Recent Development in Litigation - Securities

Since the advent of securities class actions in Canada, issuers have been under tremendous pressure to give full, complete, and accurate disclosure of material information for fear of regulatory sanctions and civil liability.

This is not as easy as it may sound. Indeed, issuers are tasked with finding the delicate balance between determining what is material, and overwhelming investors with non-material information. Compounding the difficulty is that issuers often have to make these decisions in seconds because of the obligation to get the information out to the public promptly.

With this in mind, Canada's capital markets are welcoming the Supreme Court of Canada's May 11, 2011, decision in the case of Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. (VAC), which goes a long way to helping issuers determine the scope of their disclosure obligations. The Court ruled that disclosure obligations are limited and that investors cannot hold issuers liable for losses based on excluding "trivial or unimportant" facts from press releases.

Sharbern arose after a class of approximately 200 investors purchased lots in a Hilton Hotel. VAC had also sold lots in a virtually identical Marriott hotel adjacent to the Hilton property and joined to it by a commercial concourse.

VAC developed the hotels at different times, producing differences in the financial arrangements offered to the purchasers in each hotel. The Marriott arrangements included a guarantee from VAC and higher management fees than for the Hilton.

The Hilton disclosure statement did not disclose the differences. After the Hilton owners incurred losses, they sued, claiming that the differences resulted in an undisclosed conflict of interest by creating an incentive for VAC to favour the Marriott over the Hilton in its operation and management of the two hotels.

The trial judge concluded that VAC's failure to disclose the actual or potential conflict of interest and the different arrangements amounted to negligent misrepresentation of material facts.

On appeal, the British Columbia Court of Appeal overturned the trial judge, finding that the details of the differing arrangements were not material. The Supreme Court sided with the Court of Appeal.

In upholding the Court of Appeal's decision, the Supreme Court clarified the process for determining materiality.

As the unanimous bench saw it, materiality was a legislated balance between too much and too little disclosure. Information was material where there was a substantial likelihood that it would have been considered important by a reasonable investor deciding whether or not to invest — or put another way, that it was capable of significantly altering the mix of information made available. Parties alleging materiality had to support the allegation with evidence of the information's potential effect.

The interplay between the information disclosed and the information omitted were the primary considerations in determining what was material. Evidence putting the omitted information in a broader factual context could be relevant, but again, only against the backdrop of the information provided.

It is important to note, however, that Sharbern dealt with BC's Real Estate Act, which did not define materiality. Consequently, the Supreme Court adopted the "reasonable investor" standard from US securities law.

By contrast, civil liability under Ontario's Securities Act arises where the misrepresentation can be reasonably expected to have a significant effect on the market price or value of a security.

Materiality is relevant, however, in the context of determining compliance with continuous disclosure filings. Indeed, the Ontario Securities Commission has used the same US standard adopted in Sharbern during recent proceedings against Eugene Melnyk and Biovail Corporation.

The upshot seems to be that if issuers act reasonably and responsibly in determining what is material, they go a long way to absolving themselves of liability merely because an investment has gone sour.