Raising the stakes

The effect of Canada's heightened disclosure penalties

By US standards, Canadian corporate disclosure practices have a relatively clean history. Enron-scale corporate fraud scandals and disclosure failures have been, for the most part, a US phenomenon. So it’s interesting that Canadian IROs now face one of the strictest disclosure regimes in the world.
Canada’s disclosure facelift centers around the new statutory civil liability regime for secondary market disclosures. Otherwise known as Bill 198, this is the Ontario government’s attempt to align Canadian disclosure requirements with US Sarbanes-Oxley legislation. ‘Bill 198 doesn’t change the disclosure regime, but it raises the consequences if there are violations,’ says Jane Watson of Watson Investor Relations. 

Bill 198 aims to protect investors by providing them with the right to sue public company executives for disclosure misrepresentations included in press releases, online documents and oral statements. Those who could potentially be liable include directors, IROs and even outside IR counsel. Until the first Bill 198 test cases come to court, however, it’s tricky to gauge just how far the legislation’s tentacles will extend. 

Watson says issuers were initially resistant to Bill 198. They feared it would be too easy to be found liable, as plaintiffs would not have been required to prove fraud or intention when the case centered around core disclosure documents. ‘But legislators responded with measures that should prevent frivolous lawsuits,’ says Watson. ‘Most importantly, plaintiffs need to obtain court approval to proceed, demonstrating that the action is in good faith and that there is reasonable possibility that it will succeed. Additionally, there is a cap on penalties and the loser will pay court costs.’ 

A tight fit
The hope is that a close-fitting disclosure policy will protect an issuer from being found in violation of Bill 198. In addition, courts are expected to be more lenient on companies with solid disclosure policies that happen to break the rules. 

How could disclosure quality be upped? Naturally, the best ideas come from large companies that have the resources to beef up their disclosure procedures. Lorne Gorber, VP of IR at IT services group CGI, which has a market cap of C$3 bn ($2.6 bn), thinks getting the numbers right is the first step regardless of who is communicating the message. ‘I might well talk about stats in a conference call but those numbers must be backed up by the finance group that signs off the numbers, and this must be backed up by and consistent with any press releases,’ he explains. 

Sounds straightforward enough, but it’s increasingly difficult for disclosure committees to control the flow of financial and non-financial information given the plethora of online venues available to employees to either post information or receive misinformation from unreliable sources. 

‘We have 25,000 people at CGI,’ says Gorber, ‘but if any of those people see derogatory stuff about CGI, they might want to respond, which is a dangerous practice. This means you’ve got to have a policy on this enforced by your disclosure committee, and then you’ve got to communicate this policy effectively. You just can’t slap a legally written document on the table and expect employees to soak it up and absorb it.’ 

Hindsight is everything
Another issue is volume. The sheer range of information that needs to pass through the disclosure committee can seem daunting. For instance, white papers on certain topics could be of interest to current and potential shareholders and can therefore be considered material. 

Another challenge is that it’s hard to determine how broadly regulators are going to apply the definition of misrepresentation under Bill 198. This is one of the concerns of lawyer Ross McKee, who is with Toronto-based Blake, Cassels & Graydon. He believes that misrepresentation is usually easy enough to define, but that ‘the application of that definition to a particular set of facts could be very challenging. Cases of outright fraud are going to be few and far between. More difficult to resolve will be cases involving hindsight analysis of past business judgment, or whether a particular misrepresentation was the result of gross negligence or ‘mere’ negligence.’ 

There are also concerns that companies might not be ready for the potential impact of Bill 198. Bob Tait, president and CEO of the Canadian Investor Relations Institute (Ciri), suspects that some smaller companies may not be digesting the full meaning of the new regime. 

Ciri recently conducted a survey of 101 CEOs, CFOs, IROs and other executives to explore the vulnerability of small caps to Bill 198. It shows that 68 percent of CEOs within this group think civil liability will have a significant effect on their job. ‘Even fewer – 46 percent – think non-officer IR spokespeople should be covered by liability insurance,’ reports Tait. 

When asked how significant the effects of Bill 198 are in terms of the way they do their job, a full 20 percent of respondents claim not to know. ‘But that could be because there are no cases yet – hopefully not because they are unaware of the potential consequences,’ notes Tait. 

Ready, set, go
Still, some IROs are fully aware of what Bill 198 means and aren’t scared off. Janet Craig, ATI Technologies’ former head of IR, now with Angiotech Pharmaceuticals, welcomes the disclosure safeguard. Whether it’s Sox or Bill 198, anything that continues to create confidence in capital markets is a good thing, she says. ‘But the challenge is that a lot of regulations create extra cautionary language for disclosure,’ she adds. ‘This causes people to skip over things sometimes.’ 

Some see Canada’s tighter disclosure controls as part of a broader global consolidation among stock exchanges that are putting pressure on issuers and regulators to increase the strength of their disclosure standards. This point was made recently by TSX Group CEO Richard Nesbitt, who thinks higher disclosure standards should take priority.
‘Canadians deserve strong national rules contained in a modern, competitive regulatory system,’ he says in a TSX press release. ‘They also deserve rules that generate benefits for investor protection that exceed the costs of the rules themselves. International investors deserve the same when they choose to invest in Canadian companies. Our reputation as a market depends on it.’


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