Supreme Court Dismisses Securities Class Action

On October 12, 2007, the Supreme Court of Canada issued its decision in Kerr, et al v. Danier Leather Inc., et al, the first securities class action that not only went to trial, but was considered at the highest appellate levels in Canada. Although the trial judge had found in favour of the plaintiff class, a unanimous (9-0) Supreme Court upheld the Ontario Court of Appeal's reversal of the trial judgment and its dismissal of the class action against Danier Leather Inc. and its Chief Executive Officer, Jeffrey Wortsman and Chief Financial Officer, Bryan Tatoff.

The action arose from Danier's initial public offering in May 1998. The prospectus Danier issued on May 6, 1998 signed by its CEO and CFO contained a financial forecast for the period to June 27, 1998. The public offering closed on May 20, 1998. Although the forecast was substantially achieved, the plaintiff class alleged that the forecast was not reasonable at May 20, 1998 and that Danier and its senior officers, Wortsman and Tatoff, were liable for misrepresentation under s.130 of the Ontario Securities Act, which creates civil liability where a prospectus contains a misrepresentation.

The trial judge found in favour of the plaintiff class. The Ontario Court of Appeal reversed and dismissed the action, and the Supreme Court upheld the dismissal of the action.

The Supreme Court held that the liability section of the Ontario Securities Act, s.130, was to be interpreted harmoniously with other sections of the Ontario Securities Act, specifically sections 56 to 58 which require a prospectus to be true on its date and require amendments up to the date of closing for “material changes”, not for “material facts”, occurring after the date of the prospectus until closing. The Court held that the date for assessment of the reasonableness of the forecast was the date of the prospectus, May 6, 1998, and the forecast was reasonable on that date, and as no material change occurred between that date and the closing on May 20, 1998 (even if material facts did occur) there was no disclosure obligation on Danier or its senior officers which was not fulfilled. Therefore, no prospectus misrepresentation occurred. The Supreme Court also held that even if one were to treat the date at which reasonableness of the forecast was to be assessed as May 20, 1998, the forecast was reasonable on that date, and therefore nothing needed to be disclosed on that date. The Court clarified that if there had been a disclosure obligation (which there was not) the business judgment rule did not apply to disclosure obligations themselves which were governed by specific sections of the Ontario Securities Act.

Finally, in a much talked about aspect of the decision, the Supreme Court upheld the Court of Appeal's ruling that the unsuccessful representative plaintiff was liable for costs of the defendants for the action and the appeals.

Benjamin Zarnett and Jessica Kimmel of Goodmans LLP represented Danier's senior officers, Wortsman and Tatoff. Alan Lenczner, QC and Jaan Lilles of Lenczner Slaght Royce Smith Griffin LLP represented Danier. Peter Jervis, George Glezos and Jasmine Akbarali of Lerners LLP represented the plaintiffs. Kelley McKinnon and Jane Waechter represented the intervener, the Ontario Securities Commission.