Secondary Market Liability Regulatory Prosecution Bob Cooper Emerging Issues in Directors and Officers Liability

Secondary Market Liability

3 What is secondary market liability? Creates a statutory cause of action for investors who purchase or sell in the secondary market Creates “strict liability” for issuers (and their officers and directors) who breach continuous disclosure obligations No need for investors to prove knowledge, intention or gross misconduct for misrepresentations in “core” documents such as AIF or MD&A Eliminates significant obstacle to class certification by not requiring reliance by secondary market purchasers on misrepresentations or omissions

4 Who is affected? Applies to issuers, directors and officers, and influential persons and experts of responsible issuers Will apply to BC companies who are reporting issuers in Ontario, Alberta and Manitoba or have a “real and substantial connection to those provinces” Influential Person : Insider who is not a director or senior officer Control shareholder (20% or more of voting shares) Experts: Accountants Auditors Lawyers Geologists Financial Analysts Other qualified professionals making statements in their professional capacity

5 What does it mean? No change to law requiring continuous (Financials, MD & A, AIF) and timely disclosure (material changes) Adds civil liability if there is a failure to meet these requirements and the issuer otherwise “releases” a misrepresentation or is not timely with disclosure Increased exposure to shareholder class action litigation Heightened concern for corporate and personal liability; financial and reputational risk

6 What are you liable for? For a misrepresentation contained in a documents, directors at the time the document was released and officers who authorized, permitted or acquiesced in the release are liable For a misrepresentation made in a public oral statement or for failure to make timely disclosure, directors and officers who authorized, permitted and acquiesced in making the statement or in failing to make timely disclosure are liable

7 Are there defences? Defendants must prove a “reasonable investigation” Factors include: Nature of issuer Adequacy of systems in place for disclosure Reasonableness of relying on system Reasonableness of relying on officers/employees Role and responsibility of the person making the misrepresenation

8 What is a “reasonable investigation”? At a practical level, a “reasonable investigation” will likely turn on: What internal analysis preceded the disclosure/omission to disclose? Were appropriate officers, managers 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?

9 What are the implications? Increased risk of personal liability may make it difficult to recruit top flight directors Audit committees will require experienced directors and extraordinary time commitments Officers with direct preparation responsibility will face greater risk of liability and will need to document procedures followed Directors and officers may insist in written and more elaborate indemnity agreements Disclosure policies will be revamped to emphasize accuracy of public filings Earnings guidance may be less frequent

10 Will this open the floodgates? Courts exercise a gatekeeper function Plaintiffs must demonstrate a “reasonable possibility of success” to proceed Damages are capped, absent a finding of fraud: For issuers or corporate influential person, damages cannot exceed the greater of 5% of market capitalization or $1 million For an officer, director or individual influential person, damages cannot exceed the greater of $25,000 or 50% of compensation received in the previous 12 months High barriers to entry present real risk to potential plaintiffs Only one action commenced in the first year (Imax)

Regulatory Prosecution

12 What happened to Bill C45? The “Westray Act” came into force in 2004 The Criminal Code now requires: “Everyone who undertakes, or has the authority, to direct how another person does work or performs a task is under a legal duty to take reasonable steps to prevent bodily harm to that person, or any other person, arising from that work or task” This, together with provisions that made it easier for corporations to be charged criminally, was predicted to dramatically increase the number of criminal prosecutions for OH&S matters However, charges have only been laid in two cases

13 Is prosecution a risk? Prosecution for regulatory offences in increasingly likely and organizations and individuals should not be complacent “Senior officers”, including directors and officers, are exposed to two types of prosecution – regulatory and criminal There is an international trend which features the parallel existence of criminal law and OH&S regulation in protecting worker safety There is no clear line between the OH&S standard of negligence and criminal negligence

14 Is prosecution a risk? (cont’d) Parallel investigations by police and regulators are common in serious incidents or fatalities Organized labour and safety advocates apply coordinated pressure to lobby for prosecutions Many senior officers and organizations are not properly informed about their duties and do not place a priority on worker safety

15 What steps should be taken? Compliance with applicable OH&S legislation is essential to demonstrate that all reasonable steps are being taken to prevent injury Due diligence needs to include senior management oversight of safety systems and matters A real commitment to workplace safety must be made with an effective program that demonstrates clear communication throughout the organization There must be proactive accident response plans to manage the complexities of dealing with criminal and regulatory investigations

16 Bob Cooper Partner Litigation Department Tel: