastern Canada. It coincided with Danier’s first
ever offering of its shares to the public. Not surprisingly, hot weather resulted
in lower than expected sales of leather garments at Danier’s stores and put at
risk achievement of the end of year (June 27) sales forecast contained in
its prospectus. When Danier management analysed the intra-quarterly results as
of May 16, 1998, it concluded that the year-end forecast could and
would still be met. The trial judge found that this assessment was made in
good faith. The Initial Public Offering (“IPO”) closed on
May 20, 1998, about half-way through the fourth quarter of the company’s
1998 fiscal year.
3
The trial judge held that even though management honestly believed the
year-end forecast would be met, its belief became objectively unreasonable in a
narrow window of time during the course of the distribution when it became
aware of a shortfall in expected sales, and at that point the company had a
duty to disclose this downturn before closing. Even though the issuer did
substantially achieve the forecasted sales on June 27, as management had
predicted, its lapse of judgment in failing to amend the prospectus with
updated sales information (intra-quarterly results) prior to the closing
constituted, he held, actionable misrepresentation.
4
However, the trial judge also found that the issuer had complied with
all of the regulatory requirements of Part XV (ss. 56 to 58) of the Act
governing the contents of its prospectus. In essence, the legal question is
whether a compliant issuer can be held civilly liable for statutory
misrepresentation for failing to update its prospectus with information that
comes to light during the period of distribution (i.e., after the prospectus
was filed on May 6, 1998 but prior to closing) to correct a statement
that was correct when made but which has become misleading. More succinctly,
is compliance with the regulatory demands of ss. 56 to 58 a shield against an
action for statutory misrepresentation under s. 130(1)?
5
The Court of Appeal answered this question in the affirmative, holding
that the trial judge had misinterpreted the disclosure requirements of the Securities
Act. In my view, the Court of Appeal is correct. Although disclosure lies
at the heart of an effective securities regime, the extent of the disclosure is
a matter of legislative policy. Balancing the needs of the investor community
against the burden imposed on issuers, the Ontario legislature adopted a policy
governing the continuous disclosure requirements of an issuer that drew the
line at “material change” in the “business, operations or capital of the
issuer” (s. 1). The trial judge found that the temporary slump in sales
implicated none of these things. Given that finding, and given the trial
judge’s further finding that Danier’s prospectus did not contain a
misrepresentation on the date of filing (May 6), the class action was
rightly dismissed.
II. Overview
6
The warm days of spring are not a blessing for everyone, it seems. As
temperatures rise, the sales of leather clothing can lag even in otherwise
prospering leather goods retail stores. The downturn in sales may simply
reflect the weather and indicate nothing negative about the strength of the
underlying business, as turned out to be the case here. Nevertheless, about
two weeks after closing, the respondents did issue a revised forecast
indicating that Danier would fall short of the sales and net income figures in
the original forecast. Danier’s share price dropped by about 22 percent. It
took until August 2000 for the shares to get back to their issue price. By
then, Danier’s business had grown substantially.
7
A number of purchasers had sold their new shares soon after the
announcement and lost money. The appellants then initiated a class action against
the respondents for failure to disclose material information, i.e., the
disappointing intra-quarterly results. They argued that the prospectus
contained a misrepresentation on the closing date (May 20), because even
though the year-end sales forecast was reasonable on the filing date
(May 6), lagging sales thereafter rendered it misleading to management’s
knowledge at the date of closing. The respondents, they argued, “omi[tted] to
state a material fact [i.e., lagging sales] that is . . . necessary to make a
statement [i.e., the sales forecast in the prospectus] not misleading in the
light of the circumstances in which it was made”, and this constituted an
actionable misrepresentation within the meaning of ss. 1 and 130 of the Act.
8
The respondents reply, in essence, that they fully complied with their
regulatory obligations. The legislature cannot have intended to punish under
s. 130(1) what it has permitted under s. 57(1). Moreover, they say a sales
forecast is not a “fact” but reflects the opinions of management, and such
opinions when held in good faith (as here) are protected by the Business
Judgment Rule. The issues were thus joined.
III. Facts
9
Danier designs, manufactures and sells leather clothing and
accessories. In 1998, it had 55 retail stores in various cities across Canada
and operated two manufacturing plants. At the relevant time, the respondent
Jeffrey Wortsman was a director and the President and Chief Executive Officer
of Danier. The respondent Bryan Tatoff was its Chief Financial Officer and
Secretary.
10
In 1997, Danier decided to go public. In preparation for its IPO,
Danier filed with the Ontario Securities Commission (“O.S.C.”), three
preliminary prospectuses, each of which contained a forecast. The forecast in
the April 6 preliminary prospectus was dated April 2, 1998, and was included,
unchanged, in the (final) prospectus, which was receipted by the O.S.C. on
May 6, 1998 (herein “prospectus forecast”).
11
The prospectus forecast is at the centre of this litigation. Danier’s
1998 fiscal year ran from June 29, 1997 to June 27, 1998. The
prospectus forecast included the company’s actual results for the first three
quarters, as well as projected results for the fourth quarter (which ran from
March 29 to June 27) and projected final results for the 1998 fiscal
year. Pursuant to National Policy 48, adopted by Canadian securities
regulators, this forecast was also accompanied by standard cautionary language
advising investors that “[a]ctual results achieved during the forecast period
will vary from the forecast results and such variations may be material. There
is no guarantee that such forecast will be achieved in whole or in part”
(Final Prospectus, at p. 8). The following are the key figures from the
prospectus forecast (at p. 27):
The
Forecast Figures Contained in the Prospectus
|
13
Weeks Ending
June 27,
1998
(Projected)
|
Year
Ending
June 27,
1998
(Projected)
|
Revenue
|
$17,410,000
|
$90,280,000
|
Net Earnings (Loss)
|
($384,000)
|
$4,500,000
|
An increase in
revenue of $5,000,000 was projected for the 1998 fourth quarter over that of
the 1997 fourth quarter. There were four more stores than in fiscal year 1997,
the square footage of store floor space had expanded and sales per square foot
had increased over the previous year.
12
The IPO was a “bought deal”, i.e., fully subscribed by the underwriters,
and closed on May 20. Danier sold 6,040,000 subordinated voting shares,
priced at $11.25 per share, for total gross proceeds of $67,950,000.
