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Quebec latest province to mull corporate disclosure law

Quebec latest province to mull corporate disclosure law

MONTREAL--Quebec may become the next province to give investors in the secondary market the right to sue for misleading or inadequate corporate information, which lawyers say would likely increase the number of securities claims filed in Canada.

Canadian risk managers, though, are unlikely to be adversely affected as they have already complied with similar laws in Ontario and the United States and are benefiting from plentiful capacity in the directors and officers insurance market.

Monique Jerome-Forget, a member of Quebec's National Assembly, last month introduced Bill 19--a proposal to amend the Securities Act to create a special civil remedy so secondary market investors can sue for damages if companies release documents or statements containing misrepresentations or if companies fail to disclose a material change in their business.

Quebec is the latest province to follow in the steps of Ontario, which adopted secondary market liability effective Dec. 31, 2005 (BI, Nov. 14, 2005). Alberta and Manitoba enacted secondary market disclosure liability legislation that became effective in January while a similar law is expected to go into effect this year in Newfoundland and Labrador (BI, Jan. 8). British Columbia and Saskatchewan are considering comparable legislation.

"We're all involved in this process of harmonization," a spokeswoman for Ms. Jerome-Forget said of the decision to introduce the Quebec bill, which the spokeswoman said will likely be enacted by the end of the year.

The Quebec bill adopts the major tenets of the Ontario law, most notably concerning so-called deemed reliance by secondary market investors on the misrepresentation or omission of material company developments.

Prior to the amendment, most class actions alleging misrepresentation or omission failed because plaintiffs could not prove they relied on the information, said Karim Renno, an associate in the litigation department of Osler, Hoskin & Harcourt L.L.P. based in Montreal. "It definitely opens the door to much easier class actions to be filed in Quebec because reliance is usually difficult to prove and (the bill) says you don't need reliance," he said.

The Quebec bill mirrors Ontario's law in all major aspects, including limitations on liability in the form of damage caps, lawyers say. For example, the bill would limit damages that a company could pay to $1 million or 5% of a company's market capitalization, whichever is greater.

"This is for all intents and purposes almost identical to the Ontario bill, save for a couple of (insignificant) language differences," Mr. Renno said.

The law likely would increase the number of claims being filed because of a favorable certification process for plaintiffs, lawyers say.

Quebec became a popular jurisdiction for plaintiffs' lawyers when the province amended its code of civil procedure in January 2003 to simplify the class action certification process. Since then, however, the Quebec Court of Appeal has taken steps in its rulings to rein in the class action certification process (BI, Oct. 30, 2006).

"We're still friendlier to plaintiffs than pretty much any jurisdiction in North America, but we're getting closer to what is done in the other provinces," said Mason Poplaw, a Montreal-based partner in the corporate commercial litigation department of McCarthy Tetrault L.L.P.

So far, only one claim has been filed under the Ontario law--commonly known as Bill 198--against Mississauga, Ontario-based IMAX Corp.

"I would be surprised if we don't have a lot more cases in Quebec than Ontario," said George Hendy, a partner in Osler's litigation department in Montreal.

Bill 198 claims have been limited because the stock market has been on an upswing, but that will likely change if the market reverses course, observers say.

"If the stock market changes, I think you could see an increase in frequency," said Phil Baker, vp, financial and professional services for Canada for Travelers Cos. Inc. in Toronto.

Despite dire predictions about the impact of Bill 198, the directors and officers market has been virtually unaffected due to the lack of claims, insurance experts say.

The majority of public companies in Canada are traded in Ontario, so their risk managers have already complied with Bill 198 provisions. "So while this increases their exposure, there's nothing really further that they can do at this point," Mr. Renno said.

Quebecor Media Inc., for example, is already compliant with the provisions of Bill 198, so the Quebec bill is unlikely to have an impact on the company, said Michel Turcotte, director of risk management for the Montreal-based communications company. In fact, Quebecor was already compliant with the majority of Ontario's law when it went into effect because the company had taken steps to comply with Sarbanes-Oxley Act rules in the United States, he said.

Canadian D&O rates, meanwhile, have continued to decline because of an abundance of capacity in the market (see related story).

"We didn't see any impact on the premiums because the market is soft," Mr. Turcotte said.

The impact of the new exposure for Canadian policyholders has been limited to underwriters asking questions about disclosure policies, said Andrew Brown, an associate in the management risk practice of Integro (Canada) Ltd. in Toronto. "We haven't had to rewrite the Canadian D&O policy," he said.