Kerr v. Danier Leather Inc., 2007 SCC 44, [2007] 3 SCR 331

                                                 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.

______________________________

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

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

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.