This part of the report reviews recent legislative developments in Canada as well as other reports and commissions in Canada that have considered the issue of liability. Trends in other jurisdictions are also discussed.

 

A.   Canadian Statutory Reform

 

1.                 Canada Business Corporations Act

 

The 2001 amendments to the CBCA that came into force on November 24, 2002 changed the regime of joint and several liability among co-defendants to a modified proportionate liability regime with respect to certain financial information of a CBCA corporation. Under the CBCA, subject to some qualifications, a defendant who is found responsible for a financial loss that arises out of an error, omission or misstatement in financial information that is required by the CBCA is liable to the plaintiff only for the portion of damages corresponding to the defendant’s degree of responsibility for the loss.[34]

 

The proportionate liability scheme in the CBCA is limited in several ways. First, the 2001 amendments apply only to misconduct in relation to the CBCA, and accordingly not to securities law breaches.[35] Secondly, joint and several liability continues to apply in cases of fraud.[36] Third, in situations where one of the defendants (such as the issuer company) is insolvent, financially limited or unavailable, there is a provision for the court to apportion that defendant’s liability to the other co-defendants up to a cap equal to 50% of the amount originally awarded against the co-defendant.[37]

 

In addition, certain plaintiffs are specifically excluded from the proportionate liability regime, including Crown corporations, certain charitable organizations, unsecured trade creditors in respect of goods and services that the creditor provided to the corporation and individual plaintiffs whose investment is less than $20,000.[38] The rationale is that these individuals or organizations may not or do not have the wherewithal to make well-reasoned risk assessments or investment decisions or may suffer unduly from financial loss. Such plaintiffs can continue to collect under the joint and several liability scheme.

 

Finally, there is residual court discretion: courts have the option to award joint and several liability where it is just and reasonable to do so.[39]

 

A large number of submissions were critical of the CBCA provisions. The submission of the OTLA, for example, observed that the changes implemented by the 2001 amendments are “highly technical,” narrow in scope and application, complicated and confusing. The CBCA reforms in the OTLA’s view create uncertainty for litigants and seem, in some cases, arbitrary.[40]

 

Several submissions asked whether the 2001 CBCA amendments have in fact addressed any of the ills identified when the amendments were drafted.  The OTLA states:

 

[I]t is imperative, before any recommendation can be made, that an analysis be completed of the specific impact and force of the 2001 amendments. Whatever the experience has been, it cannot be ignored if similar, or related proposals are being considered for the Ontario model. [41]

 

It is unknown what practical effects the CBCA amendments have had in their eight years of operation. There has been no judicial consideration of, or direct judicial reference to, the CBCA amendments, and the LCO found no studies demonstrating a reversal of the “liability crisis” identified in the years following the amendments.

 

The bcIMC has publicly called for the CBCA to abolish its proportionate liability regime, “believing that the corporate statute should codify the best (i.e. strongest) corporate governance practices so that they become mandatory for federal corporations.”[42]

 

2.                 Ontario Securities Act

 

A public company has two important duties under the OSA.  First, when it “goes public”, the company must prepare and file a prospectus.  A prospectus is a disclosure document that must contain full, true and plain disclosure of all “material facts” and provide information that investors would want to see and that would reasonably be expected to have a significant effect on the value of the securities. Second, the company must make continuous and periodic disclosures to the market.  The company must periodically release financial statements and other documents that affect its financial position and make disclosure of any material changes.

 

Misrepresentations in prospectus disclosure potentially expose a company and its advisors to public enforcement by regulators and private litigation.  In the context of prospectus misrepresentation, a plaintiff could pursue a common law cause of action or base his/her claim on the statutory liability regime for prospectus misrepresentations. The rule of joint and several liability operates for common law claims as well as claims for prospectus misrepresentations under the statutory civil liability provisions in the Securities Act.[43]

 

Misrepresentations in continuous disclosure also expose a company and its professional advisors to public and private enforcement, but until 2005 plaintiffs could only base their claim in the common law, as there was no statutory cause of action for continuous disclosure violations. On December 31, 2005, the Securities Act (Ontario) was amended to create new statutory causes of action in favour of the “secondary market” against directors, officers and experts for misrepresentation and failure to comply with disclosure obligations.[44]

