Several developments in Ontario securities law, taken together, have the potential to substantially increase the exposure of directors and officers to personal liability. These are:
- proposed Multilateral Instrument 52-109 - Certification of Disclosure in Companies' Annual and Interim Filings (Canada's response to the US Sarbanes-Oxley Act);
- Part XXIII.1 of the Securities Act entitled Civil Liability for Secondary Market Disclosure, which, when proclaimed, will, for the first time in Canada, create a civil right of action for damages for, and deemed reliance on, misrepresentations in continuous disclosure documents; and
- the Class Proceedings Act which provides for the certification of class actions.
The recent decision of the Ontario Securities Commission involving YBM Magnex International may exacerbate the problem. The Commission applied a subjective, rather than an objective standard in determining the availability of each director's and officer's due diligence defence.
Individually, each of the developments is a reasonable response to a perceived shortcoming in securities regulation or Ontario's legal system. Together they provide all the ingredients to create a storm of personal liability for directors and officers. This is because the plaintiffs' bar is confident it can draft statements of claim that will obtain class certification. It is also confident that, once the class is certified, statutory defences and other protective measures, such as liability limits, will become largely irrelevant as the process changes to extracting the maximum settlement the defendants will bear to end the litigation.
It will be difficult for directors to make the necessary judgments until they, and their legal advisers, know more about just how extensive their liability could be. One hopes that the current high level of uncertainty will not be too great a disincentive to capable individuals serving as directors and officers of Canadian pubic companies.