13
During the week before closing, Wortsman asked Tatoff to assemble and
analyse the financial results for the first half of the fourth quarter. The
underwriters had not requested a due diligence review, but Wortsman thought
that this “was the prudent course of action to take” (R.R., at p. 39). Tatoff
prepared an analysis as of May 16, and Wortsman admitted that he received
the results “certainly before closing” (R.R., at p. 41). These results
were worse than the results projected in the store budgets (which were the
basis of the sales forecast). In particular, as of May 16, Danier’s actual
fourth-quarter revenue was 24 percent behind projections. Moreover, the
company had as of May 16 posted a fourth-quarter net loss of $240,000
instead of the projected (as of May 16) fourth-quarter net earnings of
$259,000. Nonetheless, Wortsman and Tatoff testified that, at closing, they
still believed that by year end Danier would achieve or exceed the prospectus
forecast. As they explained, store budgets are “front-end loaded”. Adjusting
for that fact, the gross revenue shortfall as of May 16 was really only
about $700,000, they said, which put the net earnings disappointment in a
better light. With two major sales promotions planned for the second half of
the fourth quarter, Wortsman and Tatoff thought that Danier would at least make
up this shortfall.
14
However, the trial judge found that Wortsman and Tatoff made no real
effort to examine the root causes of the poor sales as of May 16. They
turned “a blind eye to the cause[s] of those results” ((2004), 46 B.L.R. (3d)
167, at para. 259), he said. For all they knew, it seems, the causes could
have been serious, internal and permanent and not necessarily something
external and transitory like the weather. They did not know, and apparently
did not choose to find out. That was his criticism.
15
Immediately after closing, Danier held the first of these planned
promotions, its annual Victoria Day Sale, which began on Thursday, May 21.
When he checked the results on Monday, May 25, Wortsman discovered that,
except in British Columbia, sales were down significantly as compared to the
previous year. He testified that these results were “completely unexpected”
(R.R., at p. 59). After some investigation, Wortsman concluded that there
was no problem with the company’s merchandise, but that the weather across the
country, except in British Columbia, had been unusually hot. Higher
temperatures (which management did not routinely monitor) meant decreased store
traffic and decreased sales. Wortsman at this point became concerned that a
hot spell, if prolonged, might jeopardize the company’s ability to achieve the
prospectus forecast. He explained this concern to the underwriters and to his
lawyers. The lawyers advised Wortsman that it would be prudent to issue a
revised forecast because of the risk that the hot weather would continue for
the rest of the fourth quarter.
16
Accordingly, on June 4, 1998, Danier announced in a press release
and a material change report that it had revised downwards its forecast for the
1998 fiscal year. The company advised that, “[d]ue to unseasonably warm
weather in most regions of the country with the exception of Vancouver, the
company believes that it will fall short of the previous sales and net income
forecast” (A.R., at p. 931). The following are the key figures from this
revised forecast, which was prepared as of June 2 and approved by the
board of directors on June 4:
Impact
of the Revised June 4 Forecast
|
13
Weeks Ending
June 27,
1998
(Projected)
|
Year
Ending
June 27,
1998
(Projected)
|
Difference
Between Prospectus Forecast and June 4 Forecast
|
Revenue
|
$12,630,000
|
$85,500,000
|
($4,780,000)
|
Net Earnings (Loss)
|
($1,149,000)
|
$3,735,000
|
($765,000)
|
17
The trial judge described the magnitude of the shift that underlay the
revised forecast:
The revised forecast differed significantly from the
original forecast. The revised expected revenue for the fiscal year was lower
by about 5%; revised net income was lower by about 17% and revised EBITDA was
lower by about 13%. As for the fourth quarter, revenues were now forecast to
be about 28% lower than had been expected in the Prospectus; the net loss for
the quarter was now expected to be almost three times larger than the original
forecast; and EBITDA was now expected to be a loss of approximately $1 million
instead of a positive $445,000. [para. 16]
18
The market quickly demonstrated the “materiality” of this information.
Prior to June 4, the company’s shares had been trading above their issue
price of $11.25, but the share price dropped immediately upon release of this
revised forecast. The trial judge found that the market had fully absorbed the
revision (and the share price stabilization activities carried out by the
underwriters) by June 10, when the shares closed at $8.90. The appellant
investors concluded that Danier had sat on the bad news to ensure the success
of its IPO, and that those who had purchased in ignorance were entitled to
compensation.
19
However, in the remaining weeks of the fourth quarter, Danier’s sales
improved significantly. The weather cooled, and the company held a successful
50 percent discount promotion. In the end, the trial judge found that Danier
“substantially achieved” the prospectus forecast.
20
On November 13, 1998, an action for prospectus misrepresentation was
commenced under s. 130(1) of the Act, claiming that the results of the
May 16 analysis should have been released before the IPO closed. On
December 3, 2002, the action was certified as a class proceeding with the
“class” defined as:
(a) Those persons in Canada who purchased shares of Danier Leather Inc.
in the distribution under its initial public offering which closed on
May 20, 1998, and who continued to hold those shares on June 4, 1998,
but not including [the defendants and certain persons associated with the
defendants].
James Frederick
Durst was appointed as the sole representative plaintiff for this class.
IV. Relevant Statutory Provisions
21
See Appendix.
V. Judicial History
A. Ontario
Superior Court of Justice
22
The trial judge said that he agreed with Cumming J., who had certified
the class action, that “it is the truthfulness of the Forecast as at May 20,
1998, that is relevant to establishing liability under s. 130(1) of the [Act]”
((2004), 46 B.L.R. (3d) 167, at para. 29). The trial lasted 44 days.
23
Lederman J. held that the sales forecast, while not itself a “fact in
the sense that actual results are facts” (para. 65), nevertheless includes the
following implied assertions of fact:
i. the forecast represents the forecaster’s best judgment of the
most probable set of economic conditions and the company’s planned course of
action . . . ,
ii. the forecast is sound and reliable in the sense that the
forecaster made it with reasonable care and skill . . . , and
iii. the forecaster generally believes the
forecast, the forecaster’s belief is reasonable and the forecaster is not aware
of any undisclosed facts tending to seriously undermine the accuracy of the
forecast . . . .
In his view, “a
forecast is an untrue statement of material fact if any of the factual
assertions implied in the forecast are untrue” (para. 77).
24
As of May 6, the date on which the prospectus was receipted,
Lederman J. found that management had complied with its obligation under s.
