The Short End of the Stick: Bolstering Legal Protections for Short Sellers in Ontario’s Secondary Market

• Author: Jacob Medvedev
• Pages: 53-84

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The Short End of the Stick: Bolstering Legal

Protections for Short Sellers in Ontario’s Secondary

Market

Jacob Medvedev

: In this paper, the author surveys Ontario’s secondary market

civil liability framework. The author reviews the constituent continuous

disclosure obligations as well as the enforcement mechanisms that are

available under common law and statute. The author then explores how

short sellers f‌it into Ontario’s secondary market securities laws. Avenues

of legal recourse have seemingly crystallized for ordinary investors

who are misled by reporting issuers in the secondary market. However,

Ontario’s securities laws are unclear regarding the legal redress that is

available to aggrieved short sellers who are resigned to a similar fate. To

address this gap, the author argues in favour of strengthening legal pro-

tections for short sellers by: (1) recognizing a duty of care owed by public

issuers to short sellers; and (2) revising the damage calculation formulas

in Part XXIII.1 of Ontario’s Securities Act to ensure that they are capable of

compensating short sellers in a manner that is commensurate with their

investment position. In doing so, Ontario could better position itself as

a robust securities market that provides adequate legal safeguards for

diverse types of investors. Moreover, the implementation of remedial

measures for short sellers may create market conditions that encour-

age the spread of negative information about stocks, paving the way for

greater accuracy in the price discovery of shares and bolstered market

eciency overall.

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THE SHORT END OF THE STICK:

BOLSTERING LEGAL PROTECTIONS

FOR SHORT SELLERS IN ONTARIO’S

SECONDARY MARKET

Jacob Medvedev*

A. INTRODUCTION

The overriding objective of Ontario’s securities laws is to “foster fair

and ecient capital markets.”1 This objective calls for the development

and implementation of safeguards that protect investors from unfair,

improper, or fraudulent practices of public companies.2 In July 2020,

Ontario’s Capital Markets Modernization Taskforce (the Taskforce) pub-

lished a consultation report that outlined policy recommendations for

the modernization and invigoration of Ontario’s capital markets.3 Among

other things, the Taskforce reiterated the importance of strengthening

prohibitions on misleading and untrue statements by public companies

and enhancing investor protections.4 The Taskforce’s calls-to-action are

especially important for the regulation of the secondary market, given

* Jacob Medvedev is a graduate from the JD/MBA program at the University of Ottawa

Faculty of Law and Telfer School of Management. Jacob will be joining Norton Rose

Fulbright LLP in Toronto, ON as an articling student in 2021. Jacob would like to

thank Erika Anschuetz, lawyer at Norton Rose Fulbright LLP in Toronto, ON, for her

guidance at the inception of this project.

1 Securities Act, RSO 1990, c S.5, s 1.1 [Securities Act].

2 Ibid. Throughout this paper, I interchangeably use the terms public company, publicly

traded company, publicly listed company, and reporting issuer in reference to

companies whose securities are traded on the primary and secondary markets.

3 Capital Markets Modernization Taskforce, Consultation Report July 2020, online:

www.ontario.ca/document/capital-markets-modernization-taskforce-consultation-

report-july-2020 at 1 [Taskforce].

4 Ibid at 37 and 44.