An increasing number of class-action suits is anticipated in 2006 as angry investors try to force public companies to be accountable for the information that affects their share prices.

Investors could have two new weapons in their fight:

> Effective Dec. 31, amendments to the Ontario Securities Act enable secondary-market investors to sue public companies for providing inaccurate information in the continuous disclosure documents they are required to file. A case expected to utilize the new rules is already underway.

> The Supreme Court of Canada is expected to rule on Kerr v. Danier Leather Inc., a case that revolves around a number of primary-market investors’ concerns about the representations made in an initial offering prospectus.

A class-action lawsuit is in the wings, waiting to be certified under the new provisions of the Ontario Securities Act. The lawsuit, filed in early December in the Ontario Superior Court against Investors Group Inc., CI Fund Management Inc., Franklin Templeton Investment Corp. and AGF Fund Management Ltd., follows settlements between the funds and the Ontario Securities Commission in March over market-timing trades that occurred between September 1998 and September 2003.

Joel Rochon, a partner with the Toronto law firm Rochon Genova LLP, says a motion to certify the lawsuit as a class action hasn’t yet been brought: “We just filed the statement of claim [in early December].”

The legislative amendments impose civil liability for a misrepresentation in a document released by a public company or in oral statements made by a company’s officers and directors, and “influential persons” such as promoters, auditors and lawyers. Liability can also be imposed for failing to disclose a material change in a timely manner. The amendments overcome the former hurdle that required plaintiffs to prove reliance on a misrepresentation in a document that was part of an issuer’s record of continuous disclosure.

“That’s how Bre-X [Minerals Ltd.] was undone,” says Nigel Campbell, a partner in the Toronto office of Blake Cassels & Graydon LLP. The plaintiffs couldn’t prove they all relied on advice from their brokers.

Ed Waitzer, securities lawyer and chairman of national law firm Stikeman Elliott LLP in Toronto, expects the new legislation will spark a slew of lawsuits: “It will take awhile to see how this settles.”

Campbell, however, doesn’t expect the floodgates to open. The legislative amendments offer a number of defences, as well as caps on civil liability that “will provide the proper balance,” he says,

In the Danier case, the Ontario Court of Appeal overturned in mid-December a decision by a lower court awarding several million dollars to a group of shareholders who blamed Danier’s senior management for not disclosing key sales information before the IPO closed.

Securities lawyers agree that the SCC will hear the Danier case because the case presents issues of national importance: securities legislation across the country is similar, so the final decision will be precedent-setting.

(Danier’s lawyer, Peter Jervis, a partner with Lerners LLP in Toronto, says an application for leave to appeal probably will be made to the SCC after he consults his client.)

The case dates back to May 6, 1998, when Danier issued its final prospectus. On May 20, the company closed its IPO of approximately six million voting shares at $11.25 a share. Then, on June 4, Danier issued a “revised forecast” that showed its intra-quarterly revenue was lagging behind the fourth quarter forecast in the prospectus. Danier’s share price dropped more than $3 a share during the next few days. But Danier’s sales rebounded: by the end of its fiscal year, it had achieved results substantially close to those forecast in the prospectus.

However, the drop in the price of shares incited investors to bring a class-action lawsuit against Danier for not disclosing the revised forecast before the IPO ended.

Securities litigators say they were not surprised the award was overturned. “It was very pragmatic and sensible,” Campbell says.

The OCA could not ignore the fact that Danier ultimately achieved the results in its forecast, says Neil Gross a Toronto securities lawyer and partner with Carson Gross Christie Knudsen. As a result, the Trial Court decision has “an air of unreality.”

However, Gross says, the decision will send a message to the corporate community it doesn’t have to read the whole Securities Act. Instead, he says, it can view the prospectus provisions as “a complete code. They aren’t going to be bound by any implied obligations in other sections. I can imagine that the plaintiffs [in the Danier case] found this a bitter pill to swallow.”

@page_break@The Danier decision examines three critical issues:

> Does an issuing company have a continuing obligation to disclose “material facts” between the time its prospectus is released and its initial public offering is closed?

> Can investors assert that a prospectus contains an “implied representation” that a prospectus forecast is “objectively reasonable”?

> How much deference should a court give to the “business judgment” of the issuing company?

Under Section 130 of the Securities Act, civil liability can be imposed when a prospectus contains a misrepresentation. A purchaser who buys the security during the IPO is “deemed to have relied” on the misrepresentation. The trial judge used this provision to find Danier and its chief officers liable. But the OCA ruled that Sec. 130 does not impose any additional disclosure obligations. It also disagreed with the trial judge’s ruling that the prospectus forecast can be viewed as “objectively reasonable.” Instead, the OCA used the “business judgment rule,” deferring to the business judgment of a company’s senior management rather than second-guessing their decisions.

The OCA decision does not close the door on another lawsuit based on intra-quarterly results that would show a material change should have been disclosed, Waitzer says. IE