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CCCA61_044,046,047,053.qxd:CCCA_V1No2_Col-CorpLaw-V1.qxd 02/07/2008 06:21 PM Page 47 Litigation Uncharted legal waters Surprises in Kerr vs. Danier Leather Supreme Court decision. n October 12,2007,the Supreme Court IPO, contained a misrepresentation regard- results did not fall within this definition, it Odelivered its highly anticipated decision ing forecasted results. Prior to the close of was not obliged to disclose. According to in Kerr v. Danier Leather, the first securities the IPO,Danier discovered that its results for the court, for the purpose of civil liability, class action to go to trial in Canada. the financial fourth quarter of 1997 (ending an issuer is not under an obligation to The decision was a double blow to June 27, 1998) were lagging behind the amend a prospectus to reflect changes in Frank Durst, the representative plaintiff forecast in the prospectus, but the company “material facts” that fall short of the statu- who prevailed at trial. Not only did the did not issue a correction at that time. tory definition of “material change.” This Supreme Court reject his theory of liabili- The IPO closed on May 20, 1998. distinction, in the court’s view, reflects a ty, but,to the surprise of many observers,it Subsequently, Danier obtained further policy choice by the legislature to relieve saddled him with an adverse costs award. information regarding the lagging results issuers from having to continually interpret While the “loser pays” rule is often and determined they were caused by and disclose “material facts” that are unre- waived in class actions, Mr. Justice Binnie, unseasonably hot weather, which was lated to changes in their “business, opera- who wrote for the court, held nothing jus- reducing demand for leather goods. In tions or capital.” tified a deviation from the rule in Mr. light of this, Danier decided to Durst’s case. He described the case as a issue a revised forecast reducing This tough-minded approach projected results, and did so on “piece of Bay Street litigation that was well- closure, the price of the stock“ to costs may be a consideration run and well-financed on both sides.”The June 4, 1998. Following this dis- for investors and plaintiffs’ fact that Mr. Durst, a wealthy investor, brought the suit on behalf of all of Danier’s dropped 20%. It took approxi- firms contemplating securities IPO investors did not affect Mr. Justice mately a year for the stock to class actions in future. Binnie’s characterization of the litigation.“If return to its IPO price. ” anything”he wrote,“converting an ordinary Mr. Durst’s suit was not the ideal test The court’s ruling on this issue is piece of commercial litigation into a class case, from a plaintiff’s perspective. Despite favourable to issuers, directors, officers and proceeding may be seen by some observers the temporary lag in sales, Danier’s man- underwriters.It is also in line with the pre- simply as an in terrorem strategy to try to agers genuinely believed they could meet vailing view among securities lawyers force a settlement.” This tough-minded the forecast (according to a finding by the regarding private liability for IPOs under approach to costs may be a consideration for trial judge), and, in fact, did so. the Securities Act. However, it should be investors and plaintiffs’ firms contemplating noted that TSX and TSX Venture policies securities class actions in future. The Supreme Court resolved two require timely disclosure of “material However, it is important not to overstate important issues: information,” which includes “material the impact of Danier Leather. Of the court’s The first was whether Danier was obliged facts” as well as “material changes.” Failure two major rulings, one favours prospective to amend its prospectus prior to the clos- to abide by this standard might create defendants and the other favours prospec- ing of the IPO. Mr. Justice Binnie held, exposure to administrative proceedings tive plaintiffs.While Mr.Justice Binnie used based on statutory interpretation of brought by provincial securities regulators. some strong language in addressing costs, it Ontario’s Securities Act, that as long as a The second important ruling by the is easy to imagine a different approach in a prospectus is accurate when filed,the post- Supreme Court was that the business judg- case involving different facts. filing disclosure obligation is limited to ment rule has no application to disclosure notice of a “material change.” Under the requirements under securities laws. On this Forecasted results Securities Act, a “material change” is defined point, the court’s decision is favourable to Mr.Durst alleged that the prospectus Danier as a “change in the business, operations or filed on May 6,1998,in connection with its capital of the issuer.”Since Danier’s lagging continued on page 53 PRINTEMPS 2008 CCCA Canadian Corporate Counsel Association 47