Kerr et al. v. Danier Leather Inc. et al., (2007) 368 N.R. 204 (SCC)

• Judge: McLachlin, C.J.C., Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ.
• Court: Supreme Court (Canada)
• Case Date: October 12, 2007
• Jurisdiction: Canada (Federal)
• Citations: (2007), 368 N.R. 204 (SCC);2007 SCC 44

Kerr v. Danier Leather Inc. (2007), 368 N.R. 204 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2007] N.R. TBEd. OC.024

Douglas Kerr, S. Grace Kerr and James Frederick Durst (appellants) v. Danier Leather Inc., Jeffrey Wortsman and Bryan Tatoff (respondents) and Ontario Securities Commission (intervenor)

(31321; 2007 SCC 44; 2007 CSC 44)

Indexed As: Kerr et al. v. Danier Leather Inc. et al.

Supreme Court of Canada

McLachlin, C.J.C., Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ.

October 12, 2007.

Summary:

A company made an initial public offering to sell shares. The prospectus contained a forecast of the company's projected revenues and earnings. An internal company analysis prepared several days before the public offering showed fourth quarter revenues and earnings lagging behind forecasted figures. The company did not disclose these partial fourth quarter results before closing. The company's sales rebounded and, by the end of the fiscal year, the company had substantially met its forecasted figures. Share purchasers commenced a class action against the company and its officers for prospectus misrepresentation (Securities Act, s. 130(1)).

The Ontario Superior Court, in a judgment reported [2004] O.T.C. 397, found the company and officers liable for statutory misrepresentation. The trial judge held that the prospectus impliedly represented that the forecast was objectively reasonable, both on the date the prospectus issued and the date of closing. The poor fourth quarter revenues were material facts required by statute to be disclosed before closing. The representation that the forecast was objectively reasonable, although true on the issuing date, was false on the closing date. The court awarded substantial damages based on the fall in share price. The company and officers appealed, submitting, inter alia, that the trial judge erred in (1) finding that s. 130(1) required continuous disclosure of material facts occurring after the date of issuing the prospectus up to the closing date; (2) finding that the prospectus contained an implied representation that the forecast was objectively reasonable; and (3) failing to take into account the business judgment of the company's senior management or that the company substantially achieved its forecasted revenue and earnings.

The Ontario Court of Appeal, in a judgment reported (2005), 205 O.A.C. 313, allowed the appeal and dismissed the action. The court agreed with all three grounds of appeal. The share purchasers appealed.

The Supreme Court of Canada dismissed the appeal. The legislation required disclosure of a "material change" in the "business, operation or capital of the issuer", not continuous disclosure of material facts. Since the trial judge found that the temporary sales slump did not constitute a "material change" and there was no misrepresentation in the prospectus as of the date of filing, the Court of Appeal was correct to dismiss the class action.

Company Law - Topic 4276

Directors - Duties - General principles - Business judgment rule - The Supreme Court of Canada discussed whether the "business judgment rule" applied to the disclosure requirements under ss. 56 and 58 of the Securities Act - The court stated that "I agree with the appellants that while forecasting is a matter of business judgment, disclosure is a matter of legal obligation. The Business Judgment Rule is a concept well-developed in the context of business decisions but should not be used to qualify or undermine the duty of disclosure. ... It is for the legislature and the courts, not business management, to set the legal disclosure requirements." - See paragraphs 54 to 55.

Securities Regulation - Topic 5405

Prospectuses - False or misleading information - A prospectus contained projected revenues and earnings - The Ontario Court of Appeal held that the trial judge erred in finding that the prospectus contained an implied representation that the projected figures were objectively reasonable - The court agreed that in most cases a forecast in a prospectus would contain an implied representation that the forecast represented management's best judgment, was prepared using reasonable care and skill and that management believed the forecast to be reasonable - Alternatively, if there was an implied representation that the forecast was objectively foreseeable, the trial judge erred by failing to take into account or give deference to the business judgment of senior management or consider that the company substantially achieved the forecasted revenues and earnings - The Supreme Court of Canada stated that "in my view, as a matter of fact, the forecast did carry an implied representation of objective reasonableness rooted in the language of the prospectus, but this implied representation extended only until the prospectus was receipted on May 6." - See paragraph 49.

