Disclosure Liability in Investor Relations:
Managing the Risk
Bob Cooper
Summary
• Investor relations professionals are exposed to
personal liability for actions taken during the
course of employment. There is a risk of both
enforcement action for violation of securities
legislation and exposure to civil liability
through secondary market claims.
• These risks can be managed by understanding
where you are vulnerable to regulatory action
and by ensuring that your disclosure policies
are comprehensive and applied with due
diligence.
2
Securities Legislation
“investor relations activities” means any
activities or oral or written communications,
by or on behalf of an issuer or security holder
of the issuer, that promote or reasonably
could be expected to promote the purchase
or sale of securities of the issuer, but does
not include:
b) Activities or communications necessary to
comply with the requirements of
i.
ii.
this Act or the regulations, or
the bylaws, rules or other regulatory instruments of a self
regulatory body, exchange or quotation and trade
reporting system,
3
“officer”
“officer” means the chair or a vice chair of the
board of directors, the president, a vice
president, the secretary, an assistant
secretary, the treasurer, an assistant treasurer,
the general manager and any other individual
appointed an officer of a corporation or acting
in a capacity similar to those specified offices
on behalf of an issuer or registrant”
4
Special Relationships
3.
b)
c)
d)
Definition of special relationships – For the
purposes of sections 86 and 136, a person is in a
special relationship with a reporting issuer if the
person
is engaging in or is proposing to engage in any
business or professional activity with or on behalf of
the reporting issuer …
Is a director, officer or employee of the reporting
issuer …
knows of a material fact or of a material change
with respect to the reporting issuer, having acquired
the knowledge while in a relationship described in
paragraph (a), (b) or (c) with the reporting issuer
5
Agency
155. Offences generally – (1) A person who does
any of the following commits an offence: …
4. If a person, other than an individual, commits
an offence under subsection (1), an
employee, officer, director or agent of that
person who authorizes, permits or acquiesces
in the offence commits the same offence
whether or not that person is convicted of
the offence.
6
Agency – cont’d
168.2 Contraventions attributable to
employees, officers, directors and agents (1) If a person, other than an individual,
contravenes a provision of this Act or of the
regulations, or fails to comply with a deicsion,
an employee, officer, director or agent of the
person who authorizes, permits or acquiesces
in the contravention or non-compliance also
contravenes the provisions or fails to comply
with the decision, as the case may be.
7
Secondary Market Civil Liability Regime
– General Overview
• Private statutory civil right of action for
purchasers and sellers of securities who buy or
sell securities during a period that an
uncorrected misrepresentation is included in
various categories of publicly filed documents
or public oral statements
• Private statutory civil right of action for
purchasers and sellers of securities who buy or
sell securities during a period that a
responsible issuer fails to disclose a material
change that should have been disclosed under
securities laws
8
Secondary Market Civil Liability Regime
– General Overview – cont’d
• Action for misrepresentation in publicly filed
document – potential defendants include
responsible issuer, directors, officers involved
in a decision to release document and
influential persons who knowingly influenced
release of document
• Action for misrepresentation in public oral
statement – potential defendants include
responsible issuer, person making statement,
directors and officers involved in decision to
release statement and influential persons who
knowingly influenced release of statement
9
Secondary Market Civil Liability Regime
– General Overview – cont’d
• Action for failure to disclose material change –
potential defendants include responsible issuer
and officers, directors and influential persons
who knowingly influenced non-disclosure
• The relevant period of liability starts on the
date that disclosure is made containing a
misrepresentation or responsible issuer should
have disclosed a material change and ends
when proper disclosure is made correcting the
misrepresentation or omission
10
Secondary Market Civil Liability Regime
– Application of Regime
• Secondary market liability applies in respect of
“responsible issuers”, i.e. reporting issuers in a
jurisdiction or issuers with a real and
substantial connection to that jurisdiction
• Shareholders of non-Canadian issuers may
pursue actions in Canadian courts
11
Secondary Market Civil Liability Regime –
Core Documents v. Non-Core Documents
• “Core documents” for all potential defendants
include prospectuses, all types of circulars,
MD&A, AIFs and annual and interim financial
statements
• Material change reports are only “core
documents” for responsible issuer and officers
• “Non-core documents” include press releases
and, in the case of potential defendants other
than responsible issuer and officers, material
change reports
12
Secondary Market Civil Liability Regime
– Burdens of Proof
• For “core documents”, plaintiff need not prove
that there was fraud or negligence in making
misrepresentation/failure to disclose – onus is
on defendant to establish due diligence (i.e.
reasonable investigation) or other defence
• For “non-core documents”, plaintiff must show
that misrepresentation/failure to disclose was
made knowlingly or recklessly or otherwise as a
result of “gross misconduct”
13
Consequences for Investor Relations
• Important to have more involvement in public
statements, disclosure judgments and
document preparation
• Must clearly define the extent of responsibility
for particular categories of documents in
disclosure policy
• More responsibility for content of public
statements, formation of materiality
judgments and due diligence procedures
• Backup certification procedure not necessarily
germane or practical for every type of
document
14
“Reasonable Investigation”
Legislation enumerates a non-exhaustive list of
factors, including:
• nature of issuer
• knowledge, experience and function of the
defendant
• adequacy of systems in place for disclosure
• reasonableness of relying on system
• reasonableness of relying on
officers/employees
• responsibility of the person making the
misrepresentation
15
“Reasonable Investigation” – cont’d
At a practical level a “reasonable investigation” will
likely turn on:
• what internal analysis preceded the
disclosure/omission to disclose?
• were appropriate officers, managers and advisers
involved?
• what outside advice was sought and was it followed?
• was the disclosure/omission made hastily under time
pressure?
• were internal compliance standards/systems followed?
• was all of the above documented so as to be provable
in a meaningful way?
16
Recommendations – Written Disclosure
Policy and Disclosure Procedures
• Policies and procedures will assist in avoiding
misrepresentations and failures to make timely
disclosure
• Policies and procedures will assist in
establishing due diligence defence: person or
company conducted or caused to be conducted
a reasonable investigation and no reasonable
grounds to believe that the document
contained the misrepresentation
• Important for Multi-lateral Instrument 52-109
17
Recommendations – Presentations and
Public Oral Statements
• Calls and other presentations should be
scripted and reviewed after delivery and any
misrepresentations or selective disclosure
should be corrected
• Keep records of presentations and oral
statements
• For forward-looking information, must have a
reasonable basis for making a forecast or
projection
18
Recommendations –
Forward-looking Information
In addition to having a reasonable basis:
i. include reasonable cautionary language
ii. Identify information as forward-looking
and identify material factors which could
cause actual results to differ materially
from forecast or projection
iii. state material factors or assumptions
applied in drawing conclusion or making a
forecast or projection
19
Recommendations – Reviewing New
Developments and Competitors’ Disclosure
• Policies and procedures should assign
responsibility to person(s) for keeping informed
regarding developments in case law and
securities commission enforcement
proceedings affecting disclosure practices as
well as reviewing disclosure of competitors
• Responsible person(s) should report to
disclosure committee (or in the absence of
such a committee, to CEO and CFO)
periodically and promptly in event of any
major development in the law or practices
20
Recommendations – Documenting
Document Preparation Process
• In order to establish reasonable investigation,
procedures establishing steps to be taken
should be in place and there should be some
record that they were followed, and the
process conducted in connection with
preparation of disclosure documents should be
documented
• Consider having documents reviewed, prior to
release, by someone uninvolved with
preparation who can look at it the way it will
be looked at by the public
21
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