Kerr et al. v. Danier Leather Inc. et al. [Indexed as: Kerr v. Danier Leather Inc.]

77 O.R. (3d) 321

[2005] O.J. No. 5388

Dockets: C41880 and C41906

Court of Appeal for Ontario,

Laskin, Goudge and Blair JJ.A.

December 15, 2005

*Application for leave to appeal to the Supreme Court of Canada was filed February 13, 2006 and submitted to court May 8, 2006.

Securities regulation -- Misrepresentation -- Neither s. 130 of Securities Act nor definition of misrepresentation in s. 1(1) of Act imposing on issuer obligation to disclose material facts occurring after date that receipt for final prospectus is issued and before end of distribution period -- Trial judge erring in finding that defendant had obligation to disclose before closing of its public offering fact that its fourth quarter revenue and earnings were lagging behind forecast contained in prospectus -- Trial judge erring in concluding that defendant's prospectus contained implied representation that forecast was objectively reasonable -- Trial judge failing to give any deference to business judgment of defendant's senior management and failing to take into account fact that forecast was substantially achieved -- Trial judge erring in concluding that forecast was not objectively reasonable -- Securities Act, R.S.O. 1990, c. S.5.

The defendant made an initial public offering of its shares through a prospectus. The prospectus contained a forecast that included the defendant's projected revenue and earnings for the last quarter of its fiscal year. An internal company analysis prepared a few days before its public offering closed showed that the defendant's fourth quarter revenue and earnings were lagging behind the forecasted figures. The defendant did not disclose its poor fourth quarter results before closing. It did disclose these results after closing in a revised forecast, which precipitated a significant decline in its share price. However, the defendant's sales rebounded, and by the end of the fiscal year it had substantially achieved its original forecast. Nonetheless, the plaintiffs brought a class proceeding for prospectus misrepresentation under s. 130(1) of the Securities Act. The trial judge found the defendant and its chief officers liable for statutory misrepresentation. He concluded first, that the prospectus impliedly represented that the forecast was objectively reasonable, both on the date the prospectus was issued and on the date the public offering closed; second, that the poor fourth quarter revenue and earnings occurring after the prospectus was issued were material facts the defendant was required by statute to disclose before closing; and third, that because of the defendant's failure to disclose these material facts, its implied representation that the forecast was objectively reasonable, though true on the date the prospectus was issued, became false on the closing date. The defendant appealed.

Held, the appeal should be allowed.

The Securities Act distinguishes between material facts and material changes. Neither s. 130 of the Securities Act nor the definition of misrepresentation in s. 1(1) imposes on an issuer an obligation to disclose material facts occurring after the date a receipt for a final prospectus is issued and before the end of the distribution period. The trial judge erred in law in concluding that, under s. 130(1) of the Securities Act, the defendant had a continuing obligation to disclose material facts occurring after the date its prospectus was issued and until closing. An issuer's disclosure obligations are contained in ss. 56(1) and 57(1) of the Act. Under s. 56(1), the defendant's prospectus had to provide full, true and plain disclosure of all material facts. Under s. 57(1), the defendant was required to amend [page322] its prospectus for material changes occurring after the date the prospectus was issued. However, the defendant had no obligation to disclose its fourth quarter r esults or any other material fact occurring between the date the prospectus was issued and the date of closing.

The trial judge erred in law in concluding that the defendant's prospectus contained the implied representation that the forecast was objectively reasonable. He reached this conclusion by relying on American jurisprudence which arises in a statutory scheme different from the Ontario Securities Act. Moreover, he erred in arriving at his finding of an implied representation of objective reasonableness as a conclusion of law. Absent legislation that deems a forecast to carry such an implied assertion, the finding that a representation has been made (whether explicitly or implicitly) is a finding of fact, not a conclusion of law. Had the trial judge approached this matter as a question of fact rather than as a question of law, there was no basis upon which he could have concluded that the defendant's chief officers implicitly represented in the prospectus that their subjective belief in the defendant's ability to achieve the forecast was objectively reasonable.

Even assuming that the forecast contained the implied representations of fact found by the trial judge, and even assuming that those representations had to be true not only on the date the prospectus was issued but also on the closing date, the trial judge erred in failing to give any deference to the business judgment of the defendant's senior management and in failing to take into account that the forecast was substantially achieved, and therefore erred in concluding that the forecast was not objectively reasonable on the closing date.

APPEAL from a judgment of Lederman J., 2004 8186 (ON SC), [2004] O.J. No. 1916, [2004] O.T.C. 397 (S.C.J.) allowing an action for damages for prospectus misrepresentation.

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Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64, 244 D.L.R. (4th) 564, 20 (04 SCC 68, 49 B.L.R. (3d) 165, 4 C.B.R. (5th) 215; Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, [1994] S.C.J. No. 58, 92 B.C.L.R. (2d) 145, 114 D.L.R. (4th) 385, 168 N.R. 321, 14 B.L.R. (2d) 217, revg 1992 5963 (BC CA), [1992] B.C.J. No. 957, 66 B.C.L.R. (2d) 257, 96 D.L.R. (4th) 137 (C.A.) (sub nom. Ivany v. British Columbia); [page323]R. v. Cognos Inc., 1993 146 (SCC), [1993] 1 S.C.R. 87, [1993] S.C.J. No. 3, 99 D.L.R. (4th) 626, 147 N.R. 169, 45 C.C.E.L. 153, 14 C.C.L.T. (2d) 113, 93 C.L.L.C. 14,019; Rizzo & Rizzo Shoes Ltd. (Re), 1998 837 (SCC), [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, 36 O.R. (3d) 418n, 154 D.L.R. (4th) 193, 221 N.R. 241, 50 C.B.R. (3d) 163, 33 C.C.E.L. (2d) 173, 98 C.L.L.C. 210-006 (sub nom. Ontario Ministry of Labour v. Rizzo & Rizzo Shoes Ltd., Adrien v. Ontario Ministry of Labour); Shaw v. Digital Equipment Corp., 82 F.3d 1194, 35 Fed. R. Serv. 3d (Callaghan) 55 (1st Cir. 1996); UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc[cf (1]., 2004 9479 (ON CA), [2004] O.J. No. 636, 250 D.L.R. (4th) 526, 42 B.L.R. (3d) 34, 32 C.C.E.L. (3d) 68 (C.A.), affg 2002 49507 (ON SC), [2002] O.J. No. 2412, 214 D.L.R. (4th) 496, 27 B.L.R. (3d) 53, 19 C.C.E.L. (3d) 203 (S.C.J.); Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 186 O.A.C. 201, 44 B.L.R. (3d) 165 (C.A.), supp. reasons 2004 31900 (ON CA), [2004] O.J. No. 6013, 6 B.L.R.(4th) 167 (C.A.); With v. O'Flanagan, [1936] 1 All E.R. 727, [1936] Ch. 575, 154 L.T. 634, 80 Sol. Jo. 285, 105 L.J. Ch. 247 (C.A.) Statutes referred to Budget Measures Act (Fall), 2004, S.O. 2004, c. 31, Sch. 34 Securities Act, R.S.O. 1990, c. S.5, ss. 1 [as am.], 1.1, 52, 53(1), 54(1) [as am.], 56(1) [as am.], 57(1), 58(1) [as am.], 61(2), 62 [as am.], 71(2), 75 [as am.], 76, 130 [as am.], 134 Securities Act of 1933 (U.S.), 15 U.S.C. 77a, Rule 175 Authorities referred to Driedger, E.A., The Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983) MacIntosh, J., "Securities Regulation and the Public Interest: of Politics, Procedures, and Policy Statements -- Part II" (1994-1995) 24 Can. Bus. L.J. 287 National Policy Statements No. 48, "Future-oriented Financial Information", s. 7.1 Ontario, Five Year Reviewing Committee, Final Report: Reviewing the Securities Act (Ontario) (Toronto: Queen's Printer, 2003) Ontario Securities Commission, National Policy 51-201, "Disclosure Standards and Proposed Rescission of National Policy 40", 2001, s. 4.5 Ontario Securities Commission, Report of the Committee of the Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements (Toronto: Dept. of Financial and Commercial Affairs, 1970) Sullivan, R., Sullivan and Driedger on the Construction of Statutes, 4th ed. (Toronto: Butterworths, 2002) Toronto Stock Exchange, Committee on Corporate Disclosure, Final Report: Responsible Corporate Disclosure: A Search for Balance (1997)

Peter R. Jervis, George S. Glezos, Jasmine T. Akbarali and Melanie D. Schweizer, for Douglas Kerr, S. Grace Kerr and James Frederick Durst. Alan J. Lenczner, Q.C. and Craig Martin, for Danier Leather Inc. Benjamin Zarnett and Jessica Kimmel for Irving Wortsman, Jeffrey Wortsman and Bryan Tatoff. [page324]

BY THE COURT:--

A. Overview

[1] A company offers to sell its securities to the public by a prospectus. The prospectus contains a forecast of the company's anticipated revenue and earnings. Does the prospectus contain an implied representation that the forecast is objectively reasonable? If so, in assessing the objective reasonableness of the forecast should the court give any weight to the business judgment of the company's senior management? Under Ontario's Securities Act, R.S.O. 1990, c. S.5 ["OSA"], does the company have a continuing obligation to disclose material facts that cast doubt on the objective reasonableness of the forecast, and that would likely adversely affect the company's share price? These important questions all arise in this litigation, a class action for prospectus misrepresentation.

[2] In May 1998, the appellant, Danier Leather Inc., made an initial public offering of its shares through a prospectus. The prospectus contained a forecast that included Danier's projected revenue and earnings for the last quarter of its fiscal year. An internal company analysis prepared a few days before its public offering closed showed that Danier's fourth quarter revenue and earnings were lagging behind the forecasted figures. Danier did not disclose its poor fourth quarter results before closing. It did disclose these results after closing in a revised forecast, which precipitated a significant decline in its share price. However, Danier's sales rebounded, and by the end of the fiscal year it had substantially achieved its original forecast.

[3] Nonetheless, the plaintiffs began a class proceeding for prospectus misrepresentation under s. 130(1) of the Securities Act. Cumming J. certified the class action. After a lengthy trial, Lederman J. found Danier and its chief officers liable for statutory misrepresentation.

[4] The trial judge concluded first, that the prospectus impliedly represented that the forecast was objectively reasonable, both on the date Danier's prospectus was issued, and on the date its public offering closed; second, that the poor fourth quarter revenue and earnings occurring after the prospectus was issued were material facts Danier was required by statute to disclose before closing; and third, that because of Danier's failure to disclose these material facts, its implied representation that the forecast was objectively reasonable, though true on the date the prospectus was issued, became false on the closing date. [page325]

[5] Having found the appellants liable, the trial judge awarded substantial damages, using the fall in Danier's share prices as the prima facie measure of that award.

[6] The appellants advance five grounds of appeal:

(1) The trial judge erred in law in concluding that, under s. 130(1) of the Securities Act, Danier had a continuing obligation to disclose material facts occurring after the date its prospectus was issued and until closing.

(2) The trial judge erred in law in concluding that Danier's prospectus contained an implied representation that its fore-cast was objectively reasonable.

(3) Alternatively, in assessing the objective reasonableness of the forecast, the trial judge erred by failing to take into account either the business judgment of Danier's senior management, or that Danier substantially achieved its fore- casted revenue and earnings.

(4) The trial judge erred in law in his approach to damages; and

(5) The trial judge erred in including a premium in the respondents' costs award.

[7] For the reasons that follow, we agree with grounds 1, 2 and 3. On any one of these grounds, the appeal must be allowed and the action dismissed. It is therefore unnecessary for us to address grounds 4 and 5, and we decline to do so.

B. Summary of the Relevant Facts

(a) Danier, Wortsman and Tatoff

[8] Danier designs, manufactures and sells leather clothing and accessories. The company was founded in 1972 by Jeffrey Wortsman's father, Irving Wortsman. It was originally called Leather Attic.

[9] By 1981, Leather Attic owned 19 retail stores in Ontario and Manitoba. In that year, the company opened its first fashion-oriented store under the name Danier in Toronto's Eaton Centre. The Danier concept proved successful. In 1986, the company opened its first Danier Leather store. By 1990, the company had converted all of its Leather Attic stores to Danier stores, and began to sell a more sophisticated label and product line.

[10] In 1986, after earning a law degree and an MBA, and working for an investment banker, Jeffrey Wortsman ("Wortsman") joined the company as its vice-president. In 1994, he became Danier's president and in 1997, its chief executive officer. [page326]

[11] Bryan Tatoff is a chartered accountant and has an MBA. He worked in industry and for a major accounting firm before joining Danier in 1996. In 1998, Tatoff became Danier's chief financial officer, and later its vice-president, finance.

[12] Danier has grown substantially under Wortsman's management. When he joined the company in the mid-1980s, the company's revenues were $15 million. By 1993, revenues had increased to $49.6 million, and by 1997, to $69.6 million. In the same period, 1993 to 1997, net earnings grew from $98,000 to $1.8 million.

[13] By 1998, the year Danier became a public company, it had grown to a national chain of 55 retail stores and had two manufacturing facilities. In that year, the company's revenues increased 30 per cent to almost $90 million and its earnings increased 144 per cent to more than $4.4 million. Danier continued to grow after 1998. By 2002, revenues had reached $180 million and net earnings had reached $10.7 million.

(b) The events leading to the initial public offering

[14] In the fall of 1997, Irving Wortsman, the company's founder, decided to sell two-thirds of his shares. Danier decided to effect that sale by an initial public offering ("IPO"), which would make it a public company. CIBC Wood Gundy and BMO Nesbitt Burns were chosen as lead underwriters.

[15] In anticipation of its IPO, Danier prepared and filed with the Ontario Securities Commission (the "Commission") three preliminary prospectuses dated November 13, 1997, January 5, 1998, and April 6, 1998. Each preliminary prospectus contained a forecast. Each forecast was prepared by Tatoff and reviewed by Wortsman.

[16] Danier's 1998 fiscal year ran from June 29, 1997 to June 27, 1998. Its fiscal year is divided into four quarters: Q1, ending in September, historically has been the worst performing quarter; Q2, covering the holiday period, has been the best performing quarter; Q3 has been the next best performing quarter; and Q4 has not performed as badly as Q1 but has generally produced a loss.

[17] The forecast in the November 13, 1997 preliminary prospectus contained actual financial results for Q1 and projected results for Q2 to Q4. The forecast projected yearly revenue of $81.3 million and net earnings of $3 million.

[18] The forecast in the January 5, 1998 preliminary prospectus contained actual results for Q1 and Q2 and projected results for Q3 and Q4. This forecast projected yearly revenue of $86.5 million and net earnings of $3.7 million. [page327]

[19] The forecast included with the April 6, 1998 preliminary prospectus was dated April 2, 1998, and used financial information up to March 28, 1998. This forecast, unchanged, was included in the final prospectus dated May 6, 1998, and became the focal point of the respondents' action.

(c) The April 2, 1998 forecast

[20] This forecast contained actual financial results for Q1, Q2 and Q3 ending on March 28, 1998, and projected results for Q4, ending on June 27, 1998. This forecast, prepared by Tatoff, was reviewed both by Wortsman and by Danier's auditors. Also, Danier's board of directors approved the forecast. As the following table shows, the forecast projected yearly revenue of over $90 million and net earnings of $4.5 million. Nine Months Ended March 28, 1998 (Actual) Year Ending June 27, 1998 (Projected) Revenue $72,870,000 $90,280,000 Net Earnings $4,884,000 $4,500,000

(d) The final prospectus dated May 6, 1998

[21] Market conditions improved, and on the advice of its underwriters, in the spring of 1998, Danier decided to proceed with its IPO. It offered to sell 6,040,000 subordinated voting shares and negotiated with its underwriters a price per share of $11.25. Thus, the total gross proceeds of the IPO amounted to $67,950,000.

[22] The IPO was a "bought" deal; the underwriters purchased all the shares and sold them to the public. The closing date was May 20, 1998.

[23] As we have said, the April 2, 1998 forecast (the "Forecast") was included in the prospectus. Neither it nor the prospectus contained any actual Q4 financial results.

[24] Wortsman and Tatoff had concluded that the Forecast was still reasonable on May 6. Danier's auditors gave an opinion that the Forecast was reasonable at April 2, 1998. In the Forecast itself, Danier's management said that it believed the assumptions underlying the forecast were reasonable. As well, the Forecast was described as representing management's best judgment of the most probable set of economic conditions and of the company's planned course of action as of April 2, 1998.

[25] The Forecast also contained, in bold letters, a caution that the company was not guaranteeing the Forecast would be [page328] achieved and that actual results might vary materially from those in the Forecast. This caution stated:

The reader should note that certain assumptions used in the preparation of the Forecast, although considered reasonable by the Company at the time of preparation of the Forecast, may prove to be inaccurate. Actual results achieved during the forecast period will vary from the forecast results and such variations may be material. There is no guarantee that such Forecast will be achieved in whole or in part.

[26] Wortsman and Tatoff signed the certificate, required by statute, stating that the prospectus contained full, true and plain disclosure of all material facts relating to the securities being offered.

[27] The trial judge made four critical findings of fact about the Forecast and the final prospectus, which are not challenged on this appeal.

-- the respondents failed to prove that the Forecast was an untrue statement of a material fact on May 6, 1998;

-- the respondents failed to prove that the Forecast was not prepared with reasonable care and skill;

-- the respondents failed to prove that management's subjective belief in the Forecast was objectively unreasonable at May 6, 1998; and

-- the respondents failed to prove that the prospectus did not contain full, true and plain disclosure of all material facts.

(e) Events from May 6 to May 20, 1998 and management's May 16th analysis

[28] After the Commission issued a receipt for the prospectus, the underwriters bought the shares, and in turn sold them to the public. The period of distribution ended on May 20, 1998, which was about halfway into Danier's Q4 for its fiscal year 1998. On that day, the underwriters paid Danier for the shares and received share certificates; individual purchasers then paid for their shares and received share certificates from the underwriters.

[29] On May 16, 1998 -- four days before the period of distribution ended -- Wortsman asked Tatoff to assemble financial information for the first half of Q4. Although he was not required to do so, and neither his lawyers nor the underwriters asked him to do so, Wortsman wanted to look at the company's financial position before closing. Danier had sophisticated technology and information systems that permitted Tatoff to track quickly daily sales, inventory and volume of customers in each of its stores. [page329]

[30] On May 19, Tatoff produced an analysis of Danier's Q4 performance up to May 16th. The analysis showed that actual revenue was $2.6 million, or 24 per cent, behind store budget projections, and that estimated earnings showed a loss of $240,000, which was $499,000 below the store budget estimated profit of $259,000.

[31] Wortsman and Tatoff testified that Danier's sales budget figures were front-end loaded to encourage its employees to sell more in the first half of a quarter. If the sales staff achieved these front-end loaded targets, they would get a bonus. In his analysis, Tatoff "normalized" the front-end figures by reallocating some of the sales to the last six weeks of Q4. By doing so, he reduced the revenue shortfall from $2.6 million to $700,000.

[32] Both Wortsman and Tatoff gave evidence that on May 20, 1998, they still believed Danier could achieve the Forecast. Although sales figures were behind store budget, Wortsman and Tatoff pointed to two planned promotions for the last six weeks of Q4 -- Danier's annual Victoria Day sale and a June promotion, which had not taken place the previous year, as well as year-end adjustments for unrecorded but earned income and over-accrued expenses. They were confident that these promotions and the year-end adjustments would permit Danier to achieve its Forecast.

[33] The trial judge found, however, that their subjective belief, though honestly held, was not objectively reasonable on May 20, 1998. He noted that to meet its Forecast, Danier would have had to achieve another $9 million in revenue in the final six weeks of Q4. This $9 million figure amounted to more than 50 per cent of the revenue forecast for Q4, even though historically Danier had achieved only one-third or less of its Q4 revenue in the last six weeks of the quarter.

[34] The trial judge found that the cause of Danier's poor Q4 sales up to May 20, 1998, was unseasonably warm weather across Canada, except in British Columbia. Danier had never tracked weather, and the expert evidence at trial indicated that weather was not a factor to consider in preparing a forecast. Nonetheless, the trial judge concluded that Wortsman and Tatoff had turned a blind eye to Danier's poor sales and earnings in the first half of Q4 and to their root cause, the weather. Importantly, however, the trial judge also found that the impact of this unseasonably warm weather was not a "material change" in the business or operations of Danier as that term is defined in the Ontario Securities Act, R.S.O. 1990, c. S.5 ("OSA"). [page330]

(f) The period from May 21, 1998 to June 27, 1998

[35] Wortsman and Tatoff counted on the Victoria Day sale to help Danier achieve its Forecast. Unfortunately, it did not do so. The week-long sale began on Thursday, May 21, the day after the closing. On Monday, May 25, Wortsman checked the results. He discovered that except for British Columbia, where the promotion was doing well, sales were 30 per cent lower than in the previous year. He had not anticipated these poor results. He investigated further and found that customers liked the products being offered, which included new lighter-weight leather jackets for spring. Wortsman concluded that the poor sales results were attributable to one cause: the unusually hot weather across Canada (other than in British Columbia).

[36] Between May 26 and May 29, Wortsman consulted with his professional advisors. On May 26, he told the underwriters that if the unusually hot weather continued into June, he could no longer be confident that Danier would meet its Forecast. On May 29, Wortsman spoke to his lawyer, Arthur Shiff of the firm Davies Ward & Beck. Mr. Shiff recommended that Danier assume the worst: the unseasonably hot weather would continue into June. On this assumption, Shiff also recommended that Danier prepare and file with the Commission a revised forecast and a material change report.

[37] On June 4, Danier prepared a revised forecast and published a material change report. The revised forecast projected 1998 fiscal year revenue of $85.5 million and net earnings of $3.7 million, corresponding to $4.7 million and $800,000 less than the figures projected in the Forecast.

[38] In its revised forecast, Danier said that "the revised forecast anticipates that the recent warm weather trends will continue into June, impacting leather apparel sales and profits". The reason given for Danier's revised forecast was "unseasonably warm weather in most of its markets".

[39] Once the June 4 press release was issued, the share price of Danier dropped substantially. The trial judge found that by June 10, the market had absorbed the effects of the revised forecast. By then, Danier's share price was $8.90, or $2.35 less than the IPO price. The trial judge used the figure of $2.35 as the basis for his damages award.

[40] Although Danier had issued a revised forecast, it still had one more promotion in Q4: the June sale. For this promotion, Wortsman put all of Danier's goods on sale at 50 per cent off. The promotion was a huge success. The weather across Canada cooled. Overall sales rebounded to figures much higher than in previous years. [page331]

(g) The year end results

[41] Danier's sales revenue for its 1998 fiscal year turned out to be $88.7 million, over $3 million higher than projected in the revised forecast and less than $2 million lower than projected in the Forecast. Danier's net earnings for the 1998 fiscal year were $4.4 million, which exceeded the revised forecast figure and was only $100,000 less than the figure projected in the Forecast. The trial judge found that Danier had "substantially achieved" its April 2, 1998 forecasted results.

C. The Statutory Regime: The [Ontario Securities Act](https://www.canlii.org/en/on/laws/stat/rso-1990-c-s5/latest/rso-1990-c-s5.html)

[42] This appeal turns on the interpretation and application of the OSA. We will briefly review the relevant provisions of the statute.

(a) Purposes of the OSA

[43] Section 1.1 describes the two main purposes of the OSA: to protect investors and to foster fair and efficient capital markets:

1.1 The purposes of this Act are,

(a) to provide protection to investors from unfair, improper or fraudulent practices; and

(b) to foster fair and efficient capital markets and confidence in capital markets.

(b) Prospectuses

[44] Part XV of the OSA prescribes the requirements for prospectuses. Under s. 53(1), any company distributing [^1] securities to the public must file with the Commission a preliminary prospectus and a final prospectus:

53(1) No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company where such trade would be a distribution of such security, unless a preliminary prospectus and a prospectus have been filed and receipts therefor obtained from the Director.

[45] Section 54(1) stipulates that the form and content of a preliminary prospectus must substantially comply with Ontario securities laws:

54(1) A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting the form and content of a prospectus, except that the report or reports of the auditor or accountant required by the regulations need not be included. [page332]

[46] Section 56(1) is a cornerstone of the statute: this section states that a prospectus must provide "full, true and plain disclosure" of all material facts concerning the securities to be distributed:

56(1) A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law.

[47] Under s. 58(1), both the chief executive officer and the chief financial officer of a company issuing securities must certify in writing that the prospectus complies with s. 56(1).

58(1) Subject to subsection (3) of this section and subsection 63(2), and subject to any waiver or variation consented to in writing by the Director, a prospectus filed under subsection 53(1) or subsection 62(1) shall contain a certificate in the following form, signed by the chief executive officer, the chief financial officer, and, on behalf of the board of directors, any two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or company who is a promoter of the issuer:

The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part XV of the Securities Act and the regulations thereunder.

(Emphasis in original)

[48] Under s. 61(2)(a)(ii), the Commission shall not issue a receipt for a prospectus that includes a misleading, false or deceptive forecast:

The Director shall not issue a receipt for a prospectus if it appears to the Director that,

(a) the prospectus or any document required to be filed therewith,

(ii) contains any statement, promise, estimate or forecast that is misleading, false or deceptive . . .

[49] Section 62 stipulates that the period of distribution of shares offered by a prospectus can be up to 12 months:

No distribution of a security to which subsection 53(1) applies shall continue longer than 12 months from the date of the issuance of the receipt for the final prospectus relating to the security, which shall be the lapse date, unless a new prospectus that complies with this Part is filed and a receipt therefor is obtained from the Director. 1997, c. 19, s. 23.

[50] Section 71(2) -- under Part XVI of the OSA -- gives a purchaser the right to withdraw within two days from an agreement to purchase securities offered by a prospectus:

71(2) An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser, if the dealer from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the purchaser not to be bound by the agreement of purchase and [page333] sale not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any amendment to the prospectus.

(c) Material facts and material changes

[51] The OSA distinguishes between material facts and material changes. This is a critical distinction on this appeal. The two terms are defined in s. 1(1) of the OSA, the definition section of the statute.

[52] "Material change" means:

(a) when used in relation to an issuer other than an investment fund, means,

(i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or

(ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable . . .

[53] "Material fact" has a broader meaning than material change: see Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, [1994] S.C.J. No. 58, at para. 79. It is defined as follows:

"material fact", when used in relation to securities issued or proposed to be issued, means a fact that significantly affects, or would reasonably be expected to have a significant effect on the market price or value of the securities;

For both terms, the criterion for materiality is market impact.

[54] Where a material change occurs after the Commission issues a receipt for a prospectus but before distribution is completed, s. 57(1) of the OSA obliges the issuer to file an amendment to the prospectus:

57(1) Subject to subsection (2), where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53(1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs.

[55] If a material change occurs, s. 75 of the OSA requires the issuer to issue a news release and also to file with the Commission a report of the change: [page334]

75(1) Subject to subsection (3), where a material change occurs in the affairs of a reporting issuer, it shall forthwith issue and file a news release authorized by a senior officer disclosing the nature and substance of the change.

(2) Subject to subsection (3), the reporting issuer shall file a report of such material change in accordance with the regulations as soon as practicable and in any event within ten days of the date on which the change occurs.

[56] An issuer has no similar express obligation to amend a prospectus or to publicize and file a report for material facts occurring after a receipt for a prospectus is obtained.

[57] By contrast, the insider trading provisions of the OSA address both material facts and material changes. Section 76 prohibits a person from trading with knowledge of either a material fact or a material change that has not been generally disclosed, and prohibits tipping of undisclosed material facts or material changes.

(d) Statutory civil liability for prospectus misrepresentation

[58] Section 130(1) -- the section under which the appellants were found liable -- creates a cause of action for prospectus misrepresentation. Section 130(1) states in part:

130(1) Where a prospectus together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered thereby during the period of distribution or distribution to the public shall be deemed to have relied on such misrepresentation if it was a misrepresentation at the time of purchase and has a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

(e) every person or company who signed the prospectus or the amendment to the prospectus.

[59] "Deemed reliance" is an important component of s. 130. If the prospectus or an amendment contains a misrepresentation at the time of purchase, the purchaser is deemed to have relied on it whether or not the purchaser read the prospectus. In other words, unlike the common law tort of misrepresentation, in an action under s. 130, purchasers need not prove that they relied on the prospectus. Section 130 deems them to have done so.

[60] The definition of misrepresentation is central to this appeal. The word is defined in s. 1(1) as:

(a) an untrue statement of material fact, or

(b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. [page335]

[61] Under this definition, a misrepresentation can occur in one of three ways:

-- by an untrue statement of a material fact;

-- by an omission to state a material fact that is required to be stated; or

-- by an omission to state a material fact that is necessary to make a statement not misleading in the light of the circumstances in which it was made.

The first and especially the third component of the definition figure prominently in the trial judge's analysis.

D. The Trial Judge's Analysis

[62] The trial judge recognized that a forecast is not a fact in the sense that an actual result is a fact, but instead is an opinion about the future. Nonetheless, he concluded that a forecast can be a fact in the sense that it includes implied assertions of fact. In the trial judge's view, a forecast in a prospectus contains these implied factual assertions:

(1) the forecast represents the forecaster's best judgment of the most probable set of economic conditions and the company's planned course of action;

(2) the forecaster made the forecast with reasonable care and skill and the forecast itself is sound and reliable; and

(3) the forecaster generally believed the forecast, the forecaster's belief was reasonable and the forecaster was not aware of any undisclosed facts tending to seriously undermine the accuracy of the forecast.

[63] The trial judge assessed the Forecast against these implied factual assertions at May 6, 1998, the date of the final prospectus. He found that the respondents had not shown that these implied factual assertions were untrue on May 6. He summarized his findings as follows [at para. 219]:

The plaintiffs have not proven that the Forecast was an untrue statement of material fact as at May 6, 1998. There is evidence that management subjectively believed that the Forecast was reasonable as at May 6, 1998. There is insufficient evidence to conclude that the Forecast was not prepared using reasonable care and skill, or that management's subjective belief in the Forecast was objectively unreasonable as at May 6, 1998. [page336]

[64] The trial judge also found that the respondents had not made out a breach of s. 56(1) of the OSA [at para. 222]:

Under s. 56(1), if Danier did not provide full, true and plain disclosure of all material facts in the Prospectus, then it would have breached its disclosure obligation as of May 6, 1998. However, there was insufficient evidence that Danier omitted material facts from the Prospectus. Although financial results for April, representing approximately one third of Q4 1998, were below the IPO Plan, it cannot be concluded that these results would reasonably be expected to have a significant effect on the market price or value of the securities.

[65] The trial judge therefore concluded that "Danier did not breach any obligation to disclose material facts required to be stated" (emphasis in original) [at para. 225]. In short, on May 6, 1998, the prospectus, including the Forecast, did not contain any actionable misrepresentation.

[66] The trial judge also found that no "material change" requiring an amendment to the prospectus occurred between May 6, 1998 and the closing date May 20, 1998. In so finding, he held that the impact of the unseasonably warm weather -- the root cause of the poor sales in the first half of Q4 -- was not a "material change". However, and critical to his analysis, the trial judge rejected the appellants' argument that absent a material change, Danier had no continuing obligation of disclosure, that is, no obligation to update the prospectus after May 6, 1998, and until closing.