56(1) to provide “full, true and plain disclosure of all material facts” in the
prospectus. None of the implied assertions underpinning the forecast was
untrue as of that date. In particular, the appellants had failed to prove that
the forecast was not prepared with reasonable care and skill, or that
management’s subjective belief in the forecast was objectively unreasonable as
of that date.
25
Lederman J. agreed that the cause of the poor results was the weather,
which is not a change in the business, operations or capital of the issuer.
Accordingly, the sales results did not amount to a “material change” requiring
that an amendment to the prospectus be filed under s. 57(1). Nonetheless,
Lederman J. held that s. 130(1) imposed an obligation (independent of ss. 56(1)
and 57(1)) to disclose material facts arising during the period of distribution
that become necessary to make any of the implied assertions in Danier’s
prospectus not misleading as of the closing date, May 20. In this regard,
he stated that under s. 130(1) (as this provision read in 1998), liability
attached to a misrepresentation “if it was a misrepresentation at the time of
purchase”. The time of purchase is typically the date of closing. Thus, even
if the prospectus contained no misrepresentation when it was receipted, and no
obligation to amend it prior to closing was imposed by Part XV of the Act,
there could still be liability for misrepresentation. As Lederman J. wrote,
“[i]f a statement is true when made, but subsequent facts make it untrue to the
knowledge of the representor, then the subsequent facts must be disclosed”
(para. 94).
26
In this case, Lederman J. found that, because of management’s analysis
as of May 16, it knew that not all of the implied assertions of
fact were true, and this awareness continued until May 20. Though he
accepted the testimony of Wortsman and Tatoff that at closing they continued to
believe that the forecast was achievable, he found that this subjective belief
was no longer objectively reasonable:
Given the sheer magnitude of revenue that was required in the last 6
weeks of the quarter if Forecast was to be met, the little time remaining in
the quarter, the history of sales in that period and the fact that the cause of
the decline could continue, the May 16th
Analysis does not provide a reasonable basis for management’s optimism.
This information should have been disclosed prior to the closing of the IPO.
[para. 269]
27
Lederman J. held that the cautionary language in the prospectus did not
relieve the defendants of liability, because “no mention is made in the
cautions, assumptions or risk factors of the impact that weather may have on
Danier’s sales” (para. 199). With regard to damages, Lederman J. found that
those shareholders who sold their shares after June 10 were entitled to
the difference between the IPO price ($11.25) and the price at closing on
June 10 ($8.90), for a total loss of $2.35 per share.
28
In a subsequent judgment on costs, Lederman J. awarded partial indemnity
costs up to April 25, 2003 (the date of a settlement offer of $1.50 per share
versus the judgment award of $2.35 per share) and substantial indemnity costs
thereafter: (2005), 76 O.R. (3d) 60. Lederman J. also awarded the appellants a
cost premium of $1,000,000.
B. Ontario Court of Appeal (Laskin, Goudge and
Blair JJ.A.)
29
In a unanimous judgment, the Ontario Court of Appeal reversed the trial
judgment on three separate bases: (2005), 77 O.R. (3d) 321. Firstly, the court
said that while investors were entitled to assume that as of the filing date
(May 6) the prospectus provided “full, true and plain disclosure of all
material facts”, thereafter they were entitled only to notice of
material changes, and here no material changes arose during the
period of distribution. The trial judge had misinterpreted the phrase “if it
was a misrepresentation at the time of purchase” in s. 130(1). Properly
construed it meant only that investors “cannot sue for a misrepresentation in a
prospectus that was corrected by an amendment before their purchase or for [a]
misrepresentation that may be found in an amendment made after their purchase”
(para. 108).
30
Secondly, the court disagreed with Lederman J.’s finding that the
forecast contained an implied representation of objective reasonableness. The
court wrote that
in this case there is no evidence —
and nothing in the language of the prospectus itself — to suggest that the appellants’ subjective belief that the
Forecast was reasonable was shared by reasonable business people or was
otherwise being put forward as “objectively reasonable” . . . . [para. 141]
31
Thirdly, the court held that in any event the forecast was
objectively reasonable as of May 20, the closing date. The fact that the
forecast was substantially achieved, in the court’s view, was at least some
evidence of its objective reasonableness as of May 20. Moreover, the
court believed that Lederman J. erred by failing to give any deference to the
“business judgment” of senior management. On this point, the court wrote:
First, given the trial judge’s finding of an implied statement that the
forecast was reasonable, the exercise of determining whether there was a
misrepresentation has the concept of a business judgment about reasonableness
built into it. A forecast is a quintessential example of the exercise of
business judgment. This business judgment must be considered. Secondly, the “reasonableness”
that is the centrepiece of the business judgment rule involves a “range
of reasonableness”. [para. 157]
Applying the
Business Judgment Rule, the court found that Lederman J. had wrongly
substituted his own view as to whether the forecast was objectively reasonable
as of May 20 for management’s view, and also that Lederman J. had
overlooked important pieces of evidence that tended to support management’s
view. The court therefore allowed the appeal as to liability, and declined to
address the issue of damages. As to costs, the court characterized the
litigation as “a commercial dispute between sophisticated commercial actors who
are well resourced” ((2006), 20 B.L.R. (4th) 1, at para. 6), and
subsequently refused the representative plaintiff’s request that no costs be
awarded against him based on s. 31(1) of the Class Proceedings Act,
1992, S.O. 1992, c. 6. Costs were thus awarded to Danier, Wortsman
and Tatoff on a partial indemnity basis.
VI. Analysis
32
The Securities Act is remedial legislation and is to be given a
broad interpretation: Pezim v. British Columbia (Superintendent of Brokers),
[1994] 2 S.C.R. 557. It protects investors from the risks of an unregulated
market, and by its assurance of fair dealing and by the promotion of the
integrity and efficiency of capital markets it enhances the pool of capital
available to entrepreneurs. The Act supplants the “buyer beware” mind set of
the common law with compelled disclosure of relevant information. At the same
time, in compelling disclosure, the Act recognizes the burden it places on
issuers and in Part XV sets the limits on what is required to be disclosed.
The problem for the appellants is that when a prospectus is accurate at the
time of filing, s. 57(1) of the Act limits the obligation of post-filing
disclosure to notice of a “material change”, which the Act defines in s. 1 in
relevant part as
a change in the business, operations or capital of the issuer that would
reasonably be expected to have a significant effect on the market price or
value of any of the securities of the issuer . . . ;
An issuer has no
similar express obligation to amend a prospectus or to publicize and file a
report for the modification of material facts occurring after a receipt
for a prospectus is obtained. That is where the legislature has drawn the
line.
