The securities legislation of every Canadian province and territory gives certain rights to parties that invest in the secondary market, as described below. This includes the right to sue for damages incurred due to “misrepresentations” made by experts, directors and officers of mining issuers (mining professionals). This blog post explains when mining professionals can be held personally liable and suggests ways they can protect themselves against these potential claims for damages for misrepresentation.[1]
Liability
The secondary market refers to securities that are bought and sold after their first issuance from treasury, including via a stock exchange. Secondary market liability is a statutory right of action that allows investors to seek damages against mining professionals, among others, for misrepresentations made in a mining issuer’s public disclosure documents, or oral public statements. It does not matter whether an investor actually relied on the misrepresentation. If the security was acquired or disposed of between the time the information containing a misrepresentation was disclosed to the public, and the time the information was publicly corrected, the mining professional responsible for the information containing the misrepresentation can be held personally liable, subject to certain defenses. Directors and officers of the applicable mining issuer may also be liable for a mining issuer’s failure to make timely disclosure of a material change.
A misrepresentation means (i) an untrue statement of a material fact, or (ii) an omission to state a material fact that is either required to be stated, or necessary to prevent a statement already made from beingfalse or misleading in the circumstances. A material fact is a fact that would “reasonably be expected” to have a significant effect on the market price or value of a security.
The initial hurdle for a potential plaintiff is in obtaining permission from the court to sue, which requires that the action is brought in good faith and that there is a “reasonable possibility” of success. Despite the fact that sanctions for secondary market liability have been included in securities legislation for over a decade, only one final judgment has been made in this regard. In that decision, a mining company successfully defended itself against a secondary market liability claim. Otherwise, the trend has been for aggrieved investors to pursue class actions and ultimately settle out of court. In British Columbia and Ontario, damages for secondary market liability are capped under the respective securities acts in accordance with specific formulas. However, a potential plaintiff can also sue for misrepresentation under the common law where no formal monetary caps exist.
The type of evidence required to prove that a misrepresentation existed depends in part on the characterization of the document in question. The securities acts in both British Columbia and Ontario define core documents to include, among other things, prospectuses, information circulars, and management’s discussion and analysis reports. For core documents, a potential plaintiff is only required to prove there was a misrepresentation. Where the mining professional is not an expert, and the documents are either not core documents, or misrepresentations in a public oral statement, the plaintiff must also prove knowledge, willful blindness or gross misconduct on the part of the mining professional.
Experts
In British Columbia and Ontario, an expert means a person whose profession gives authority to a statement made by the person in a professional capacity. This definition includes geologists.
Experts may be liable for a misrepresentation in a disclosure document, such as an annual financial statement, or in a public oral statement about the business or affairs of a mining issuer. In both of these situations, the expert is liable where:
- The misrepresentation is also contained in the expert’s reports, statements or opinions
- The document or statement summarizes or quotes from one of the three aforementioned sources or
- The expert gave written consent for the use of one of these three aforementioned sources by another person who then releases the document or statement
Mining Executives
Where a mining issuer releases a document containing a misrepresentation, each director acting at the time of release, and each officer who authorized, permitted or acquiesced in the document’s release, can be held liable for damages for misrepresentation. Furthermore, directors and officers of that mining issuer can be liable if a person with actual, implied or apparent authority makes a public oral statement about the business or affairs of the mining issuer that contains a misrepresentation, where the director or officer authorized, permitted or acquiesced in the making of that statement. This same liability rule applies to directors and officers of a mining issuer that fails to make a timely disclosure.
Defenses
While the liability net is broad, there are several defenses that mining professionals may rely upon to safeguard themselves from secondary market liability. The starting point should always be to consider the applicable limitation period in the respective jurisdiction, as an aggrieved investor may have waited too long to advance a potential claim. If the applicable limitation period has not expired, a mining professional may be able to rely on the due diligence defense. This defense may be available where a mining professional can establish that he or she conducted, or caused to be conducted, a reasonable investigation, and at the time of the release of the impugned information, they had no reasonable grounds to believe such a misrepresentation occurred. In considering whether an investigation was reasonable, a court may consider the mining professional’s role and responsibility in the preparation and release of the document or statement, and in ascertaining the facts contained in that document or statement. As experts, this puts geologists front and center as they cannot disclaim secondary market liability in technical reports prepared under National Instrument 43-101 Standards of Disclosure for Mineral Projects. Furthermore, directors and officers may have a defense of reliance on experts. Experts in turn may protect themselves by ensuring they have properly qualified forward-looking documents, which conform to the disclosure requirements in the relevant jurisdiction.
Mining professionals may have a defense where an investor already knew of the misrepresentation or material change when they bought or sold the securities in question. An additional defense exists where a misrepresentation or failure to disclose occurs without the mining professional’s knowledge or consent. Upon realizing such a situation has occurred, a Mining professional may advance a partial defense by taking corrective action. This requires the mining professional to promptly notify the mining issuer and its board of the occurrence. If the required correction or disclosure does not occur within two business days, and reporting it is not prohibited by law or relevant professional association obligations, a mining professional must then notify the mining issuer’s principal regulator.
For an understanding of how this regime has been applied, stay tuned for our upcoming insight article: Secondary market liability: Lessons for mining issuers arising from the first merits decision in Canada, which will be posted soon on our Dentons Mining Blog.
[1] This blog post focuses on the law of BC, unless otherwise stated.