[67] Instead, the trial judge held that s. 130(1) of the OSA imposed on an issuer a separate and continuing obligation of disclosure, an obligation independent of the other disclosure requirements of the statute. This separate, continuing, and independent obligation required an issuer to disclose any material facts arising after the date of the prospectus and before closing that made any of the factual assertions implied in the Forecast untrue.

[68] The trial judge's reasoning [at para. 91] rested on two planks: the phrase "if it was a misrepresentation at the time of the purchase" in s. 130(1) of the OSA; and the definition of misrepresentation in s. 1(1), especially the third component of that definition "an omission to state a material fact . . . that is necessary to make a statement not misleading in the light of the circumstances in which it was made" [at para. 35].

[69] The trial judge held that because s. 130(1) imposed liability for a misrepresentation "if it was a misrepresentation at the time of purchase", the factual assertions implied in the Forecast must be true not only on the date of the prospectus, May 6, but also on the date of closing, May 20. If they were not true on the date of [page337] purchase, a purchaser could sue for misrepresentation. That was so, in the trial judge's view, because a failure to disclose a material fact arising after May 6 that made any of the factual assertions implied in the Forecast untrue, would also be a failure to disclose a material fact necessary to make a statement not misleading in the light of the circumstances in which it was made.

[70] Thus the trial judge concluded that under s. 130(1) of the OSA, an issuer has a continuing obligation to disclose material facts up to the end of the distribution period. The trial judge held that this interpretation of s. 130(1) (including the definition of misrepresentation) was consistent with the importance of disclosure to the effectiveness of the OSA.

[71] The trial judge then considered whether the factual assertions he implied into the Forecast were true on May 20. He found that not all of them were true. He accepted that on May 20, Wortsman and Tatoff still subjectively believed that Danier could achieve the Forecast. However, he found that in the light of the May 16 analysis, their subjective belief was not objectively reasonable. In his view, the poor revenue and earnings figures in the first half of Q4, which he thought were likely to continue to the end of the quarter, seriously undermined the accuracy of the Forecast.

[72] Moreover, the trial judge held that the Q4 results to May 16 were material facts because disclosing these results would reasonably be expected to have a significant effect on Danier's share price or on the value of its securities. Therefore, he concluded that the prospectus contained a misrepresentation at the time of purchase. To avoid this misrepresentation, Danier was required to disclose the Q4 results to the date of closing, which it had not done. The trial judge summarized his conclusion in the following para. [para. 287]:

As of May 20, 1998, the time of purchase, the Forecast was misleading in the light of the circumstances in which the Forecast was made, and certain of the factual assertions implied from the Forecast were untrue. Disclosure of the intra-Q4 1998 results was necessary to make the Forecast not misleading. I find, therefore, that the Prospectus contained a misrepresentation at the time of purchase.

[73] Finally, the trial judge held that Danier could not rely on the cautionary language in the prospectus to avoid liability. That standard language -- required by National Policy 48 ("NP 48") -- did not refer to the specific risk that led to the adverse Q4 results at May 16 and to the revised forecast: the impact of weather on Danier's sales.

[74] In awarding damages, the trial judge held that the prima facie measure was the depreciation in the price of the security [page338] caused by the misrepresentation. He calculated this depreciation to be $2.35, which was the difference between the sale price ($11.25), and the price of Danier's shares on June 10 ($8.90), the date when, in the trial judge's view, the market had absorbed the effects of the misrepresentation.

E. Discussion

I. Statutory interpretation: Did the trial judge err in law in concluding that under s. 130 of the OSA Danier had a continuing obligation to disclose material facts occurring after the date a receipt for its prospectus was issued and until closing?

(a) Positions of the parties

[75] The trial judge held that s. 130(1) of the OSA required Danier to disclose material facts that occurred after May 6 (the date Danier obtained a receipt for its final prospectus) and until May 20 (the date of closing or the date the period of distribution ended). The "material facts" Danier was required to disclose were its poor revenue and earnings results for the first half of Q4. According to the trial judge, unless Danier disclosed these results, the implied representation in the prospectus -- that the Forecast was objectively reasonable -- would be false on the closing date and therefore would be an actionable misrepresentation under s. 130(1).

[76] The trial judge's liability finding rests on two related bases: s. 130(1) imposes a continuing obligation to disclose material facts; and Danier's prospectus contained an implied representation that the Forecast was objectively reasonable. In this section of our analysis, we address the first basis of the trial judge's liability finding: whether s. 130(1) imposes a continuous obligation to disclose material facts. In the other two sections of our analysis, we address the other basis for the liability finding: the implied representation of objective reasonableness.

[77] In supporting the trial judgment, the respondents rely on the trial judge's analysis of Danier's disclosure obligations. They emphasize that his analysis promotes a prime objective of the OSA -- investor protection -- and reflects the effectiveness of disclosure in achieving that objective.

[78] The appellants submit that s. 130 is a remedies provision, and that the trial judge erred in interpreting it as a source of an issuer's disclosure obligations. The appellants say that Part XV of the OSA is a complete code for prospectus disclosure. Both its context and express wording are incompatible with an obligation of continuous disclosure of material facts. [page339]

[79] Therefore, under the OSA, the appellants contend, Danier was obliged to make full, true and plain disclosure of all material facts in its prospectus and to amend its prospectus for any material changes occurring between the date a receipt was given and the date distribution ended. However, it had no continuing obligation to disclose material facts occurring after May 6 and before May 20.

[80] Even accepting that the Forecast contained the implied factual assertions found by the trial judge, the appellants submit that on the trial judge's findings of fact they met their statutory disclosure obligations. The trial judge found that Danier's prospectus did not contain any misrepresentation on May 6, and that no material change occurred after May 6 and before May 20. Thus, the appellants submit that they are not liable to the respondents for prospectus misrepresentation under s. 130(1) of the OSA. We agree with the appellants' submissions.

(b) Application of the modern approach to statutory interpretation

[81] The competing positions of the parties raise a question of statutory interpretation: the proper interpretation of s. 130(1) of the OSA. That question is a pure question of law of widespread precedential importance. The trial judge's interpretation therefore is not entitled to deference. The appropriate standard of review is correctness.

[82] Section 130 should be interpreted by applying Professor Driedger's "modern approach" to statutory interpretation, the approach consistently preferred by the Supreme Court of Canada:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

See Elmer A. Driedger, The Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983) at 87 ("Driedger"), approved in, for example, Rizzo & Rizzo Shoes Ltd. (Re), 1998 837 (SCC), [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, at para. 21; and Bell ExpressVu Ltd. Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, at para. 26.

[83] This modern approach has two aspects. One aspect is that context matters. The court must interpret s. 130, not as a stand-alone provision, but in its total context. In Bell ExpressVu at para. 27, Iacobucci J. stressed the importance of context in interpreting the words of a statute:

The preferred approach recognizes the important role that context must inevitably play when a court construes the written words of a statute: as [page340] Professor John Willis incisively noted in his seminal article "Statute Interpretation in a Nutshell" (1938), 16 Can. Bar Rev. 1 at p. 6, "words, like people, take their colour from their surroundings."

[84] The context for interpreting s. 130 includes its purpose, the purpose of the OSA as a whole, an issuer's express disclosure obligations in Part XV of the statute, and related provisions of the OSA dealing with disclosure of material facts and material changes.

[85] The second aspect of this modern approach imports the sound advice of Professor Ruth Sullivan, who has edited the third and fourth editions of Driedger. In interpreting a statutory provision, the court should take account of all relevant and admissible indicators of legislative meaning. After taking these indicators into account, the court should adopt an interpretation that complies with the legislative text, promotes the legislative purpose, and produces a reasonable and sensible meaning: see Ruth Sullivan, Sullivan and Driedger on the Construction of Statutes, 4th ed. (Toronto: Butterworths, 2002) at 1-3 ("Sullivan and Driedger") See also David Polowin Real Estate Ltd. v. Dominion of Canada General Insurance Co.; Segnitz v. Royal & SunAlliance Insurance Co. of Canada (2005), 2005 21093 (ON CA), 76 O.R. (3d) 161, [2005] O.J. No. 2436, 255 D.L.R. (4th) 633 (C.A.).

[86] Our application of this "modern approach" to statutory interpretation leads us to conclude that neither s. 130 nor the definition of misrepresentation in s. 1(1) of the OSA imposes any disclosure obligations on an issuer. On our view of an issuer's statutory disclosure obligations, the respondents and other purchasers of Danier shares were entitled to assume that:

(a) at May 6, 1998, Danier's prospectus, including the Forecast, provided full, true and plain disclosure of all facts that would reasonably be expected to have a significant effect on the market price or value of Danier's securities (see s. 56(1) and the definition of "material fact" in s. 1(1) of the OSA); and

(b) no change in the business operations or capital of Danier that would reasonably be expected to have a significant effect on the market price or value of any of Danier's securities occurred between May 6 and May 20, 1998 (see s. 57(1) and the definition of "material change" in s. 1(1) of the OSA).

[87] The purchasers of Danier shares, however, were not entitled to assume that no facts had occurred after May 6 and before May 20 that would reasonably be expected to have a significant [page341] effect on the market price or value of Danier's securities. Danier had no obligation to disclose material facts occurring between May 6 and May 20 (unless those material facts amounted to a material change, in which case the material change would have had to have been disclosed). In short, Danier had no obligation to update its Forecast by disclosing its Q4 results to May 16, 1998.

[88] That said, we do not foreclose the possibility that poor intra-quarterly results could, under certain circumstances, in themselves amount to a material change. See Pezim, supra, at para. 87; and see also Shaw v. Digital Equipment Corp., 82 F.3d 1194, 35 Fed. R. Serv. 3d (Callaghan) 55 (1st Cir. 1996), at p. 1211 F.3d. However, the trial judge made no such finding in this case.

[89] Thus, to reiterate, on our interpretation of the OSA, neither s. 130 nor the definition of misrepresentation in s. 1(1) imposes on an issuer an obligation to disclose material facts occurring after the date a receipt for a final prospectus is issued and before the end of the distribution period. A number of indicators of legislative meaning support this interpretation.

(c) Indicators of legislative meaning

(i) The specific context: An issuer's express disclosure obligations in Part XV of the [OSA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-s5/latest/rso-1990-c-s5.html)

[90] As we have said, the OSA distinguishes between material facts and material changes. This distinction is critical to the question of statutory interpretation on this appeal. No provision of the statute expressly requires an issuer to disclose material facts occurring after the Commission gives a receipt for a final prospectus. By contrast, s. 57(1) in Part XV of the OSA requires an issuer to amend its prospectus for a material change occurring after it obtains a receipt for its final prospectus.