33
The appellants no longer dispute the trial judge’s finding that Danier’s
prospectus provided “full, true and plain disclosure of all material facts”
when it was receipted on May 6, 1998. However, they cite Shaw v.
Digital Equipment Corp., 82 F.3d 1194 (1st Cir. 1996), for the proposition
that an issuer should not be allowed to “exploit its informational trading
advantage, at the expense of investors, by delaying disclosure of material
nonpublic negative news until after completion of the offering” (p. 1204). As
to intra-quarterly results, Shaw states:
[G]iven that at any point in a quarter, the remainder of the period may
not mirror the quarter-to-date, is there a sufficient probability that
unexpectedly disastrous quarter-to-date performance will carry forward to the
end of the quarter, such that a reasonable investor would likely consider the interim
performance important to the overall mix of information available? . . . [T]he
question is whether the nondisclosure of interim facts rendered the prospectus
materially incomplete. [p. 1210]
The appellants
argue that Shaw’s “materially incomplete” test applies at least to the
extent of obliging issuers to correct misinformation, and this duty (grounded
in s. 130(1) itself) exists independently of the prospectus disclosure
requirements of ss. 56 to 58. The separate and continuing obligation on
issuers is to disclose any material facts arising after the date of the
prospectus and before closing that make any of the factual assertions implied
in the forecast untrue. The gist of the appellants’ complaint is succinctly
summarized in their factum as follows:
. . . Danier management decided not to disclose this [the
intra-quarterly] information to Danier’s board, counsel, auditors,
underwriters, or to the market. Rather, they closed the offering and collected
$67,950,000 in proceeds. Two weeks after closing, [Danier] finally disclosed
the information and a revised, substantially lower, forecast for Q4 and FY
1998. The market price of Danier’s shares immediately fell. In contrast to
the Wortsman Family Trust, which reaped $27,500,000, Danier’s investors lost
22% of their investment. [para. 1]
A. Did Section 130(1) of the Securities Act
Oblige Danier to Disclose Material Facts Arising After its Prospectus was
Filed?
34
The appellants argue that post-filing information falling short of
“material change” can nevertheless base an action for prospectus
misrepresentation because of the wording, as they interpret it, of s. 130(1)
which reads:
130.—(1) Where a prospectus together with any amendment to the
prospectus contains a misrepresentation, a purchaser who purchases a
security offered thereby during the period of distribution or distribution to
the public shall be deemed to have relied on such misrepresentation if it
was a misrepresentation at the time of purchase and has a right of action
for damages against,
(a) the issuer or a selling security holder on whose behalf the
distribution is made;
.
. .
(e) every person or company who signed the
prospectus or the amendment to the prospectus other than the persons or
companies included in clauses (a) to (d), . . .
35
Was the sales forecast, though found not to be a “material change”,
nevertheless a “misrepresentation” as of May 16, 1998? According to s. 1,
a “misrepresentation” can occur by
an omission to state a material fact that is . . . necessary to
make a statement not misleading in the light of the circumstances in which it
was made;
The argument,
therefore, is that failure to disclose the intra-quarterly results prior to
closing rendered the prospectus forecast “misleading” at the “time of purchase”
to the knowledge of the respondents, and therefore actionable under
s. 130(1). This is because a “material fact” is defined in the Act more
broadly than a “material change” and includes “a fact that significantly
affects, or would reasonably be expected to have a significant effect on, the
market price or value of . . . securities” (s. 1). The trial judge
concluded that the intra-quarterly results constituted a “material fact”.
36
The appellants further submit that nothing in s. 130(1) suggests
any legislative intent to alter the basic common law principle that requires a
representation that becomes untrue to the maker’s knowledge to be corrected
before it is acted upon (see S. M. Waddams, The Law of Contracts
(4th ed. 1999), at p. 315). In this vein, the appellants, as did the
trial judge, observe that s. 130(1) (as it stood in 1998) deems an
investor to have relied on a misrepresentation “if it was a misrepresentation
at the time of purchase”. Reference to “the time of purchase”, they say,
further indicates that an issuer’s duty to disclose material facts continues
until the closing date.
37
In my opinion, with respect, these submissions are not persuasive.
Prospective purchasers were entitled to assume that no material changes (as
defined in the Act) had occurred to the material facts disclosed in the
prospectus between the filing date and the closing date, but that is the extent
of the assurance given by the Act to prospective investors.
38
The appellants submit that s. 57(1) should not be used as a guide to the
interpretation of s. 130(1), relying in part on the argument that “s. 57(1)
says nothing about whether a material fact if disclosed may remain uncorrected
if it becomes untrue by the date of purchase, and thus the section does nothing
to limit any such duty that may otherwise exist”, as discussed by
H. Underwood and R. Sorell in “Danier Leather Inc. and the Duty to
Update a Prospectus” (2006), 43 Can. Bus. L.J. 134, at pp. 144-45.
However, such an interpretation would disregard the court’s duty to interpret
the statute “harmoniously” as a whole. Imposition of civil liability under s.
130(1) for an omission to do what the legislature as a matter of policy has
declined to require in s. 57(1) would simply be to substitute the court’s view
of policy for that adopted by the legislature. The distinction between
“material change” and “material fact” is deliberate and policy-based, as
explained by a former chairman of the O.S.C.:
The term
“material fact” is necessary when an issuer is publishing a disclosure
document, such as a prospectus or a take-over bid circular, where all material
information concerning the issuer at a point in time is published in one
document which is convenient to the investor. The term “material change” is
limited to a change in the business, operations or capital of the issuer. This
is an attempt to relieve reporting issuers of the obligation to continually
interpret external political, economic and social developments as they affect
the affairs of the issuer, unless the external change will result in a
change in the business, operations or capital of the issuer, in which case,
timely disclosure of the change must be made. [Emphasis added.]
(Remarks of Peter J. Dey concerning disclosure under the Securities
Act made to securities lawyers in Calgary and Toronto on June 7 and 9,
1983.)
As to the
current state of this policy, it is worth noting that both the Toronto Stock
Exchange Committee on Corporate Disclosure, Final Report: Responsible
Corporate Disclosure: A Search for Balance (1997) (“Allen Report”), and the
Ontario, Five Year Review Committee Final Report: Reviewing the Securities
Act (Ontario) (2003) (“Crawford Report”), considered whether the Securities
Act should be amended to require continuing disclosure by issuers of
material facts or whether the policy of requiring the disclosure of only
material changes should be continued. Both committees recommended against a
modification of the statutory policy.
