Bob Cooper Disclosure Liability in Investor Relations: Managing the Risk

2 Summary Investor relations professionals are exposed to personal liability for actions taken during the course of employment. There is a risk of both enforcement action for violation of securities legislation and exposure to civil liability through secondary market claims. These risks can be managed by understanding where you are vulnerable to regulatory action and by ensuring that your disclosure policies are comprehensive and applied with due diligence.

3 Securities Legislation “investor relations activities” means any activities or oral or written communications, by or on behalf of an issuer or security holder of the issuer, that promote or reasonably could be expected to promote the purchase or sale of securities of the issuer, but does not include: b)Activities or communications necessary to comply with the requirements of i.this Act or the regulations, or ii.the bylaws, rules or other regulatory instruments of a self regulatory body, exchange or quotation and trade reporting system,

4 “officer” “officer” means the chair or a vice chair of the board of directors, the president, a vice president, the secretary, an assistant secretary, the treasurer, an assistant treasurer, the general manager and any other individual appointed an officer of a corporation or acting in a capacity similar to those specified offices on behalf of an issuer or registrant”

5 Special Relationships 3.Definition of special relationships – For the purposes of sections 86 and 136, a person is in a special relationship with a reporting issuer if the person b)is engaging in or is proposing to engage in any business or professional activity with or on behalf of the reporting issuer … c)Is a director, officer or employee of the reporting issuer … d)knows of a material fact or of a material change with respect to the reporting issuer, having acquired the knowledge while in a relationship described in paragraph (a), (b) or (c) with the reporting issuer

6 Agency 155. Offences generally – (1) A person who does any of the following commits an offence: … 4.If a person, other than an individual, commits an offence under subsection (1), an employee, officer, director or agent of that person who authorizes, permits or acquiesces in the offence commits the same offence whether or not that person is convicted of the offence.

7 Agency – cont’d Contraventions attributable to employees, officers, directors and agents - (1) If a person, other than an individual, contravenes a provision of this Act or of the regulations, or fails to comply with a deicsion, an employee, officer, director or agent of the person who authorizes, permits or acquiesces in the contravention or non-compliance also contravenes the provisions or fails to comply with the decision, as the case may be.

8 Secondary Market Civil Liability Regime – General Overview Private statutory civil right of action for purchasers and sellers of securities who buy or sell securities during a period that an uncorrected misrepresentation is included in various categories of publicly filed documents or public oral statements Private statutory civil right of action for purchasers and sellers of securities who buy or sell securities during a period that a responsible issuer fails to disclose a material change that should have been disclosed under securities laws

9 Secondary Market Civil Liability Regime – General Overview – cont’d Action for misrepresentation in publicly filed document – potential defendants include responsible issuer, directors, officers involved in a decision to release document and influential persons who knowingly influenced release of document Action for misrepresentation in public oral statement – potential defendants include responsible issuer, person making statement, directors and officers involved in decision to release statement and influential persons who knowingly influenced release of statement

10 Secondary Market Civil Liability Regime – General Overview – cont’d Action for failure to disclose material change – potential defendants include responsible issuer and officers, directors and influential persons who knowingly influenced non-disclosure The relevant period of liability starts on the date that disclosure is made containing a misrepresentation or responsible issuer should have disclosed a material change and ends when proper disclosure is made correcting the misrepresentation or omission

11 Secondary Market Civil Liability Regime – Application of Regime Secondary market liability applies in respect of “responsible issuers”, i.e. reporting issuers in a jurisdiction or issuers with a real and substantial connection to that jurisdiction Shareholders of non-Canadian issuers may pursue actions in Canadian courts

12 Secondary Market Civil Liability Regime – Core Documents v. Non-Core Documents “Core documents” for all potential defendants include prospectuses, all types of circulars, MD&A, AIFs and annual and interim financial statements Material change reports are only “core documents” for responsible issuer and officers “Non-core documents” include press releases and, in the case of potential defendants other than responsible issuer and officers, material change reports

13 Secondary Market Civil Liability Regime – Burdens of Proof For “core documents”, plaintiff need not prove that there was fraud or negligence in making misrepresentation/failure to disclose – onus is on defendant to establish due diligence (i.e. reasonable investigation) or other defence For “non-core documents”, plaintiff must show that misrepresentation/failure to disclose was made knowlingly or recklessly or otherwise as a result of “gross misconduct”

14 Consequences for Investor Relations Important to have more involvement in public statements, disclosure judgments and document preparation Must clearly define the extent of responsibility for particular categories of documents in disclosure policy More responsibility for content of public statements, formation of materiality judgments and due diligence procedures Backup certification procedure not necessarily germane or practical for every type of document

15 “Reasonable Investigation” Legislation enumerates a non-exhaustive list of factors, including: nature of issuer knowledge, experience and function of the defendant adequacy of systems in place for disclosure reasonableness of relying on system reasonableness of relying on officers/employees responsibility of the person making the misrepresentation

16 “Reasonable Investigation” – cont’d At a practical level a “reasonable investigation” will likely turn on: what internal analysis preceded the disclosure/omission to disclose? were appropriate officers, managers and advisers involved? what outside advice was sought and was it followed? was the disclosure/omission made hastily under time pressure? were internal compliance standards/systems followed? was all of the above documented so as to be provable in a meaningful way?

17 Recommendations – Written Disclosure Policy and Disclosure Procedures Policies and procedures will assist in avoiding misrepresentations and failures to make timely disclosure Policies and procedures will assist in establishing due diligence defence: person or company conducted or caused to be conducted a reasonable investigation and no reasonable grounds to believe that the document contained the misrepresentation Important for Multi-lateral Instrument

18 Recommendations – Presentations and Public Oral Statements Calls and other presentations should be scripted and reviewed after delivery and any misrepresentations or selective disclosure should be corrected Keep records of presentations and oral statements For forward-looking information, must have a reasonable basis for making a forecast or projection

19 Recommendations – Forward-looking Information In addition to having a reasonable basis: i.include reasonable cautionary language ii.Identify information as forward-looking and identify material factors which could cause actual results to differ materially from forecast or projection iii.state material factors or assumptions applied in drawing conclusion or making a forecast or projection

20 Recommendations – Reviewing New Developments and Competitors’ Disclosure Policies and procedures should assign responsibility to person(s) for keeping informed regarding developments in case law and securities commission enforcement proceedings affecting disclosure practices as well as reviewing disclosure of competitors Responsible person(s) should report to disclosure committee (or in the absence of such a committee, to CEO and CFO) periodically and promptly in event of any major development in the law or practices

21 Recommendations – Documenting Document Preparation Process In order to establish reasonable investigation, procedures establishing steps to be taken should be in place and there should be some record that they were followed, and the process conducted in connection with preparation of disclosure documents should be documented Consider having documents reviewed, prior to release, by someone uninvolved with preparation who can look at it the way it will be looked at by the public

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