[91] Part XV of the OSA deals specifically with the distribution of securities to the public through a prospectus. The two key disclosure provisions in Part XV are s. 56(1) and 57(1). We agree with the appellants that these two provisions constitute a complete code of prospectus disclosure, both for statutory compliance and for statutory civil liability. Holding that s. 130, which is a remedies section found in another part of the statute (Part XXIII -- Civil Liability), also imposes on an issuer a prospectus disclosure obligation, fails to give effect to the importance of context in interpreting the provisions of the statute.

[92] For convenience we reproduce ss. 56(1) and 57(1):

56(1) A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law. [page342]

57(1) Subject to subsection (2), where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53(1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs.

[93] Section 56(1) reads in the present tense. In the context of Danier's prospectus, it mandates full, true and plain disclosure of all material facts on May 6, not on May 20, 1998. This interpretation is confirmed by the language of the certificate required by s. 58(1), which is also in the present tense. Both Wortsman and Tatoff signed this certificate stating:

The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part XV of the Securities Act and the regulations thereunder.

[94] In effect, the trial judge read the prospectus as though it were signed on the date of closing instead of on the date of receipt. If the legislature had intended that it be so read, ss. 56(1) and 58(1) would have been drafted differently.

[95] Section 57(1) has no counterpart for the disclosure of material facts. The substance of s. 57(1) is therefore an important indicator of an issuer's continuous disclosure obligations. So too are the statutory reporting requirements and the purchaser's right of withdrawal that are triggered on a material change. Section 75 requires an issuer to issue a news release disclosing a material change and to file a report with the Commission. Section 71(2) gives a purchaser the right to withdraw after the prospectus has been amended. The statute does not contain similar reporting requirements or withdrawal rights for later-occurring material facts. The absence of such provisions is another indicator that the legislature did not intend to impose on an issuer a continuing obligation to disclose material facts occurring up to the end of the distribution period, a period that can be up to one year (s. 62 of the OSA).

[96] At para. 93 of his reasons, the trial judge gave a hypothetical example, which he suggested buttressed his conclusion that Danier had a continuous obligation to disclose material facts. Suppose, he hypothesized, after May 6 and before May 20, all 55 of Danier's stores had burned down. In the trial judge's view, Danier would be required to disclose the subsequent fact that the stores had burned down. Unless it did so, Danier's factual statement in its prospectus that it had 55 retail stores, while true on [page343] May 6, would no longer be true on May 20. We agree that Danier would have had to disclose that all of its stores had been destroyed, but not for the reason given by the trial judge. Disclosure would be required, not because the burning down of the stores was a material fact, but because it would amount to a "material change" requiring an amendment to Danier's prospectus under s. 57(1) of the OSA.

[97] The respondents submit that Part XV is not a complete code of prospectus disclosure. In support of this submission they make two arguments, which were accepted by the trial judge. First, they contend that disclosure is so important to the effectiveness of securities regulation that it should not be confined to the express provisions in Part XV. Second, they contend that limiting an issuer's continuous disclosure obligations to material changes undermines one of the principal goals of the statute: to protect investors by ensuring that they have equal access to all information that might materially affect their investment decisions. We do not agree with either contention.

[98] We agree that disclosure is an important aspect of the effective regulation of capital markets. Yet precisely because it is so important, we would expect the legislature to spell out its contours in clear, affirmative language in the statute. If the legislature had intended to require issuers to disclose material facts occurring between the date a receipt is given for a prospectus and the end of the distribution period, it would have said so expressly as it did for material changes. Throughout the OSA, the legislature has recognized that participants in the capital markets are entitled to know the important rules governing their participation. For issuers, their disclosure obligations are spelled out in Part XV. Implying a disclosure obligation into a remedies section is entirely at odds with the critical importance of disclosure to the statute's effectiveness.

[99] We also agree, of course, that investor protection is a prime objective of the statute. We disagree, however, that the legislature intended to impose on issuers an ongoing obligation to disclose material facts as an essential means to achieving this objective.

[100] The legislature made a policy choice. It engaged in a line-drawing exercise. It decided to require issuers to update prospectuses for material changes but not for material facts. No doubt it weighed the considerations for and against broader continuous disclosure: on the one hand, the advantage of giving investors more information; on the other, the disadvantages of cost and inconvenience that flow from flooding the market with transitory information. We see nothing inconsistent between the legislature's [page344] express choice in s. 57(1) and a statutory regime aimed at investor protection. United States securities legislation has drawn a similar line. And, as Mr. Zarnett aptly pointed out in oral argument, the proposition that more transitory information is good for the market is not shown by this case, where the original forecast was substantially achieved and the revised forecast proved inaccurate.

[101] We recognize that securities regulators have adopted policy statements incorporating disclosure obligations going beyond those in securities legislation. One example is National Policy 51-201 ("NP 51-201", formerly National Policy 40), which deals with timely disclosure. Section 4.5 of NP 51-201 acknowledges that the Toronto Stock Exchange ("TSE") has a policy requiring listed companies to make timely disclosure of all "material information", which includes both "material facts" and "material changes" relating to the business and affairs of the company. NP 51-201 states that it expects listed companies to comply with the TSE's requirements. Failure to do so might invite an administrative proceeding before a provincial securities regulator.

[102] Another example is NP 48, which deals with the preparation of and disclosure in forecasts and projections -- called FOFI, or future-oriented financial information. NP 48 also goes beyond legislative requirements. Part 7 of NP 48 addresses "Updating FOFI". Section 7.1(1) states:

When a change occurs in the events or in the assumptions used to prepare FOFI that has a material effect on such FOFI, such a change shall be reported in a manner identical to that followed when a material change occurs as defined under the Securities Legislation and Securities Requirements.

[103] Arguably, the scope of "change" in s. 7.1(1) of NP 48 is broader than "material change" under the OSA. Likely, the wording of s. 7.1(1) prompted Mr. Schiff to advise Danier to issue a press release and a revised forecast in early June 1998.

[104] However, as the trial judge properly acknowledged, National Policy statements are not law: Ainsley Financial Corp. v. Ontario Securities Commission (1994), 1994 2621 (ON CA), 21 O.R. (3d) 104, [1994] O.J. No. 2966 (C.A.). They may be relied on in proceedings before a securities regulator, but they cannot be used to found an action for prospectus misrepresentation under s. 130(1) of the OSA: see Jeffrey MacIntosh, "Securities Regulation and the Public Interest: of Politics, Procedures, and Policy Statements -- Part II" (1994-1995) 24 Can. Bus. L.J. 287 at 298.

[105] Although NP 51-201 has largely eliminated the distinction between material facts and material changes, and has [page345] instead required the timely disclosure of all "material information", the OSA has preserved the distinction. Thus we must assume that the legislature intended the distinction to yield different disclosure obligations. In the Court of Appeal decision in Pezim v. British Columbia (Superintendent of Brokers), 1992 5963 (BC CA), [1992] B.C.J. No. 957, 96 D.L.R. (4th) 137 (C.A.), at p. 150, Lambert J.A. made this point in discussing the same distinction under the British Columbia statute:

There is a legislative reason for distinguishing between material facts and material changes and it is no accident that the legislature did not impose an obligation under s. 67 [of the B.C. Act] to disclose material information unless that information amounted to a change in the business, operations, assets or ownership of a reporting issuer. In enacting [the section] in its present form the legislature must be taken to have rejected the more exacting standard that would have been imposed if "material facts" (or "material information" as it is described in national policy No. 40) were included in that section.

Although the Supreme Court of Canada overturned the decision of the British Columbia Court of Appeal, it did not quarrel with Lambert J.A.'s conclusion on the legislative distinction between material facts and material changes: see 1994 103 (SCC), [1994] 2 S.C.R. 557, [1994] S.C.J. No. 58.

(ii) The text of section 130(1)

[106] The words of s. 130(1) themselves belie any suggestion that they are an additional source of an issuer's disclosure obligations. Indeed, to accept the respondents' position this court would have to find a disclosure requirement in a provision that does not even mention the word disclosure. At the very least, this would be an odd result. Section 130(1)(a) states:

130(1) Where a prospectus together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered thereby during the period of distribution or distribution to the public shall be deemed to have relied on such misrepresentation if it was a misrepresentation at the time of purchase and has a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

[107] The respondents submit, and the trial judge found, that an issuer's obligation to update a prospectus for subsequently occurring material facts arises from the phrase "if it was a misrepresentation at the time of purchase". The respondents argue that by inserting this phrase into s. 130(1), the legislature intended the material facts in a prospectus to be true not just on the date a receipt is given for the prospectus (in this case, May 6, 1998) but as well at the time of purchase (in this case, May 20, 1998). [page346]

[108] In our view, the respondents have misread the legislature's purpose in imposing liability for a misrepresentation at the time of purchase. The legislature intended to limit what purchasers can complain about in a remedies section whose significant characteristic is "deemed reliance". Purchasers need not have read a prospectus to be able to sue for a misrepresentation in it. Under s. 130(1) they are deemed to have relied on the misrepresentation whether or not they have read the prospectus. But they cannot sue for a misrepresentation in a prospectus that was corrected by an amendment before their purchase or for misrepresentation that may be found in an amendment made after their purchase.

[109] Again, the use of the word "contains" -- the present tense of the verb -- in the phrase "where a prospectus together with any amendment to the prospectus contains a misrepresentation", shows that to be actionable the misrepresentation must be a misrepresentation in the document, not a misrepresentation arising because of a fact occurring after the date of the document. To interpret s. 130(1) as the respondents suggest, would turn a section giving a cause of action for misrepresentation into a section giving a cause of action for failing to make continuous disclosure. In our view, the respondents' interpretation is inconsistent with the text of s. 130(1) of the OSA.

(iii) The text of the definition of misrepresentation

[110] "Misrepresentation" is defined in s. 1(1) of the OSA. As we have said, the statute provides that a misrepresentation can take one of three forms:

-- an untrue statement of a material fact;

-- an omission to state a material fact that is required to be stated; or

-- an omission to state a material fact that is necessary to make a statement not misleading in the light of the circumstances in which it was made.

[111] The respondents rely on the last component to support their submission that Danier had an obligation to update its forecast by disclosing its Q4 results to May 16. According to the respondents, Danier was required to disclose these Q4 results to ensure that the implied factual assertions in its Forecast were not misleading.

