SECONDARY MARKET CIVIL LIABILITY COMES TO BC

July 14, 2008

On July 4, 2008, some amendments to the British Columbia Securities Act and Securities Rules came into effect providing new statutory remedies for investors in the secondary market who suffer damages from misleading disclosure. This new secondary market civil liability framework is already in effect in all other provinces and it will be interesting to see if more class actions will now ensue in the BC "no-costs" class actions regime. D&O insurers will be taking note.

The Act now provides new statutory remedies for investors in the secondary market who suffer damages from misleading disclosure but also provides protections for defendants against excessive liability. The crux of the amendment is the following section of the Act:

      “140.3 (1) Where a responsible issuer or a person with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation, a person who acquires or disposes of the issuer's security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person relied on the misrepresentation, a right of action for damages against

1. the responsible issuer,

2. each director of the responsible issuer at the time the document was released,

3. each officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document,

4. each influential person, and each director and officer of an influential person, who knowingly influenced

1. the responsible issuer or any person acting on behalf of the responsible issuer to release the document, or

2. a director or officer of the responsible issuer to authorize, permit or acquiesce in the release of the document, and

5. each expert where

1. the misrepresentation is also contained in a report, statement or opinion made by the expert,

2. the document includes, summarizes or quotes from the report, statement or opinion of the expert, and

3. if the document was released by a person other than the expert, the expert consented in writing to the use of the report, statement or opinion in the document.”

2. The Act adds a new defence against civil liability for a misrepresentation in forward-looking information in a prospectus, take over or issuer bid document, or offering memorandum. The defence is worded as follows:

“A person is not liable for a misrepresentation in forward-looking information if the person proves that

1. the document containing the forward-looking information contained, proximate to that information,

   1. reasonable cautionary language identifying the forward-looking information as such, and identifying material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information, and

   2. a statement of the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in the forward-looking information, and

2. the person had a reasonable basis for drawing the conclusions or making the forecasts and projections set out in the forward-looking information.”

3. The Act defines the term ‘forward-looking information’ and ‘material fact’, as

"forward-looking information" means disclosure regarding possible events, conditions or results of operations that is based on assumptions........... and includes ........... prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection;

"material fact" means, ........ a fact that would reasonably be expected to have a significant effect on the market price or value of the securities;

The result is increased liability exposure of public companies, along with their directors, officers and advisors, based on misrepresentations regardless of whether or not the investor relied on, or was even aware of, same. It remains to be seen if BC's "no cost" class action regime will attract the sort of predatory "stock drop" litigation that is common in the USA. So far, plaintiffs' counsel in other provinces appear to be proceeding cautiously. The first action, involving IMAX Corporation, was filed under the Ontario legislation in September, 2006. However there has been a lengthy delay in moving forward. The motion for leave of the court to assert the secondary market claim and for certification as a class action was scheduled to be heard in June, 2008.

Readers with questions about either secondary market liability or class action litigation in BC are welcome to contact Nigel Kent (604-643-3135, npk@cwilson.com). Also Clark Wilson's brief primer on Class Actions in British Columbia can be found at: www.cwilson.com/guides/classactions.