39
Firstly, if an issuer has fully complied with its regulatory obligations
under ss. 56 to 58 of the Act it would be contrary to the scheme of the Act,
and to the intent of the Ontario legislature reflected therein, to find civil
liability against an issuer under s. 130(1) for failing to disclose post-filing
information that does not amount to a material change.
40
Secondly, the statutory definition of “misrepresentation” uses the past
tense in the phrase “in the light of the circumstances in which it was
made”. The appellants say the past tense “contemplates that a statement may
need correction later” (A.F., at para. 51). In my view, however, this past
tense simply signals that the relevant date for assessing the accuracy of a
statement is the effective date when the statement was made, i.e.,
the date the prospectus (or an amendment) was filed.
41
Thirdly, the appellants rely on the phrase “if it was a
misrepresentation at the time of purchase” but this reliance too, in my view,
is misplaced. These are words of limitation designed to ensure that s. 130(1)
does not impose civil liability for a representation that had become cured or
corrected at the date of purchase. Suppose, for example, that Danier owned an
important patent on a process for working leather, and trumpeted this fact in
its prospectus, inadvertently failing to disclose that a competitor had mounted
a serious court challenge to the patent’s validity. The Act gives the
purchasers the benefit of “deemed” reliance. The existence of a serious court
challenge would be a material fact. Yet if the challenge were settled or
discontinued and the patent thus vindicated before the time of purchase,
why should the omission attract damages or rescission? The answer, according
to the language of s. 130(1), is that it does not.
42
The appellants’ reliance on the common law as a guide to the
interpretation of s. 130(1) is also unconvincing. The common law does not
require a person selling shares to issue a prospectus. It does not define or
distinguish between material facts and material changes. It does not create a
scheme of compelled disclosure with its own requirements and limits on those
requirements. It is the Act and not the common law that settles the policy.
43
In summary, when (as here) a prospectus (or an amendment) contains no
misrepresentation on the date the document is filed, information
amounting to material facts (but not material changes) that
arises subsequently cannot support an action under s. 130(1). (Of course, if a
material change arises during the period of distribution, failure to
disclose this change as required by s. 57(1) could support an action under s.
130(1).) In the case at bar, however, the trial judge found that the
intra-quarterly results were not a material change, and as will be
explained, I agree with the trial judge in this regard. Such is the prospectus
disclosure policy presently mandated by the Act and the courts are obliged to
give effect to it. In contexts other than “prospectus misrepresentation”,
including regulatory or stock exchange oversight, a different policy may
prevail, depending on the governing rules and enactments. This appeal is
concerned only with s. 130(1).
44
For the sake of completeness, I note that s. 130(1) was amended by
the Budget Measures Act (Fall), 2004, S.O. 2004, c. 31,
Sched. 34, s. 6, but the change is not material to the present appeal.
B. Did the Courts Below Err in Failing to
Find That the Intra-Quarterly ResultsAmounted to a Material Change?
45
In an alternative argument, the appellants insist that the trial judge
erred in failing to find that the intra-quarterly results constituted a
“material change” that should have been disclosed pursuant to s. 57(1). For ease
of reference, I repeat the definition of a “material change” in s. 1(1) of the
Act:
. . . a change in the business, operations or capital of the
issuer that would reasonably be expected to have a significant effect on the
market price or value of any of the securities of the issuer . . . .
The appellants
submit that “the change in the results of Danier’s operations amounted
to a material change” (A.F., at para. 56 (emphasis added)), but this submission
conflates “operations” with “results of operations”. The shortfall in sales
noted on May 16, 1998 is properly characterized as “results of
operations”, a term which is now found in ss. l(1), 3.9 and 138.1 of the Act.
Again, the legislature could have included “results of operations” in the
definition of “material change” if it had intended to cast the disclosure
obligation so widely, but they did not.
46
The appellants rely in this respect on Pezim, at p. 600,
where the Court agreed with the British Columbia Securities Commission that “a
change in assay and drilling results can amount to a material change depending
on the circumstances”. A change in assay or drilling results is itself a
change in the issuer’s “assets” (the term then used in the British Columbia Securities
Act), but a change in intra-quarterly results is not itself a change in the
issuer’s business, operations or capital and, for that matter, does not
necessarily signal that a material change has occurred. Sales often fluctuate
(as here) in response to factors that are external to the issuer.
47
It almost goes without saying that poor intra-quarterly results may reflect
a material change in business operations. A company that has, for example,
restructured its operations may experience poor intra-quarterly results because
of this restructuring, but it is the restructuring and not the results
themselves that would amount to a material change and thus trigger the
disclosure obligation. Additionally, poor intra-quarterly results may motivate
a company to implement a change in its business, operations or capital in an
effort to improve performance. Again, though, the disclosure obligation would
be triggered by the change in the business, operations or capital, and not by
the results themselves.
48
In the present case, there is no evidence that Danier made a change in
its business, operations or capital during the period of distribution. It is
not disputed that the revenue shortfall as of May 16 was caused by the
unusually hot weather, a factor external to the issuer. Consequently, Danier
experienced no material change that required disclosure and did not breach s.
57(1).
C. Did the Forecast Contain an Implied
Representation of Objective Reasonableness?
49
The trial judge found that the forecast contained an implied
representation of objective reasonableness that extended until closing on
May 20. The Court of Appeal disagreed, holding that the forecast
contained no implied representation of objective reasonableness in fact, and
that none is implied as a matter of law. In my view, as a matter of fact,
the forecast did carry an implied representation of objective
reasonableness rooted in the language of the prospectus, but this implied
representation extended only until the prospectus was receipted on May 6.
50
The forecast was prepared as of April 2, and in the prospectus it is
stated that “[t]he Forecast is based on assumptions that reflect management’s
best judgement of the most probable set of economic conditions and the
Company’s planned course of action as of April 2, 1998” (Final
Prospectus, at p. 26). Likewise, the Auditors’ Report, dated April 6,
advises that “the assumptions developed by management are suitably supported
and consistent with the plans of the Company, and provide a reasonable basis
for the forecast” (ibid.). The prospectus further states that the
assumptions were “considered reasonable by the Company at the time of
preparation of the forecast” (p. 8) and that “[t]he Forecast has been
prepared using generally accepted accounting principles” (p. 27).