[112] We interpret the definition of misrepresentation, and especially the purpose of the third component, differently from [page347] the respondents. We view the third component of the definition to be an admonition to issuers to pay attention to the context in which they make statements in a prospectus. By defining "an omission to state a material fact necessary to make a statement not misleading in the light of the circumstances in which it was made" as a misrepresentation, the legislature intended to capture under the rubric of misrepresentation so-called "half-truths".

[113] For example, if an issuer said in a prospectus, truthfully, that it had acquired a patent, but it omitted to say that it was engaged in litigation challenging the validity of the patent, it may well be liable for prospectus misrepresentation. Or, if an issuer had said that over the past ten years its profits had averaged $4 million annually, without also disclosing that its profits were $40 million in the first year and zero in the next nine years, this half-truth would also likely amount to a misrepresentation. In each example, the second statement was necessary to make the first statement -- "in the circumstances" -- not misleading.

[114] We do not interpret any of the three components of the definition of misrepresentation to change the date for assessing the truthfulness of statements in a prospectus or in an amendment to a prospectus. Nor do we interpret this definition to impose on an issuer a requirement to disclose after the date it obtains a receipt for its prospectus, information that does not amount to a material change. Nothing in the wording of the definition supports such an interpretation. Moreover, we cannot accept that the legislature would use a definition section of the statute as a source of an issuer's disclosure obligations when it has explicitly prescribed these obligations where one would expect to find them -- in Part XV of the OSA.

(iv) The wider context: Related disclosure provisions in the [OSA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-s5/latest/rso-1990-c-s5.html)

[115] The indicators of legislative meaning that we have discussed so far are specific to the context of this case: prospectus disclosure and prospectus misrepresentation. Each of these indicators, in our view, shows that the legislature intended to require an issuer to update its prospectus only for material changes, but not for material facts, arising after obtaining a receipt for its prospectus.

[116] Another indicator showing this to be the legislature's intent is the contrasting disclosure regime for insider trading. Under s. 76(1) of the OSA, insiders can neither purchase nor sell securities of an issuer with knowledge of either a material fact or a material change that has not been generally disclosed. [page348] Similarly, s. 76(2) prohibits insiders from "tipping" a material fact or a material change that has not been generally disclosed. Under s. 134, insiders who violate s. 76 are liable to purchasers and sellers in an action for damages.

[117] In short, where the legislature intends to give purchasers a cause of action based on disclosed or undisclosed material facts, it says so expressly. The legislature has not expressly given purchasers a cause of action for an issuer's failure to make continuous disclosure of material facts.

(v) Committee reports

[118] At least three Ontario Committee reports have considered the distinction between "material facts" and "material changes": the Merger Report [^2] of 1970, the Allen Report [^3] of 1997, and the Crawford Report [^4] of 2003.

[119] Traditionally, committee reports have been considered a relevant and admissible indicator of legislative purpose but not of legislative meaning: see for example Morguard Properties Ltd. v. Winnipeg (City), 1983 33 (SCC), [1983] 2 S.C.R. 493, 3 D.L.R. (4th) 1. More recently, courts have begun to rely on these reports as evidence of legislative meaning. The weight to be accorded to any particular report must be assessed on a case-by-case basis: see Sullivan and Driedger, supra, at pp. 500-02.

[120] Each of the committee reports, in its own way, provides persuasive evidence of the legislature's intent to distinguish between material changes and material facts, and to impose on issuers a continuous disclosure obligation for the former but not for the latter.

[121] The Merger Report first proposed a continuous disclosure regime for material changes. The recommendations of the Merger Report led to the 1978 amendments to the OSA, which included for the first time the definitions of "material fact" and "material change" and the requirement (now in s. 57(1)) to update prospectuses for material changes.

[122] The Allen Committee was formed to examine the adequacy of corporate disclosure. The principal recommendation of [page349] the Allen Report was to extend statutory civil liability for misrepresentation to purchasers in the secondary market. That recommendation was ultimately adopted and will soon be implemented [^5]. However, the Committee also considered, but ultimately decided not to recommend, eliminating the distinction in the statute between material facts and material changes: see Allen Report, supra, at 144.

[123] One of the Allen Committee members, and a recognized expert in securities law, Philip Anisman, commented on this legislative distinction in the context of insider trading (at 113-14):

Both material changes and material facts are "material information" under stock exchange timely disclosure policies and under the securities commissions' National Policy No. 40 [now NP 51-201]. Timely disclosure of "material facts" is not required by our securities laws (although it is by stock exchange and commission policies), but the securities laws prohibit any trading by insiders who have knowledge of a material change or a material fact about an issuer or its securities.

Canadian securities legislation thus accommodates the fact that the materiality of corporate intentions and business plans develops with their progress and implementation. The legislation requires timely disclosure only after such plans have developed to the point where they are sufficiently firm that they may be characterized as a change in the issuer's business, operations or affairs. . . . In other words, the legislation recognizes that information may become "material" for purposes of insider trading laws at an earlier stage than is appropriate to require public disclosure of the information.

(Internal footnotes omitted)

[124] The Allen Report recognized the importance of disclosure, which it described (at 86-87) as a fundamental principle of securities law. Nonetheless, as Mr. Anisman pointed out (at 114), eliminating the distinction between material facts and material changes would have caused practical difficulties by increasing filing obligations and requiring ongoing press releases.

[125] The Crawford Committee, formed as part of an automatic review of the OSA, also considered the implications of broadening the continuous disclosure standard beyond material changes. The Committee saw three advantages to doing so (Crawford Report at 145):

-- more information would be available to investors, leading to more informed investment decisions;

-- eliminating the fine distinctions between material facts, material changes and material information would bring more clarity to the disclosure regime; and [page350]

-- eliminating these distinctions would reduce reliance on the enforcement procedures under stock exchange rules.

[126] However, the Crawford Committee decided (at 142-47) not to recommend changing the continuous disclosure standard for these reasons:

-- Without the benefit of hindsight, issuers would have difficulty in determining whether to disclose material information;

-- Issuers would face a significant burden of continually monitoring matters external to them; and

-- The Commission now has rule-making authority, which will permit it to promulgate specific disclosure requirements.

[127] Thus, both the Allen Report and the Crawford Report recognized that the legislative distinction ushered in by the Merger Report has limited an issuer's continuous disclosure obligations: an issuer must make continuous disclosure of material changes but not of material facts.

(d) Conclusion

[128] All of these indicators of legislative meaning point to the same conclusion: s. 130(1) of the OSA does not impose a disclosure obligation on an issuer. Instead, an issuer's disclosure obligations are contained in ss. 56(1) and 57(1) of the statute. Therefore, under s. 56(1), Danier's prospectus dated May 6, 1998, had to provide full, true and plain disclosure of all material facts. Under s. 57(1), Danier was required to amend its prospectus for material changes occurring after May 6. Danier, however, had no obligation to disclose its Q4 results up to May 16 or any other material fact occurring between May 6 and May 20.

[129] On the trial judge's findings of fact, which are not challenged on this appeal, Danier met its statutory disclosure obligations. On this ground alone, the appeal must succeed and the action against the appellants must be dismissed.

II. Implied representations: Did the trial judge err in law in concluding that Danier's prospectus contained an implied representation that its Forecast was objectively reasonable?

[130] In the first part of our analysis ("Statutory Interpretation"), we assumed that as of May 6, 1998, the Forecast contained the implied representations found by the trial judge. In this part of our analysis, we address the appellants' challenge to the key [page351] implied representation: that the Forecast was objectively reasonable. However, in the final part of our analysis ("Business Judgment Rule"), we assume that the Forecast does contain an implied representation of objective reasonableness, and that this implied representation must be true not only on May 6, but on May 20 as well.

[131] The appellants argue that the trial judge erred in finding that the prospectus contained an implied representation that the Forecast was objectively reasonable. As we have said, the trial judge held the appellants liable because he concluded that their obligation under the OSA to avoid a misrepresentation in the prospectus ran until May 20, 1998, that the prospectus contained an implied representation that the Forecast was objectively reasonable, and that this representation, although not proven to be untrue as of May 6, was false as of May 20.

[132] The finding that the prospectus contained an implied representation of objective reasonableness was therefore an essential link in the trial judge's chain of reasoning, and one that the appellants attack. The appellants say that even if there were a continuing disclosure obligation, the trial judge was in error to imply this representation, and that on this basis as well the appeal must succeed. We agree.

[133] The trial judge acknowledged that a financial forecast is a statement about the future, and in that sense is not a statement of fact capable of being a "material fact" for the purposes of the OSA. However, he concluded that a forecast contains certain implied assertions of fact capable of being "material facts". He put it this way at para. 65 of his reasons:

A forecast is not a fact in the sense that actual results are facts. Issuers cannot be liable under s. 130 for every variation from forecast results. A forecast can be a fact in that every promise includes implied assertions of fact. The factual assertions that may be derived from a forecast have been described as:

i. the forecast represents the forecaster's best judgment of the most probable set of economic conditions and the company's planned course of action (Summary Judgment Motion, supra);

ii. the forecast is sound and reliable in the sense that the forecaster made it with reasonable care and skill (Esso, supra) [^6]; and

iii. the forecaster generally believes the forecast, the forecaster's belief is reasonable and the forecaster is not aware of any undisclosed facts tending to seriously undermine the accuracy of the forecast (NationsMart, supra). [page352]

[134] He reiterated this conclusion at paras. 77 and 78:

A forecast is not an untrue statement of material fact if the results were not achieved; rather, a forecast is an untrue statement of material fact if any of the factual assertions implied in the forecast are untrue. That is, a forecast is untrue if it does not represent management's best judgment because:

i. the forecast was not prepared using reasonable care and skill; or

ii. management does not generally believe the forecast; or

iii. management's belief in the forecast is not reasonable; or

iv. management is aware of facts that would seriously undermine the forecast.

It is clear from the factual assertions that both a subjective and an objective lens should be used. The forecast is untrue if management subjectively did not believe the forecast. The forecast is also untrue if management subjectively did believe the forecast, but objectively there is no reasonable basis for this belief.

[135] In the end, the trial judge concluded that as of May 20, while the appellants subjectively believed that Danier could and would achieve the Forecast, that belief was not objectively reasonable. The implied representation in the prospectus that the Forecast was objectively reasonable was therefore false.

[136] We agree that in most cases a forecast in a prospectus can be taken to contain implied representations that the forecast represents management's best judgment, that the forecast was prepared using reasonable care and skill, and that management believes the forecast to be reasonable. Indeed, in this case there is an express representation that the forecast represents management's best judgment. However, in our view, the trial judge erred in three respects in finding that the Forecast contained an additional implied representation, namely, that the Forecast was objectively reasonable.

