Ruling that extends issuers' due diligence obligation until closing and curtails financial forecasting indicates where the court is drawing the line, says Trisha Jackson in Financial Post

June 09, 2004

A decision in the first Canadian securities class action to go to trial has wide-ranging implications for public offerings in Canada and for the officers, directors, and underwriters responsible for ensuring the accuracy of information in a prospectus. The decision is being closely scrutinized because it is the Ontario Superior Court’s first interpretation of the statutory cause of action for misrepresentation in an offering document, deeming that a financial forecast in a prospectus can now be a material fact because of the assumptions it contains.

In Douglas Kerr et al v. Danier Leather Inc. et al, the plaintiffs were investors who had purchased Danier Leather Inc. shares upon its 1998 IPO, the final prospectus of which contained a forecast for Q4 and the 1998 fiscal year. The plaintiffs sued Danier, its president/CEO and its CFO under section 130 of the Ontario Securities Act for damages due to alleged misrepresentations contained in the IPO final prospectus of May 6, 1998.

Judge Sidney Lederman found the company, its president/CEO and CFO liable for misrepresentations, holding in particular that disclosure of the company's intra-Q4 1998 results were necessary to make the forecast contained in the IPO not misleading. Damages were fixed at $2.35 per share.

Trisha Jackson, who represented Danier’s founder Irving Wortsman, says the decision marks a significant change in tone and may change common practice for issuers and underwriters. “I think most people would have thought of a financial forecast as fundamentally an exercise of management judgment about where a corporation is going over the next short period of time,” she says. “The court found that the managers who made that decision honestly believed the judgment they made, and that judgment in fact was borne out by the fact they met their forecast, essentially. Notwithstanding that, the court was prepared to say that although they believed it, and they met it, it wasn’t reasonable—on the basis, of course, of expert people who were not running the business.” Adds Trisha: “If you’re looking for an indication of where the court is drawing the line in the review of what businesses do, this is a very activist and interventionist decision and I expect if it’s sustained on appeal, there’ll be a lot more class actions, a lot more litigation in this area.”

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