Significant assumptions are then listed. That is enough, it seems to me, for
potential investors to infer not just that the forecast represents management’s
best judgment (as the Court of Appeal held), but also that management’s judgment
is based on facts and assumptions that reasonable business people in possession
of the same information as Danier’s management would reasonably regard as
reliable for the purpose of a forecast.
51
The forecast was not, however, put forward as objectively reasonable as
of May 20 or, for that matter, as of any date after May 6. The
prospectus stated that “[t]he financial reports issued by the Company to its
shareholders during the forecast period will contain either a statement that
there are no significant changes to be made to the Forecast or a revised
forecast accompanied by explanations of significant changes” (Final Prospectus,
at p. 26), but no financial reports were issued to shareholders during the
period of distribution. The prospectus did not promise that the
forecast would be updated if and as soon as conditions changed. Potential
investors should therefore have recognized that the forecast was just a
snapshot of the company’s prospects as of May 6. Accordingly, the trial
judge, having found the forecast to be objectively reasonable as of May 6,
erred in going on to evaluate the objective reasonableness of the forecast at
the date of closing, and assessing damages for its perceived deficiencies as of
that date.
D. Does the Business Judgment Rule Have any
Application to the Disclosure Requirements Under Sections 56 to 58 of the
Securities Act?
52
The respondents invoke the Business Judgment Rule. The Court of Appeal
held that the trial judge had paid insufficient deference to management’s
expertise in forecasting sales based on years of hands-on retail experience.
At para. 165, the Court of Appeal said:
The trial judge’s point of view is necessarily a
retrospective one. By contrast, the point of view of Wortsman and Tatoff was a
prospective one, informed by the circumstances as they were on May 20.
Their view might have been an optimistic one, but it was not unreasonable in
the sense that it was outside a range of reasonable views of Danier’s situation
at that time.
Accordingly, in
that court’s view, there was no breach of any implied assertion of “objective
reasonableness” as of May 20. Thus, even if (which they doubted) there
was such an implied assertion, no follow-up disclosure obligation was
triggered. For the reasons already stated, I accept that as of May 6 (the
date of receipt) there was an implied assertion by the issuer of objective
reasonableness. The trial judge found the assertion to be true as of May 6.
End of argument.
53
However, even if the situation is to be considered as of May 20, as
contended for by the appellants (a faulty approach, as already stated), the
trial judge still erred in finding that the implied assertion was incorrect as
of the closing date. The respondents’ expert had testified that the forecast
remained objectively reasonable as of May 20, and neither of the
appellants’ experts testified to the contrary. The trial judge failed to
provide any persuasive reasons to reject the unchallenged expert testimony on
that point. His finding in that respect “can properly be characterized as
‘unreasonable’ or ‘unsupported by the evidence’”: H.L. v. Canada (Attorney
General), [2005] 1 S.C.R. 401, 2005 SCC 25, at para. 56.
54
On the broader legal proposition, however, I agree with the appellants
that while forecasting is a matter of business judgment, disclosure is a matter
of legal obligation. The Business Judgment Rule is a concept well-developed in
the context of business decisions but should not be used to qualify or
undermine the duty of disclosure. The Business Judgment Rule was well stated
by Weiler J.A. in Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42
O.R. (3d) 177 (C.A.):
The court looks to see that the directors made a reasonable decision not
a perfect decision. Provided the decision taken is within a range of
reasonableness, the court ought not to substitute its opinion for that of the
board even though subsequent events may have cast doubt on the board’s
determination. As long as the directors have selected one of several reasonable
alternatives, deference is accorded to the board’s decision . . . . [Emphasis
deleted; p. 192.]
55
I do not agree with the respondents that the Business Judgment Rule,
thus formulated, applies here. This is not to say that the expertise of
Wortsman and Tatoff was not relevant to an analysis of the events leading up to
the May 20 closing. If, contrary to my view, a disclosure obligation had
arisen as the appellants contend, management would have been required to
disclose the fourth quarter slump in sales but management could have announced
with confidence that in its business judgment the forecast would nevertheless
be met by the company’s financial year end. Potential investors would have the
current facts and might accept or not management’s business judgment about the
future outcome. However, the disclosure requirements under the Act are not to
be subordinated to the exercise of business judgment. I do not believe the
Court of Appeal intended to say otherwise, although its treatment of the
“objective reasonableness” issue arguably had that effect in this case. It is
for the legislature and the courts, not business management, to set the legal
disclosure requirements.
56
In Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3
S.C.R. 461, 2004 SCC 68, for example, a decision by management to implement a
joint inventory procurement policy was challenged. In holding that
management’s decision was reasonable, the Court explained the judicial role in
the context of that particular business decision as follows:
Courts are ill-suited and should be reluctant to second-guess the
application of business expertise to the considerations that are
involved in corporate decision making, but they are capable, on the
facts of any case, of determining whether an appropriate degree of prudence
and diligence was brought to bear in reaching what is claimed to be a
reasonable business decision at the time it was made. [Emphasis added; para.
67.]
The O.S.C. in
its argument stated with apparent confidence that “[t]he business judgment rule
has never been applied in relation to securities disclosure generally or, more
particularly, to forecasts contained in a prospectus” (O.S.C. Factum, at para.
2).
57
In Re Anderson, Clayton Shareholders’ Litigation, 519 A.2d 669
(1986), the Court of Chancery of Delaware declined to apply the business
judgment rule to determine whether accurate disclosure had been made to
shareholders in proxy disclosures and supplemental disclosures, stating:
. . . one of the underlying reasons for the great deference the business
judgment rule carries with it, is not present in a setting of this kind. The
quality of disclosure is inherently something that the court itself must
ultimately evaluate. [p. 675]
58
The traditional justifications for the rule argue against its
application here. It is said, truly enough, that judges are less expert than
managers in making business decisions. Moreover, business decisions often
involve choosing from amongst a range of alternatives. In order to maximize
returns for shareholders, managers should be free to take reasonable risks
without having to worry that their business choices will later be
second-guessed by judges. These justifications — based on relative
expertise, and on the need to support reasonable risk-taking — do
not apply to disclosure decisions. Agreement with the appellants on this
point, while it is an important point, does not change the outcome of the
appeal. The appellants’ argument had already suffered two fatal blows before
arriving at this point. The appeal on liability must still be dismissed.