[137] First, as para. 65(iii) of his reasons makes clear, the trial judge reaches this conclusion by relying on American jurisprudence. That jurisprudence arises in a statutory scheme different from the OSA in a critical respect.

[138] The American case cited by the trial judge as authority for his conclusion that a forecast contains an implied assertion of objective reasonableness is In re NationsMart Corporations Securities Litigation, 130 F.3d. 309, 39 Fed. R. Serv. 3d (Callaghan) 383 (8th Cir. 1997). That case also involved a claim based on an allegedly erroneous forecast in filings made in connection with an initial public offering. It is true that the court there found that forecasts as "forward- looking statements" are actionable if they lack a reasonable basis. However, the court based that finding [page353] squarely on Rule 175 under the United States Securities Act of 1933, 15 U.S.C. 77a et. seq., which expressly provides that such a forward-looking statement can be the subject of a suit if it is made without a reasonable basis. The case is not about finding representations to have been implied in a particular forecast, but about an express legislative requirement that a forecast may be actionable if it is not reasonably based.

[139] Second, as the respondents acknowledge in their factum, the trial judge arrived at his finding of an implied representation of objective reasonableness as a conclusion of law. In our view, he erred in doing so. Absent legislation that deems a forecast to carry such an implied assertion, the finding that a representation has been made (whether explicitly or implicitly) is a finding of fact, not a conclusion of law. The case of R. v. Cognos Inc., 1993 146 (SCC), [1993] 1 S.C.R. 87, [1993] S.C.J. No. 3, at p. 128 S.C.R. ff. provides an example of this. There Iacobucci J. discusses at length the implied representations found by the trial judge to have been made as a matter of fact. Such a conclusion is not surprising, since whether a statement was made, either expressly or by implication, is surely a question of fact.

[140] Third, had the trial judge approached this matter as a question of fact rather than as a question of law, we can see no basis upon which he could have concluded that the appellants implicitly represented in this prospectus that their subjective belief in Danier's ability to achieve the Forecast was objectively reasonable.

[141] Although in another case, the facts might yield a different conclusion, in this case there is no evidence -- and nothing in the language of the prospectus itself -- to suggest that the appellants' subjective belief that the Forecast was reasonable was shared by reasonable business people or was otherwise being put forward as "objectively reasonable". A reasonable person reading the prospectus would certainly conclude that the Forecast represented management's best judgment. The prospectus says so explicitly. Indeed, in a competitive marketplace that is the judgment that the investor is looking for. The reader of this prospectus would not, however, conclude that the appellants were also implicitly saying that their best judgment was shared by reasonable business people, or would be seen as reasonable by a trial judge, or was otherwise "objectively" reasonable.

[142] In short, we can see no basis upon which the trial judge could have properly concluded that the Forecast in the prospectus contained an implied representation of objective reasonableness.

[143] This ground of appeal must therefore succeed. [page354]

III. The business judgment rule: In assessing the objective reasonableness of the Forecast, did the trial judge err by failing to take into account either the business judgment of Danier's senior management or that Danier substantially achieved its Forecast?

[144] Even if we assume that the Forecast contained the implied representations of fact found by the trial judge, and even if we assume that these representations had to be true not only on May 6, but also on May 20, we agree with the appellants that the trial judge committed a reviewable error in finding these implied representations false as of May 20.

[145] It is a central finding of the trial judge that, although Wortsman and Tatoff honestly (i.e., subjectively) believed on May 20 that the forecast could be achieved, their belief was unreasonable. He found that this rendered false Danier's implied representation that the Forecast was objectively reasonable. The two aspects of this implied representation that he found to be false were:

(a) that the Forecast was reasonably achievable; and

(b) that there were no material facts known to Wortsman and Tatoff that would seriously undermine the achievability of the Forecast.

[146] What was a true representation on May 6 -- the Forecast projections -- therefore became an untrue representation as of May 20, and Danier was liable in damages for that misrepresentation under s. 130 of the OSA.

[147] There are a number of flaws in the trial judge's analysis that, in our view, constitute palpable and overriding error. On this basis as well, the appeal must be allowed. First, the trial judge found the fact that the Forecast was substantially achieved as projected, to be immaterial to the analysis of whether the Forecast was reasonably achievable on May 20, 1998. This simply cannot be so. Second, the trial judge erred generally, in our opinion, in his approach to determining the objective reasonableness of the Forecast. Especially he erred by failing to give any deference to the business judgment of Danier's senior management.

(a) Achievement of the Forecast was a proper consideration

[148] The trial judge found that the Forecast was substantially achieved. For the purposes of these proceedings, substantial achievement is tantamount to actual achievement: [page355] see With v. O'Flanagan, [1936] 1 All E.R. 727, [1936] Ch. 575 (C.A.), at p. 732 All E.R., per Lord Wright M.R.

[149] After making that finding, and stating his reasons for doing so, the trial judge said (reasons, para. 278):

The defendants emphasize that, through various factors post-closing, Danier was able to substantially achieve Forecast. They submit this fact gives rise to an inference that there was a reasonable basis for the Forecast and it was therefore neither untrue nor misleading on May 20, 1998. However, the key date for the determination of liability under s. 130(1) of the OSA is the time of purchase. As such, the focus is on whether the factual assertions implied from the Forecast were true or untrue, or whether there was an omission of material facts which were necessary to make the Forecast not misleading, as of that date. Thus, it is information available as of May 20, 1998, that is critical to this analysis. It is the public information available as of that date upon which the purchasers of securities base their investment decision. It is the public and non-public information available as of that date that management must consider in determining whether or not it needs to take action to avoid breachi ng its obligations under s. 130(1) of the OSA. In this case, hindsight obtained from the fact that a misrepresentation at the time of purchase later becomes true because the Forecast is substantially achieved, does not make it any the less a misrepresentation at the operative date, the time of purchase.

[150] Respectfully, we disagree.

[151] The trial judge fatally intermingled two different concepts in this analysis. He merged the question whether the fact the Forecast was achieved can support the reasonableness of the Forecast as at May 20 with the notion of a continuing obligation to disclose material facts up to that date. For the reasons outlined above, we do not accept that there is such a continuing obligation to disclose material facts up to the date of the closing of a public offering. However, because he held the view that there was, and because he thus blended the two concepts, the trial judge -- as demonstrated in the foregoing passage -- effectively eliminated the fact that the Forecast was achieved from his assessment of whether it was reasonably achievable, even though he made passing reference to having weighed it later in his reasons (at para. 286). This was a clear and overriding error in our view.

[152] This was a clear and overriding error because the ultimate achievement of the Forecast was at least some support for its objective reasonableness as of May 20. This fact could not properly be eliminated from the assessment of objective reasonableness on May 20, just because it occurred after May 20. The objective reasonableness of the predicted result of an experiment is perhaps best tested by conducting the experiment.

[153] Put differently, we do not agree that the fact the Forecast was achieved is immaterial to the analysis of whether the Forecast was reasonably achievable, viewed through the lens of a [page356] May 20th perspective. The misrepresentation alleged was that the Forecast's Q4 projections were no longer reasonably achievable as of May 20. But the Q4 projections remained projections to be measured as at June 27, 1998, and when measured against that mark, the appellants had successfully accomplished what they had forecast would happen. It makes no sense to disregard that fact. As counsel for Wortsman and Tatoff submit in their factum, "It is a contradiction in terms to say that a Forecast which accurately predicts what will occur is not, at the very least, one of the alternatives management could reasonably select" (factum of the appellants, Wortsman and Tatoff, at para. 112).

(b) Errors in determining whether the Forecast was reasonably achievable

[154] The trial judge's failure to consider the fact that the Forecast was achieved in determining whether the Forecast was reasonably achievable points to the principal overriding error that he made in dealing with objective reasonableness. Essentially, the trial judge focused on only one view of whether the Forecast could be considered to be reasonably achievable on May 20 -- his own -- instead of asking whether Wortsman and Tatoff's honest belief in the Forecast's achievability was within a range of reasonable alternative opinions open to business people in their position, knowing what they knew and facing the circumstances they faced.

[155] In other words, the trial judge failed to give any deference to the "business judgment" of senior management which, in the end -- despite the misgivings of more junior employees and of the trial judge -- turned out to be correct. Instead, he applied his own view of what was objectively reasonable as of May 20, without reference to expert evidence supporting the reasonableness of the Forecast on that date, and without regard to what actually happened as of June 27. In adopting this approach, the trial judge failed to give effect to recent jurisprudence in the Supreme Court of Canada, and in this court, on how management's judgments on matters of business are to be evaluated by the courts: see Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64; Maple Leaf Foods Inc. v. Schneider Corp. (1998), 1998 5121 (ON CA), 42 O.R (3d) 177, [1998] O.J. No. 4142 (C.A.); UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., 2002 49507 (ON SC), [2002] O.J. No. 2412, 214 D.L.R. (4th) 496 (S.C.J.), affd 2004 9479 (ON CA), [2004] O.J. No. 636, 250 D.L.R. (4th) 526 (C.A.); Brant Investments Ltd. v. KeepRite Inc. (1991), 1991 2705 (ON CA), 3 O.R. (3d) 289, [1991] O.J. No. 683 (C.A.). [page357]

[156] The respondents argue that the business judgment rule has no application in the circumstances of this case. They submit that their claim is based upon a cause of action for statutory misrepresentation under s. 130 of the OSA, and that the test for prospectus misrepresentation in that provision is solely an objective one. Therefore the belief of directors or management is irrelevant. They submit that the issue is whether the prospectus did or did not contain a misrepresentation, and that once a misrepresentation has been established the court cannot defer to the issuer's "business judgment" not to disclose a material fact. Moreover, they say, the only defences available are the due diligence defences provided by ss. 130(5) and 132 of the OSA, and those provisions import a standard of the reasonably prudent person in the circumstances of the case -- again, taking the views of the directors or management out of the equation. Finally, they argue that the business judgment rule, even if applicable, would not help the appellants in this case in the light of the trial judge's findings that Wortsman and Tatoff acted unreasonably and "turned a blind eye" to the cause of Danier's financial problems before closing.

[157] These submissions fail to recognize at least two important considerations. First, given the trial judge's finding of an implied statement that the forecast was reasonable, the exercise of determining whether there was a misrepresentation has the concept of a business judgment about reasonableness built into it. A forecast is a quintessential example of the exercise of business judgment. This business judgment must be considered. Secondly, the "reasonableness" that is the centrepiece of the business judgment rule involves a "range of reasonableness". As this court said in Maple Leaf Foods, supra, at paras. 64-67 (and the Supreme Court of Canada echoed in Peoples Department Stores, supra):

The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board's determination [^7]. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board's decision [citations omitted]. This formulation of deference to the decision of the Board is known as the "business judgment rule".

