With its Oct. 13 rul-ing in Kerr v. Danier Leather Inc., the Su-preme Court of Canada has provided “a great deal of clarity” to money managers, who, until now, may have been confused about what issuers of new stocks are required to disclose and when they are required to disclose it, says George Glezos, a partner with Toronto law firm Lerners LLP.

This is especially the case during the ultra-sensitive period between the issuance of a prospectus and the date at which the initial sale of the stock closes, he adds.

In the SCC’s decision, it backed the Ontario Court of Appeal in overturning a 2004 Ontario Superior Court ruling in which co-plaintiffs Douglas Kerr, S. Grace Kerr and James Frederick Durst won against clothier Danier. Glezos represented Durst — a former investment banker who had the case certified as a class-action lawsuit — in what has become Canada’s most expensive shareholder-rights lawsuit.

In the 2004 ruling against Danier, the Superior Court had found that the company had improperly failed to disclose new information to investors in the 14 days preceding the closing of its initial public offering, which raised $69 million in May 1998. That ruling has now been doubly repudiated.

The SCC’s ruling may help avert many such battles in the future, Glezos says, noting that it’s now clear that issuers are not obligated to disclose new “material facts” that may arise during this critical period.

In Danier, the undisclosed fact in question was that company forecasters had predicted that the prolonged, unexpected period of warm weather could slow sales of heavy leather coats. That prediction of warm weather proved true, although Danier kept sales volumes at about the level stated in its prospectus, which meant there was no significant material change in its business. But when Danier disclosed its worries about the weather after the IPO closed, its share price dropped by 20%, which cost Durst $550,000.

“Our argument was that there is a continuing obligation to disclose new material facts right up to the time of share purchase,” Glezos says. “The court has made it very clear that while there is an obligation to disclose a material change, there is no obligation to disclose a material fact.”

After spending almost nine years and 50 days at trial trying to persuade three different courts that Ontario securities laws entitle shareholders to be apprised of new material facts casting doubt on previously disclosed information, it comes as a bit of a surprise to hear Glezos say the SCC got it right.

But, Glezos says, the court actually agreed with almost everything he asserted. Most important, he adds, the SCC ruled that Danier was wrong when it argued that company managers are entitled to rely on the “business judgment rule” in deciding what to disclose to potential shareholders. This long-standing but far from empirical test used by U.S. and Canadian courts has proved controversial in many cases in which company decisions have been challenged.

“The SCC has clearly stated that disclosure obligations are not subject to the business judgment rule,” Glezos says. “They are not discretionary; when there is an obligation to disclose [under Ontario’s Securities Act], there is a strict obligation to disclose.”

In addition, Glezos says, the SCC endorsed his argument that the assessment of a material fact should involve an objective test based on securities legislation rather than a subjective test of the sort facilitated by the business judgment rule. This may seem like legal nitpicking, but Glezos strongly believes that these clarifications may enhance shareholder protection in the future. “It may, in fact, prove to be a major victory,” he says. “This decision will cause issuers of securities to err on the side of caution.”

Glezos isn’t alone in this view. Kelley McKinnon, chief litigation counsel at the Ontario Securities Commission, says the decision clarifies the defences on which company officers can rely in defending themselves on rule-breaking charges. For situations in which disclosure decisions are in question, McKinnon says, it is now clear the business judgement rule no longer applies: “It’s a good clarification.”

A team of Blake, Cassels & Graydon LLP securities lawyers, led by Nigel Campbell and Chris Javornik, also praised the decision in an Oct. 15 briefing: “By excluding the business judgment rule from the context of disclosure decisions, the SCC has mandated an objective rather than subjective standard with regard to the courts’ evaluation of disclosure obligations under securities laws.”

@page_break@However, not everyone is impressed with this small but potentially significant advancement for shareholders rights.

Kai Li, a finance professor at the University of British Columbia’s Sauder School of Business who has written about rules-based corporate governance shareholder management relations, says the SCC missed an opportunity to ensure shareholders get much better disclosure, as they do in the U.S.

As a result, global markets may not like what they see in Canada when it comes to disclosure, and that could hurt the Canadian capital markets, she warns:. “Shareholders should continue to be very concerned about how much faith they can have in managerial forecasts.”

Glezos seconds that opinion: “What should money managers tell their clients? It’s still ‘buyer beware’.” IE