E. Did the Trial Judge Err in the Manner in
Which He Calculated Damages?
59
In light of the conclusion that the appellants’ class action must be
dismissed, it becomes unnecessary to address the appellants’ arguments on
damages.
VII. Costs
60
The appellant Durst argued that the Court of Appeal erred as a matter of
law in awarding costs against him as the representative plaintiff because of
its misinterpretation of s. 31(1) of the Class Proceedings Act, 1992.
Quite apart from s. 31(1), he says, general concerns about access to
justice justified a departure from the usual rule that costs follow the event.
The Court of Appeal, in effect, held that there was no more reason in this case
for the successful defendants to carry the full costs of the defence than in
any other commercial litigation.
61
The costs of the proceedings in the courts below were very much in the
discretion of the Court of Appeal: Courts of Justice Act, R.S.O. 1990,
c. C.43, s. 131. I would not interfere with its disposition.
62
There is no doubt that the representative plaintiff, Mr. Durst, was
outraged by what he regarded as the devious conduct of the respondents, and
considered that it was in the public interest to call them to account.
Nevertheless, he also has a major personal financial interest in the outcome.
He purchased 222,600 shares in Danier’s IPO and made a profit of approximately
$1.5 million when he sold these shares. If the trial judgment had not
been reversed on appeal, he would also have recovered an additional $518,410 by
way of damages. He acknowledged that he was a person of substance, with an
investment portfolio in the range of $11‑22 million. (Although put
forward as potential representative plaintiffs, the certification judge
considered the appellants Douglas Kerr and S. Grace Kerr unacceptable in that
role because Ms. Kerr was a partner in the law firm seeking to be class
counsel ((2001), 19 B.L.R. (3d) 254, at para. 68) and
that “[a]s a
general principle, it is best that there is no appearance of impropriety. In
this situation, there is the perception of a potential for abuse by class
counsel through acting in their own self‑interest rather than in the
interests of the class” (para. 72). Accordingly, “the Kerrs are not
approved as representative plaintiffs. Mr. [D]urst is approved as the
sole representative plaintiff” (para. 73).)
63
There is nothing to be criticized in any of this. The trial judge noted
that the costs incurred by Mr. Durst in this litigation outweighed any
personal financial benefit. However, protracted litigation has become the
sport of kings in the sense that only kings or equivalent can afford it. Those
who inflict it on others in the hope of significant personal gain and fail can
generally expect adverse cost consequences.
64
The appellants are correct to point out that there is a strong public
interest in setting the rules of adequate disclosure by issuers prior to
closing, that indeed proper disclosure is the heart and soul of the securities
regulations across Canada. However, regard must also be had to the situation
of the respondents/defendants who have incurred the costs of a 44-day trial and
5 days in the Court of Appeal and one day here to defend themselves against
serious allegations, and who in this instance have prevailed.
65
Section 31(1) of the Class Proceedings Act, 1992, provides:
31.—(1) In exercising its discretion with
respect to costs under subsection 131 (1) of the Courts of Justice Act,
the court may consider whether the class proceeding was a test case, raised a
novel point of law or involved a matter of public interest.
It has not been
established that this is a “test case” in the conventional sense of a case
selected to resolve a legal issue applicable to other pending or anticipated
litigation. Nor have the appellants raised a “novel point of law”. As we have
seen, the heart of the case is simply a shareholder dispute over a lot of money
requiring the application of well‑settled principles of statutory
interpretation to particular legislative provisions. This is the usual fodder
of commercial litigation (see generally Gariepy v. Shell Oil Co. (2002),
23 C.P.C. (5th) 393 (Ont. S.C.J.), aff’d [2004] O.J. No. 5309 (QL) (Div. Ct.),
at para. 8; Moyes v. Fortune Financial Corp. (2002), 61 O.R. (3d) 770
(S.C.J.), at paras. 4-5).
66
While counsel for the appellants have put before the Court exhaustive
research into the U.S. jurisprudence on different variants of statutory
language, and have said what could be said on their clients’ behalf, the proper
interpretation of s. 130(1) of the Ontario Act has from the outset been the
time bomb ticking under their case. The respondents attempted to have this
issue determined in their favour on a motion for summary judgment heard in
December 2000 but were unsuccessful. The result was a very expensive piece of
shareholder litigation, but there is no magic in the form of a class action
proceeding that should in this case deprive the respondents of their costs.
The language of s. 31(1) is permissive.
67
The Class Proceedings Act, 1992 uses the expression “matter of public
interest” in s. 31(1) in the sense of a matter that involves “either issues of
broad public importance or persons who are historically disadvantaged in
society” (M. M. Orkin, The Law of Costs (2nd ed.
(loose-leaf)), vol. 1, at §208.2.1 (footnote omitted)). The appellants contend
that the present case raises a matter of public interest, indeed they say that
this may well be “the first Canadian case to consider statutory prospectus
misrepresentation” (Supp. A.F., at para. 1). However, this is a dispute where
private commercial interests predominated.
68
We are certainly not dealing with people on either side who are
historically disadvantaged. Nor, as the Court of Appeal noted, “is it a
contest characterized by significant power imbalance” ((2006), 20 B.L.R. (4th)
1, at para. 6). Though many Canadians are investors and the resolution of
the present dispute will affect future actions for prospectus
misrepresentation, the Court of Appeal rightly concluded that this is, in
essence, “a commercial dispute between sophisticated commercial actors who are
well resourced” (para. 6). If anything, converting an ordinary piece of
commercial litigation into a class proceeding may be seen by some observers
simply as an in terrorem strategy to try to force a settlement. Be that
as it may, Mr. Durst was well aware that as a representative plaintiff he
ran the risk of being held solely responsible for the defendants’ costs if the
action failed. He gambled on his interpretation of s. 130(1) and lost.
69
Nor do general concerns about access to justice warrant a departure from
the usual cost consequences in this case. While I agree with counsel for the
appellants that “[a]n award of costs that exceeds or outweighs the potential
benefits of litigation raises access to justice issues” (Supp. A.F., at para.
39), it should not be assumed that class proceedings invariably engage access
to justice concerns to an extent sufficient to justify withholding costs from
the successful party. I agree with the observation of Nordheimer J. in Gariepy
that caution must be exercised not to stereotype class proceedings. “[T]he
David against Goliath scenario” he writes, “does not necessarily represent an
accurate portrayal of the real conflict” (para. 6). Class actions have become
a staple of shareholder litigation. The Court of Appeal took the view that
this case is a piece of Bay Street litigation that was well run and well
financed on both sides. Success would have reaped substantial rewards for the
representative plaintiff and his counsel. He put the representative
respondents to enormous expense and I see no error in principle that would
justify our intervention in the discretionary costs order made against him by
the Court of Appeal.