 

The statutory provisions were a compromise between plaintiffs’ interests and defendants’ interests. They provide plaintiffs with a statutory cause of action that is easier to establish than the common law cause of action of misrepresentation which requires proof of reliance on the misrepresentation. In contrast, the statutory cause of action does not require the plaintiff to prove reliance on the negligent misrepresentation. However, the statutory provisions also limit the damages that will be paid out once the statutory cause of action is proven, providing some benefit to defendants, as compared to the common law which provides for joint and several liability. The damages are limited in three ways under the statutory provisions, as discussed below.[45]

 

First, the damages must be calculated in accordance with the formulae set out in the Securities Act.

 

Second, the court is required to fix the proportionate share of those damages payable by each defendant found liable, recovery against each defendant being limited to its respective share of the total damages assessed for all plaintiffs.

 

Third, the amount payable by each particular defendant found liable may be further limited, provided that they did not have knowledge of the misrepresentation or fail to make timely disclosure of a material change, to various liability limits specific to each category of defendant.

 

The legislative caps are as follows. A company’s liability may not exceed the greater of $1 million and 5% of its market capitalization. The liability of an individual (other than an expert), such as a director or officer, is limited to the greater of $25,000 and 50% of his or her total compensation from the company and its affiliates during the preceding 12 months (including the value of any options, pensions benefits and stock appreciation rights granted during that period).[46]

 

An expert’s liability is limited to the greater of $1 million and the fees earned by the expert from the company and its affiliates during the preceding 12 months.[47]

 

The liability limits and proportionate liability provisions in the OSA do not apply to a defendant (other than a company) if the plaintiff proves that the defendant knowingly authorized, permitted or acquiesced in the making of the misrepresentation or the failure to make timely disclosure of a material change. In such cases, defendants are jointly and severally liable for the full amount of damages assessed in the action.[48]

 

Both the written submissions received and the comments of participants at the Roundtable suggested that practical effects of the reforms to the OSA were modest.

 

The submission of The Advocates Society states that the statutory secondary market liability amendment is a modest and incomplete remedy for investors harmed by misconduct of others in the secondary market.[49] It notes that there has been little litigation under these amendments made six years ago.

 

There is simply no case to be made that there have been massive increases in the liability of auditors, directors and/or officers to public shareholders and/or other third parties who rely upon financial statements provided by their corporations as a result of these OSA amendments and/or similar legislative amendments in other provinces.[50]

 

The Advocates Society submission also notes that the OSA amendments provided for a new substantive right for investors while also providing for proportionate liability as opposed to joint and several liability.

 

[I]n the consultation paper, there is no reference to any corresponding statutory rights and remedies to the OBCA shareholders and other corporate stakeholders being offered by the proponents of change to those introduced in the aforementioned OSA amendments. Instead, the Consultation Paper appears only to raise the prospect of limits to be placed on existing OBCA shareholders’ and other stakeholders’ rights.[51]

 

Siskinds’ submission agrees that the statutory secondary market regime is “an incomplete remedy for investors harmed by misconduct because of the pro-defendant barriers embedded in the statutory scheme.”[52] Siskinds also notes that the experience with these provisions has been rather uneventful. It states:

 

When Part XXIII.1 was enacted, advocates for the business community, principally major Bay Street law firms, warned of dire consequences and the likelihood of an avalanche of securities class actions. Those consequences have simply not materialized. Indeed, since Part XXIII.1 was called into force on December 31, 2005, there have been filed, to our knowledge, approximately 17 class actions seeking to assert claims under Part XXIII.1. That amounts to approximately 4 class actions per year. To our knowledge, an auditing firm was named as a defendant in only one of those actions, and ultimately agreed to settle the claims asserted against it for $500,000.[53]

 

B.   Previous Consideration of Joint and Several Liability in Canada

 

Reform of joint and several liability h