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Due Diligence on forecasts

A recent decision in Canada illustrates the increased exposure of directors and officers to personal liability in Canada. In Kerr v Danier Leather Inc the Superior Court of Justice of Ontario imposed liability on the CEO and CFO of Danier for making misrepresentations in a prospectus.

In a class action lawsuit against Danier and the two senior officers, shareholders alleged that financial forecasts contained in the prospectus for the company's IPO were untrue and misleading. In determining whether a misrepresentation at the time of purchase had occurred, the court stated that the forecast would be an untrue statement of material fact if: (i) the forecast was not prepared using reasonable care and skill; (ii) management does not generally believe the forecast; (iii) management's belief in the forecast is unreasonable; or (iv) management is aware of facts that would seriously undermine the forecast. On the day that the final prospectus was filed, the court did not find the Forecast to be an untrue statement of material fact. However, the court found that the underlying factual assertions were not true on the day of closing, which occurred two weeks after the final prospectus filing and after intervening facts had significantly dampened sales. The court thereby affirmed that closing is the time at which a purchase occurs, and therefore, on this date, the presence of liability for misrepresentation remains under consideration.

When a time lag between prospectus filing and closing occurs, at least one party will typically require a bring-down due diligence session to confirm material facts and representations. Though it may be tempting to skip this usually routine aspect of a transaction, the Danier decision highlights its critical importance and serves as a useful reminder to follow through with due diligence through all stages of a deal.

In play finding defeats standstill provision

A recent decision in Canada sheds some light on the meaning of the words in play and the interpretation of standstill provisions.

On March 30 2004, IAMGold Corporation and Wheaton River Minerals Ltd jointly announced a proposed business combination by way of a plan of arrangement whereby Wheaton River would be acquired by IAMGold. The proposed transaction was to be approved at shareholder meetings of both companies to be held on June 8 2004. On May 27 2004, IAMGold announced that it had received an unsolicited proposal from Golden Star Resurces Ltd to acquire all of the outstanding IAMGold shares. Shortly thereafter, Golden Star announced that it would apply to the Superior Court of Justice for a declaration that its offer would not breach the standstill provision of a confidentiality agreement with IAMGold entered into in September 2003. The standstill provision restricted each company from acquiring any voting securities of the other, without prior written approval, for a two-year period, except where one of them became subject to a formal takeover bid, a proposal to merge or amalgamate, or a proxy solicitation where the effect of the proposal would be a change-of-control of its voting securities or control of its board of directors.

The case, Golden Star Resources Ltd v IAMGold Corporation [2004] OJ No 2869 (unreported), was heard and oral judgment rendered on June 8 2004. The Court was not prepared to find that the proviso was inapplicable only because IAMGold may have initiated the discussions with Wheaton River but found that the proposed transaction would effect a change-in-control of the board of IAMGold, which would be doubled in size (with the new members being the directors of Wheaton River). Accordingly, it held that the standstill provision did not prevent Golden Star from making a takeover bid. Although it would effect a change-in-control of the board (but not a change in voting control), in the Court's view the Wheaton River transaction did not put IAMGold in play. However, the Court went on to find that the Golden Star proposal did put IAMGold in play.

In addition to its decision on the standstill provision, the Court ordered that the IAMGold meeting be adjourned until June 29 2004 to accommodate the reasonable expectation of IAMGold shareholders that they would have time to assess the Golden Star offer before voting on the Wheaton River transaction.

At the IAMGold meeting, the business combination with Wheaton River was not approved. However, the Golden Star offer was subsequently abandoned after IAMGold announced a new transaction with Gold Fields Limited.

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