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Canadian provinces joining Ontario in revising corporate disclosure laws

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EDMONTON, Alberta—Several Canadian provinces are following Ontario's lead in amending their securities laws to add requirements related to corporate disclosures, creating additional exposures for Canadian companies because the amendments lower the bar for filing securities class action lawsuits.

The impact of the legislative changes in the other provinces, though, is expected to be fairly limited because most publicly traded Canadian companies are listed on the Toronto Stock Exchange and have taken steps to comply with Ontario's amended securities law, which became effective Dec. 31, 2005.

Alberta and Manitoba enacted legislation creating liability for disclosures in the secondary market that became effective last week, while British Columbia and Saskatchewan are considering similar legislation.

Provincial legislators have introduced a right of action for secondary market investors because more than 90% of equity trading in Canada occurs in the secondary market, in which an investor purchases a security from another investor rather than the issuing company. Investors in the primary market generally buy shares from public companies—as part of an initial public offering, for example—and already have a statutory right to sue for false or misleading information.

There is no federal securities regulator in Canada and responsibility for regulating securities lies with the provinces.

Amended securities laws in Alberta and Manitoba harmonize the provinces' laws with securities legislation in Ontario, which was amended in 2005—via Bill 198—to impose civil liability for inaccurate or incomplete corporate disclosure in the secondary market (BI, Nov. 14, 2005).

"It sets a consistent standard for companies and their directors in terms of what they need to do," said Robert Cooper, a Vancouver, British Columbia-based partner in the litigation group of McCarthy Tetrault L.L.P.

Like the Ontario amendment, for example, the Alberta and Manitoba amendments provide for a "deemed reliance" on information in core documents such as annual financial statements, so plaintiffs do not have to prove misrepresentation or failure to disclose, lawyers say.

Establishing commonality has been one of the most difficult obstacles to class action lawsuits and the introduction of presumed reliance in Alberta will make companies more vulnerable to securities suits, said Dalton McGrath, a Calgary, Alberta-based partner in the litigation group of Blake, Cassels & Graydon L.L.P. "As a result of these barriers being legislatively reduced, my view is that it's reasonable to assume more litigation will result," he said.

Concerns about an avalanche of lawsuits have eased somewhat because only one company—Mississauga, Ontario-based IMAX Corp.—has faced a Bill 198 claim since the amendment became effective.

"It's nice to see that after one year of this type of liability that we've only had one claim," said Jay A.R. Cassidy, vp, national claims advocacy practice of FINPRO—Marsh Inc.'s financial and professional liability practice—for Marsh Canada Ltd. in Toronto.

The Alberta and Manitoba laws likely will have the most impact on companies headquartered within their borders that do not have substantial operations in Ontario or that are listed only on the Alberta and Manitoba stock exchanges.

Most publicly traded Canadian companies are listed on Ontario's stock exchange or have operations in the province and have already taken steps to comply with the requirements of Bill 198.

"I don't think it's a surprise and I think, quite frankly, they're prepared for it," Mr. Cassidy said. "It's less of a concern after having dealt with Bill 198."

Despite projections that Bill 198 would lead to higher pricing for directors and officers' insurance coverage, the D&O market has remained stable, with some softening seen in the second half of 2006 amid a surge in foreign capacity over the last two years, brokers and insurers say.

"I think the underwriters have taken a measured approach to Bill 198 and I would presume they would do the same as the legislation is adopted across Canada," said Jonathan Ashall, senior vp, regional director for the executive risk practice of Willis Canada in Toronto.

For Calgary, Alberta-based Nova Chemicals Corp., for example, the Alberta amendment has had no D&O impact because Nova, with operations in Ontario and Alberta and stock traded in Toronto, faced the same exposure with Bill 198, said Joe Restoule, leader-risk management. "It was really no change," he said.

Bill 198 has led to careful examinations of D&O policies to ensure that they will appropriately respond to the exposure and reconsideration of limit levels and named insureds, brokers and insurers say.

For example, some companies have requested that the vice president of investor relations and the staff be included as named insureds under the D&O policy, said Scott Saddington, chief underwriting officer for Toronto-based Executive Risk Services Ltd., which provides capacity via a managing general agreement with Lloyd's of London underwriters. Executive Risk will make this change only at the request of an audit committee member or the board chairman because it dilutes the policy limits available for board members, he said. "That's not good for board members," Mr. Saddington said.

From an underwriting perspective, a key impact of Bill 198 has been to encourage insurers to ask questions about their policyholder's disclosure policies and procedures.

"It creates a whole new area of additional questions underwriters have to ask," said Chris Magee, a New York-based assistant vp and international underwriting manager for Hartford Financial Products International.