British Columbia Set to Adopt Secondary Market Civil Liability Regime
As part of a sweeping reform of its securities law, British Columbia is expected to establish Canada's first statutory secondary market civil liability regime on November 15, 2004. Under the new legislation, securityholders who trade in the secondary markets in the wake of a corporation's uncorrected misrepresentation or failure to make timely disclosure will have a cause of action with respect to losses incurred.
Similar in scope and design to Ontario's proposed Bill 198 - discussed in Stikeman Elliott llp's Litigation Unleashed - the British Columbia initiative will potentially affect both domestic and non-Canadian corporations. Thus, while final passage of Bill 198 has been delayed by Ontario's recent change of government (see below), the rapidly approaching implementation date of the new British Columbia legislation means that business should start to consider secondary market liability issues now.
It is important to note that the courts would probably limit the potential plaintiff class under the new legislation to securityholders who can establish a sufficient connection to the province. Potential defendants are generally the same as in Bill 198: the issuer, its directors and officers, significant securityholders and their directors and officers, experts and those with express or implied authority to represent the issuer.
The new legislation provides a range of defences similar to those envisaged in Bill 198. Chief among these is the implementation within the corporation of a "reasonable system to ensure compliance with this Act". If such a system has been implemented and monitored, issuers and directors will generally be insulated from liability, with the exception of directors who knew (or wilfully or recklessly avoided knowing) of the misconduct. Other due diligence defences are available to the issuer, directors and other potential defendants, and there is also a safe harbour for forward-looking information.
The British Columbia legislation does not follow Bill 198's mechanical approach to the calculation of damages, instead allowing an appropriate amount to be determined by the court. However, proposed Rules accompanying the legislation do establish upper limits on damages that are virtually identical to the corresponding limits under the proposed Ontario legislation. As in Bill 198, the limits are not available to defendants with knowledge of the relevant misconduct, and the British Columbia proposal also denies their benefit to defendants whose lack of knowledge was wilful or reckless. Such persons may also be subject to exemplary or punitive damages under the British Columbia proposal.
Reporting issuers in British Columbia will also be subject to secondary market liability for failure to meet timely disclosure obligations.
In addition to these civil liabilities, the British Columbia proposals create new offences and penalties relating to insider trading, market manipulation, misrepresentation and fraud. These can range as high as $3 million dollars or (in some cases) triple any profit made, without limit. An issuer or connected person who engages in insider trading or tipping can also be held civilly liable to investors who purchased during the period prior to the disclosure of the relevant information-the upper limit on damages being established in the proposed Rules as triple the profit made. The British Columbia Securities Commission will also have increased powers to ban market participants, and prison sentences of up to three years are possible in some circumstances.
Ontario's Bill 198
Ontario's Bill 198 reforms (including both Bill 198 and the companion Bill 41) appear likely to return to the province's legislative agenda soon. The urgency of proceeding was emphasized by Ontario Securities Commission chair David Brown in his August 18, 2004 remarks to the Standing Committee on Finance and Economic Affairs of the Legislative Assembly of Ontario.
