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2021 Corporate Finance Law Developments

  

  

DISCLAIMER The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.

  

The year 2021 saw a continuation of the very strong Canadian income fund market, with approximately 35 new income funds taken public. The market for cross border income funds using innovative structures designed to solve the complexities of cross border tax issues has been slower to take off than was predicted last year. Mergers and acquisitions activity has been brisk, with significant transactions such as the merger of Molson and Coors, the combination of BFI Canada Income Fund and IESI Corporation, the acquisition by Nexen of Encana's North Sea assets, the acquisition by CHUM of Craig Media and the acquisition by Midnight Oil and Gas of Vintage Petroleum.

Recent developments of importance include the following:

   

1. Kerr v. Danier Leather Inc.

  

Kerr v. Danier Leather Inc. ("Danier") is a landmark case for Canadian securities law. When certified as a class action under the Class Proceedings Act (Ontario) in 2001, it became one of the first securities class actions in Canada. In May 2021, Danier became one of the few class actions to proceed to trial resulting in a judgment on the common issues certified by the certification motions judge. Danier is one of the few civil judgments under Canada's securities legislation and one of the few cases dealing with the so called due diligence defence. Because the judgment deals with liability for a forecast in a prospectus, it is also a precedent setting decision. Finally, the decision is noteworthy because of Justice Lederman's reference to and reliance on the common law and on U.S. decisions in interpreting the civil liability provisions of the Securities Act (Ontario).

The decision has caused issuers and underwriters to reconsider certain practical aspects of how securities offerings are conducted in Canada.

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The Facts

  

In connection with its IPO, Danier prepared three preliminary prospectuses over the period from November 1997 to April 1998. The final prospectus was dated May 6, 1998. The offering was completed on May 20, 1998.

As is relatively common in Canada, Danier's prospectus contained a forecast of financial results, which was amended in each successive prospectus. The final prospectus contained the results of the first three quarters of the 1998 financial year and a forecast for the last quarter. The forecast was unchanged from that of the last preliminary prospectus.

Two weeks after the IPO was completed, Danier issued a press release revising its fourth quarter forecast downward. On the last trading day before the revised forecast, the shares traded at $11.65, up from the original issue price of $11.25. Following the press release, the share price dropped to $8.25. The final results for the year were better than the revised forecast. Over the next six weeks or so, the share price fluctuated between $9.25 and $10.00.

The main issue at trial was whether the forecast constituted a misrepresentation under the Securities Act and at common law. This question gave rise to a number of subsidiary issues, including whether a forecast is a representation; whether a representation that is true when made can become a misrepresentation if the maker of the statement discovers information that makes the representation untrue; whether in such a case the maker of the statement has a duty to dis close the new information to the recipients of the original statement; the effect on liability of cautionary statements in a prospectus; and the measure of damages for a misrepresent ation in these circumstances.

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Forecast as a Representation

  

The law only imposes liability for a misrepresentation of a present fact. A statement about the future will generally not support a claim for misrepresentation. Therefore, one might conclude that a forecast, being a prediction of the future, could not be the basis for a claim for misrepresentation.

However, the law has long recognized that a statement regarding the future may constitute a representation about the state of mind of the maker of the statement, and the maker's state of mind could constitute a representation of fact. Justice Lederman held that the forecast could constitute a material fact for purposes of the Securities Act. He acknowledged that a forecast will not constitute a misrepresentation merely if the results are not actually achieved, but may be so if it does not represent management's best judgment, because: (i) the forecast was not prepared using reasonable care and skill; (ii) management did not generally believe the forecast; (iii) management's belief in the forecast was not reasonable; or (iv) management was aware of facts that would undermine the forecast.

Justice Lederman held that, in the period between the filing of the final prospectus on May 6 and closing on May 20, certain factual assumptions underlying the forecast were untrue and that the belief of the CFO and CEO that the forecast remained achievable could not have been reasonable. As a result, he concluded that the prospectus contained a misrepresentation.

  

Materiality

  

Under the Securities Act, a misrepresentation of fact can only give rise to liability if it is "material." In essence, the same is true at common law. Danier argued that its forecasts could not be material because of cautionary language that appeared in the prospectus. The cautionary language is in fact a requirement imposed by National Policy 48, the securities regulators' policy governing the disclosure of forward looking financial information.

Justice Lederman held that the cautionary language did not relieve Danier from responsibility for its accuracy. He observed that nothing in National Policy 48 suggested that management would be immune from liability if they included standard cautionary language. To the contrary, Justice Lederman held that the cautionary language could be seen as emphasizing that the forecast was management's best judgment, made after exercising reasonable care and skill.

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