70
By the time it reached this Court, the case had narrowed to a half-day
argument about statutory interpretation. The legal issue is important, as is
required for leave to be granted under s. 40 of the Supreme Court Act,
R.S.C. 1985, c. S-26 , but the circumstances already discussed do not justify
our Court in departing from the usual rule that costs follow the result.
71
In the Court of Appeal, the costs were awarded only against the then
respondent Durst. In this Court, the respondents claim costs only against the
appellant Durst. It appears from the material before us that the appellants
Douglas Kerr and S. Grace Kerr took no active role in the appeal to this
Court. Yet, the appellants’ supplementary factum speaks of costs for or
against “the appellants” (plural) (para. 8). On this record, costs should be
awarded against the respondent Durst only, with leave to Durst, if he contends
that the costs order should go against the Kerrs as well, to apply in writing to
the Court for a variation of the costs order to include the Kerrs within 30
days from the date of this judgment.
VIII. Disposition
72
For the foregoing reasons, I would dismiss the appeal with costs against
the appellant Durst with leave to Durst to apply to extend the costs order to
include the appellants Douglas Kerr and S. Grace Kerr within 30 days of this
date.
APPENDIX
Securities
Act, R.S.O. 1990, c. S.5 (all provisions as they were in 1998)
1.—(1)
In this Act,
.
. .
“material change”, where used in relation to the affairs of an
issuer, means a change in the business, operations or capital of the issuer
that would reasonably be expected to have a significant effect on the market
price or value of any of the securities of the issuer and includes a decision
to implement such a change made by the board of directors of the issuer or by
senior management of the issuer who believe that confirmation of the decision
by the board of directors is probable;
“material fact”, where used in relation to securities issued or
proposed to be issued, means a fact that significantly affects, or would
reasonably be expected to have a significant effect on, the market price or
value of such securities;
“misrepresentation” means,
(a) an untrue statement of material fact, or
(b) an omission to state a material fact that is required to be
stated or that is necessary to make a statement not misleading in the light of
the circumstances in which it was made;
.
. .
56.—(1) A prospectus shall provide full, true and plain
disclosure of all material facts relating to the securities issued or proposed
to be distributed and shall comply with the requirements of Ontario securities
law.
57.—(1) Subject to subsection (2), where a material adverse
change occurs after a receipt is obtained for a preliminary prospectus filed in
accordance with subsection 53 (1) and before the receipt for the prospectus is
obtained or, where a material change occurs after the receipt for the
prospectus is obtained but prior to the completion of the distribution under
such prospectus, an amendment to such preliminary prospectus or prospectus, as
the case may be, shall be filed as soon as practicable and in any event within
ten days after the change occurs.
.
. .
58.—(1) Subject to subsection (3) of this section and
subsection 63 (2), a prospectus filed under subsection 53 (1) or subsection 62
(1) shall contain a certificate in the following form, signed by the chief
executive officer, the chief financial officer, and, on behalf of the board of
directors, any two directors of the issuer, other than the foregoing, duly
authorized to sign, and any person or company who is a promoter of the issuer:
The
foregoing constitutes full, true and plain disclosure of all material facts
relating to the securities offered by this prospectus as required by Part XV of
the Securities Act and the regulations thereunder.
.
. .
130.—(1) Where a prospectus together with any amendment
to the prospectus contains a misrepresentation, a purchaser who purchases a
security offered thereby during the period of distribution or distribution to
the public shall be deemed to have relied on such misrepresentation if it was a
misrepresentation at the time of purchase and has a right of action for damages
against,
(a) the issuer or a selling security holder on whose behalf the
distribution is made;
(b) each underwriter of the securities who is required to sign
the certificate required by section 59;
(c) every director of the issuer at the time the prospectus or
the amendment to the prospectus was filed;
(d) every person or company whose consent has been filed
pursuant to a requirement of the regulations but only with respect to reports,
opinions or statements that have been made by them; and
(e) every person or company who signed the prospectus or the
amendment to the prospectus other than the persons or companies included in
clauses (a) to (d),
or, where the
purchaser purchased the security from a person or company referred to in clause
(a) or (b) or from another underwriter of the securities, the purchaser may
elect to exercise a right of rescission against such person, company or
underwriter, in which case the purchaser shall have no right of action for
damages against such person, company or underwriter.
(2) No person or company is liable under subsection (1) if he, she or
it proves that the purchaser purchased the securities with knowledge of the
misrepresentation.
. . .
(5) No person or company, other than the issuer or selling security
holder, is liable under subsection (1) with respect to any part of the
prospectus or the amendment to the prospectus not purporting to be made on the
authority of an expert and not purporting to be a copy of or an extract from a
report, opinion or statement of an expert unless he, she or it,
(a) failed to conduct such reasonable investigation as to
provide reasonable grounds for a belief that there had been no
misrepresentation; or
(b) believed there had been a misrepresentation.
.
. .
(7) In an action for damages pursuant to subsection (1), the
defendant is not liable for all or any portion of such damages that the
defendant proves do not represent the depreciation in value of the security as
a result of the misrepresentation relied upon.
. . .
(9) In no case shall the amount recoverable under this section exceed
the price at which the securities were offered to the public.
(10) The right of action for rescission or damages
conferred by this section is in addition to and without derogation from any
other right the purchaser may have at law.
Class
Proceedings Act, 1992, S.O. 1992, c. 6
31.—(1) In exercising its discretion with respect to costs
under subsection 131 (1) of the Courts of Justice Act, the court may
consider whether the class proceeding was a test case, raised a novel point of
law or involved a matter of public interest.
(2) Class members, other than the representative
party, are not liable for costs except with respect to the determination of
their own individual claims.
Appeal dismissed with costs.
Solicitors for the appellants: Lerners, Toronto.
Solicitors for the respondent Danier Leather Inc.: Lenczner
Slaght Royce Smith Griffin, Toronto.
Solicitors for the respondents Jeffrey Wortsman and Bryan
Tatoff: Goodmans, Toronto.
Solicitor for the intervener: Ontario Securities
Commission, Toronto.