Securities Regulation - Topic 5415

Prospectuses - Disclosure of material facts and changes - The prospectus for a company's initial public offering provided full, true and plain disclosure of all material facts as of the date of issue (May 6) - The prospectus contained projected revenues and earnings - The closing date for distribution of shares was May 20 - On May 16, the company obtained internal financial information showing that revenues and earnings for the first portion of the 4th quarter were lagging behind projected figures because of unseasonably warm weather - The company did not disclose this information - Share purchasers sued for prospectus misrepresentation (Securities Act, s. 130(1)), alleging that s. 130(1) required continuous disclosure of material facts (not just material changes) up to the closing date - The judge found the poor partial 4th quarter results to be a "material fact", but not a "material change"- The Ontario Court of Appeal stated that "neither s.130 nor the definition of misrepresentation in s. 1(1) imposes on an issuer an obligation to disclose material facts occurring after the date a receipt for a final prospectus was issued and before the end of the distribution period" - The court did not foreclose the possibility that poor intra-quarterly results could, under certain circumstances, constitute a material change - The Supreme Court of Canada affirmed the decision, stating that "when a prospectus is accurate at the time of filing, s. 57(1) of the Act limits the obligation of post-filing disclosure to notice of a 'material change' ... An issuer has no similar express obligation to amend a prospectus or to publicize and file a report for the modification of material facts occurring after a receipt for a prospectus is obtained. ... In summary, when (as here) a prospectus (or an amendment) contains no misrepresentation on the date the document is filed, information amounting to material facts (but not material changes) that arises subsequently cannot support an action under s. 130(1)." - See paragraphs 32 to 43.

Securities Regulation - Topic 5415

Prospectuses - Disclosure of material facts and changes - [See Company Law - Topic 4276 ].

Cases Noticed:

Pezim v. British Columbia Securities Commission et al., [1994] 2 S.C.R. 557; 168 N.R. 321; 46 B.C.A.C. 1; 75 W.A.C. 1, refd to. [para. 32].

Shaw v. Digital Equipment Corp. (1996), 82 F.3d 1194 (1st Cir.), refd to. [para. 33].

H.L. v. Canada (Attorney General) et al., [2005] 1 S.C.R. 401; 333 N.R. 1; 262 Sask.R. 1; 347 W.A.C. 1; 2005 SCC 25, refd to. [para. 53].

Pente Investment Management Ltd. et al. v. Schneider Corp. et al. (1998), 113 O.A.C. 253; 42 O.R.(3d) 177 (C.A.), refd to. [para. 54].

Maple Leaf Foods Inc. v. Schneider Corp. - see Pente Investment Management Ltd. et al. v. Schneider Corp. et al.

Peoples Department Stores Inc. (Bankrupt) v. Wise, [2004] 3 S.C.R. 461; 326 N.R. 267; 2004 SCC 68, refd to. [para. 56].

Anderson, Clayton Shareholders' Litigation, Re (1986), 519 A.2d 669 (Del. Ch.), refd to. [para. 57].

Gariepy et al. v. Shell Oil Co. et al., [2002] O.T.C. 459; 23 C.P.C.(5th) 360 (Sup. Ct.), affd. [2004] O.J. No. 5309 (Div. Ct.), refd to. [para. 65].

Moyes v. Fortune Financial Corp. et al., [2002] O.T.C. 883; 61 O.R.(3d) 770 (Sup. Ct.), refd to. [para. 65].

Statutes Noticed:

Class Proceedings Act, S.O. 1992, c. 6, sect. 31 [para. 65, Appendix].

Securities Act, R.S.O. 1990, c. S-5, sect. 1(1) [para. 45, Appendix]; sect. 56(1), sect. 57(1), sect. 58(1) [Appendix]; sect. 130(1) [para. 34, Appendix]; sect. 130(2), sect. 130(5), sect. 130(7), sect. 130(9), sect. 130(10) [Appendix].

Authors and Works Noticed:

Ontario, Ministry of Finance, Five Year Review Committee Final Report: Reviewing the Securities Act (Ontario) (2003), generally [para. 38].

Orkin, Mark M., The Law of Costs (2nd Ed.) (2006 Looseleaf Update), vol. 1, § 208.2.1 [para. 67].

Toronto Stock Exchange, Exchange Committee on Corporate Disclosure, Final Report: Responsible Corporate Disclosure: A Search for Balance (1997), generally [para. 38].

Underwood, Harry, and Sorell, René, Danier Leather Inc. and the Duty to Update a Prospectus (2006), 43 Can. Bus. L.J. 134, pp. 144, 145 [para. 38].

Waddams, Stephen M., The Law of Contracts (4th Ed. 1999), p. 315 [para. 36].

Counsel:

George S. Glezos, Peter R. Jervis, Karen W. Kiang and Jasmine T. Akbarali, for the appellants;

Alan J. Lenczner, Q.C., and Jaan Lilles, for the respondent, Danier Leather Inc.;

Benjamin Zarnett and Jessica Kimmel, for the respondents, Jeffrey Wortsman and Bryan Tatoff;

Kelley McKinnon and Jane Waechter, for the intervenor.

Solicitors of Record:

Lerners, Toronto, Ontario, for the appellants;

Lenczner Slaght Royce Smith Griffin, Toronto, Ontario, for the respondent, Danier Leather Inc.;

Goodmans, Toronto, Ontario, for the respondents, Jeffrey Wortsman and Bryan Tatoff;

Ontario Securities Commission, Toronto, Ontario, for the intervenor, Ontario Securities Commission.

This appeal was heard on March 20, 2007, before McLachlin, C.J.C., Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ., of the Supreme Court of Canada.

On October 12, 2007, Binnie, J., delivered the following judgment in both official languages for the Supreme Court of Canada.