Directors and Officers Beyond Canadian Borders: Searching for the Right Venue for the Claim Or the Defence

• Author: Thomas G. Heintzman, O.C., Q.C. and David Vaillancourt
• Pages: 185-214

185

DIRECTORS AND OFFICERS BEYOND

CANADIAN BORDERS: SEARCHING

FOR THE RIGHT VENUE FOR THE

CLAIM OR THE DEFENCE

Thomas G. Heintzman, O.C., Q.C. and

David Vaillancourt*

A. INTRODUCTION

Publicly traded corporations in the twenty-first century operate in a global

economy. They have shareholders from around the world. Accordingly, the

directors and officers (D & Os) of those corporations are subject to potential

litigation complaining about their conduct in a variety of jurisdictions.

This paper compares the liability of corporate D & Os arising inside

Ontario with the liability arising outside Canada from material misrepresen-

tations in the secondary securities market. In particular, it focuses on the

liability regimes found in Ontario and under the federal law of the United

States.

In order to put D & O liability inside and outside Canada in context,

this paper will compare the advantages and disadvantages between Ontario

and federal US law from a variety of perspectives, including the standard of

liability, the jurisdiction of courts in both countries, and the enforcement of

judgments against D & Os across the Canada–US border. In so doing, this

paper will try to provide some insight into the best jurisdiction in which to

assert or defend secondary market litigation against D & Os — the Ontario

courts or the US Federal Courts.

* Thomas G. Heintzman is counsel to McCarthy Tétrault LLP in its Toronto office.

David Vaillancourt is an associate at Affleck Greene McMurtry LLP and was for-Affleck Greene McMurtry LLP and was for-

merly an articling student at McCarthy Tétrault LLP in its Toronto office.

186 THE CANADIAN CLASS ACTION REVIEW

B. THE TESTS FOR D & O LIABILITY

Both Ontario law and US federal law grant shareholders a civil right of

action against corporate D & Os if there has been a misrepresentation in the

secondary securities market.

1) Ontario Law: Part XXIII.1 of the Ontario Securities

Act1

Under Ontario securities law, secondary market liability is now governed

by Part XXIII.1 of the OSA. Part XXIII.1 was introduced into Ontario law in

2005 by a Bill known as Bill 198.2 Part XXIII.1 creates an express cause of

action in respect of misrepresentations in the secondary market.3

Broadly speaking, if a corporation issues a document or statement

that contains a misrepresentation, or fails to disclose information that

it is required to disclose, then under Part XXIII.1 any shareholder who

purchased or disposed of that corporation’s securities during the time the

misrepresentation was in the market has a cause of action.4 Shareholders

need not prove that they relied on the misrepresentation.5 Where the

misrepresentation is contained in a core document,6 the defendant will be

liable unless a due diligence defence can be established.7 Therefore, for core

documents, liability accrues on a negligence standard; a culpable mental

1 R.S.O. 1990, c. S.5 [OSA].

2 Bill 198, Keeping the Promise for a Strong Economy Act (Budget Measures), 2002, 3d.

Sess., 37th Leg., Ontario, 2002 (assented to 9 December 2002 [Bill 198].

3 OSA, above note 1, s. 138.3. Similar statutory provisions are found in the other

provinces and territories. See Securities Act, R.S.B.C. 1996, c. 418, s. 140.3;

Securities Act, R.S.A. 2000, c. S-4, s. 211.03; Securities Act, 1988, S.S. 1988–89,

c. S-42.2, s. 136.11; Securities Act, C.C.S.M. c. S50, s. 176; Securities Act, R.S.Q.

c. V-1.1, s. 225.8; Securities Act, S.N.B. 2004, c. S-5.5, s. 161.2; Securities Act,

R.S.N.S. 1989, c. 418, s. 146C; Securities Act, R.S.P.E.I. 1988, c. S-3.1, s. 124;

Securities Act, R.S.N.L. 1990, c. S-13, s. 138.3; Securities Act, R.S.Y. 2002, c. 201,

s. 124; Securities Act, S.N.W.T. 2008, c. 10, s. 124; Securities Act, S.Nu. 2008, c.

12, s. 124.

4 OSA, ibid., s. 138.3.

5 Ibid.

6 A prospectus, a take-over bid circular, an issuer bid circular, a directors’ circular,

a notice of change or variation in respect of a take-over bid circular, issuer bid

circular, or directors’ circular, a rights offering circular, management’s discus-

sion and analysis, an annual information form, an information circular, annual

financial statements, and interim financial statements of the responsible issuer. In

addition to this list, a material change report qualifies as a core document if the

defendant is an officer of the corporation (ibid., s. 138.1).

7 OSA, ibid., s. 138.4(6).