(Italics in original, underlining added)

[158] Lax J. also captured the rationale behind this approach to assessing the actions of business people, in UPM-Kymmene Corp., supra. [page358] Before noting at para. 153 that "directors are only protected to the extent that their actions actually evidence their business judgment", and that "[t]he principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate diligence in arriving at decisions", she said (at para. 152):

The business judgment rule protects Boards and directors from those that might second-guess their decisions. The court looks to see that the directors made a reasonable decision, not a perfect decision. This approach recognizes the autonomy and integrity of a corporation and the expertise of its directors. They are in the advantageous position of investigating and considering first-hand the circumstances that come before it and are in a far better position than a court to understand the affairs of the corporation and to guide its operation.

(Emphasis added)

[159] As noted above, Lax J.'s decision was affirmed by this court. Accordingly, we reject the argument that the business judgment rule has no application to the trial judge's analysis of prospectus misrepresentation.

[160] Here, the trial judge made a number of palpable and overriding errors in finding that the implied assertion of objective reasonableness was false as of May 20, 1998. A number of them, although not all, relate back to his failure to take into account the business judgment rule.

[161] The heart of his findings on the objective reasonability of the Forecast is found in his reasons at paras. 254-87. Throughout his analysis he faults Wortsman and Tatoff for failing to do further inquiries that, on his view, were obviously needed (at paras. 254-55, 259):

What is missing from the May 16th Analysis is any attempt to understand why the actual results to date were so poor and the impact on the Forecast if this departure from IPO Plan [^8] continued for the balance of the quarter. Rather, it seems that their focus was singularly on whether they could recoup the shortfall to date.

Further, this lack of inquiry is remarkable given that the Prospectus emphasizes Danier's state-of-the art ability to track daily sales results. In particular, reference is made to state-of-the-art computer systems that provide immediate information on all important aspects of operations.

This scenario in June raises the following question: If the catalyst for the revised forecast was Wortsman's reaction to the poor Victoria Day Sale results and an appreciation of what caused those results, namely, [page359] unseasonably warm weather, why was there a complete failure on Wortsman and Tatoff's part to react to the poor actual sales numbers and estimated loss numbers up to May 20th, and why did they turn a blind eye to the cause of those results?

[162] Having concluded that management ought to have made further inquiries, the trial judge goes on to reassess management's judgment in the light of the information that would have been revealed by those inquiries (at paras. 260, 264 and 269):

The defendants' counsel say that Wortsman and Tatoff were still confident they could achieve Forecast in the face of those results. Although the foundation for that confidence was tenuous at best, the real criticism is the fact that no inquiry whatsoever was made about the root cause of the poor financial results up to the time of the closing of the IPO. Given that the results of the two sales promotions prior to closing did not yield the kind of success that they had hoped for, it should have been apparent to them that warm weather in April and May was having a significant negative impact on those sales

[emphasis added].

Had Wortsman and Tatoff conducted prior to May 20th the very review they performed after the Victoria Day Sale, they would have discovered that the same problem that plagued that Sale was the root cause of their departure from IPO Plan prior to closing.

The information in management's possession prior to closing demonstrated a marked departure from the results that had been expected. Further, there was a sufficient probability that this marked departure would continue to the end of the quarter. As of May 20, 1998, management's optimism about achieving Forecast through the re-allocation of front-end loaded sales, the prospect of the two planned promotions and the use of year-end reserves does not make the information, on a reasonable basis, any the less material or take away from the necessity to disclose it in order to make the Forecast not misleading. Given the sheer magnitude of revenue that was required in the last 6 weeks of the quarter if Forecast was to be met, the little time remaining in the quarter, the history of sales in that period and the fact that the cause of the decline could continue, the May 16th Analysis does not provide a reasonable basis for management's optimism. This information should have been disclosed prior to the closing of the

IPO.

[163] The trial judge concludes that given the information that would have come to light had the proper inquiries been conducted, the belief in the Forecast was not objectively reasonable in the circumstances (at paras. 285-87):

In my view, the same factors that indicate that there was a sufficient probability that the departure from Forecast would continue until the end of the quarter also demonstrate that the Forecast was untrue as of May 20, 1998. The intra-Q4 1998 results tended to seriously undermine the accuracy of the Forecast, and Wortsman and Tatoff's subjective belief in Danier's ability to achieve Forecast in the face of the departure [from] the IPO Plan, which was derived from the Forecast, and the factors enumerated above, was [page360] objectively unreasonable. Wortsman and Tatoff claim that they were not aware of the cause of the poor performance before May 20th, until after the Victoria Day Sale after the closing of the IPO. Therefore, they had no reasonable belief that the cause of the shortfall before May 20th would not continue to adversely affect sales through the balance of the quarter. They had no reasonable belief that sales growth of 100.5 per cent could be achieved in the remaining weeks of the quarter, w hen the Forecast called for 40.8 per cent growth for Q4, and actual cumulative sales growth to May 20th was only 5.1 per cent. They had no idea why cumulative sales growth was below Forecast and no reasonable belief that sales growth would return to Forecast in the remaining weeks of the quarter or significantly exceed Forecast sales growth as was required to correct the shortfall.

The fact that Danier was able, through various factors post-closing, to substantially achieve Forecast is outweighed by the information available as of May 20, 1998.

As of May 20, 1998, the time of purchase, the Forecast was misleading in light of the circumstances in which the Forecast was made, and certain of the factual assertions implied from the Forecast were untrue. Disclosure of the intra-Q4 1998 results was necessary to make the Forecast not misleading. I find, therefore, that the Prospectus contained a misrepresentation at the time of purchase.

[164] These passages are revealing for what they show about the trial judge's approach to determining the question whether Wortsman's and Tatoff's honest belief in the achievability of the Forecast was objectively reasonable on May 20. He gave very short shrift to their knowledge, experience and expertise in conducting the successful operations of Danier over the years (effectively confining these factors to his acceptance of their honest belief in the Forecast's achievability). Indeed, the trial judge appears to have discounted their knowledge, experience and expertise because he felt they should have been attempting to determine the cause of the slumping sales rather than concentrating on whether they could overcome the shortfall in their projections. This is the common theme at the core of his findings. Finally, in concluding that the Forecast was not objectively reasonable on May 20, he conflated the analysis of that issue with his conclusion that the facts known to management constituted new material facts and were therefore required to be disclosed.

[165] The trial judge's point of view is necessarily a retrospective one. By contrast, the point of view of Wortsman and Tatoff was a prospective one, informed by the circumstances as they were on May 20. Their view might have been an optimistic one, but it was not unreasonable in the sense that it was outside a range of reasonable views of Danier's situation at that time.

[166] Wortsman testified that he only appreciated the impact of the unseasonably warm weather on Q4 sales after the unexpectedly poor results of the Victoria Day sale. Sales were down in [page361] most provinces except in British Columbia. The weather was unseasonably warm in most provinces except in British Columbia. He made the connection and consulted Danier's advisors with the ultimate result that the June fourth revised forecast, with a new weather-based assumption underlying it, was issued.

[167] The trial judge accepted that Wortsman and Tatoff did not realize the weather impact problem until after the Victoria Day sale ended on May 25. However, his central criticism is that they did not take steps to determine this cause earlier, by following up on the information obtained from the May 16 analysis (prepared on May 19). One wonders how Danier's "state-of-the-art ability to track daily sales results" could have revealed any more than it did about the cause of the problem. The daily sales results generated the numbers, not the causes for the numbers. Although the trial judge is critical of Wortsman and Tatoff for not determining the cause of the slumping sales earlier -- this is the true source of his "turning a blind eye" comment -- the criticism, and the findings based upon it, ignore:

(a) that Danier had never before tracked weather results or based sales analyses on predictions of unseasonable weather;

(b) that no expert testified to any standard practice among retailers to do such tracking, or that Danier had fallen below an accepted standard by failing to do so;

(c) that the plaintiffs' own expert, Mr. Plant, testified that to study weather as a reason for poor sales or to try to predict its continuance, was neither an accepted practice, nor useful; and

(d) that even the trial judge had found that the unseasonably warm weather did not constitute a material change in Danier's circumstances.

[168] Neither of the plaintiffs' experts gave evidence that the Forecast was unreasonable on May 20. On the other hand, Mr. Cole, the defendants' expert, testified that it was reasonably based. Although the trial judge accepted Mr. Cole's evidence that the Forecast was reasonable as of May 6, he failed to acknowledge his testimony that it was reasonable on May 20.

[169] Finally, in this part of his analysis, the trial judge did not advert to another important piece of evidence from the cross-examination of the plaintiffs' expert, Mr. Stewart. This evidence indicated that if one added the actual Q4 sales up to May 20 and [page362] the sales that would result if Danier simply achieved historical average sales for the last six weeks of that quarter (the year end) -- which he calculated to be 7.5 per cent over the previous five fiscal years -- Danier's total sales for the year would not be materially different from the Forecast. They would represent 97.5 per cent of the Forecast sales. In fact, Danier achieved 8.2 per cent over the last six weeks and attained 98.2 per cent of its projections, which the trial judge held to constitute substantial achievement of the Forecast.

[170] It is well settled that a trial judge is entitled to accept, or reject, some or all of a witness's testimony. However, the trial judge's failure to take into account both Mr. Stewart's testimony (about the effect of achieving historical averages over the last six weeks of the fiscal year) and Mr. Cole's testimony (about the Forecast being reasonable on May 20) reinforces the view that he measured whether the Forecast was reasonable on the basis of his own assessment of the numbers and the circumstances. He, himself, could simply not accept that with the unexpectedly bleak sales information confronting them after completion of the May 16 analysis, Wortsman and Tatoff could reasonably believe the Forecast was achievable. The expert evidence of Stewart and Cole, and the actual events that transpired, showed that their confidence was well-founded -- at least to the extent that their view represented "one of several reasonable alternatives" and was "within a range of reasonableness": Maple Leaf Foods, supra, at p. 192 O.R. To adopt the language of this court in Brant Investments Ltd., supra, at 320 O.R.:

[The trial judge] is dealing with the matter at a different time and place; it is unlikely that he will have the background knowledge and expertise of the individuals involved; he could have little or no knowledge of the background and skills of the persons who would be carrying out any proposed plan; and it is unlikely that he would have any knowledge of the specialized market in which the corporation operated. In short, [the trial judge] does not know enough to make the business decision required.

(c) The standard of review

[171] There is no doubt that a trial judge's findings of fact, including inferences drawn from the facts, are entitled to great deference. In recent years "palpable and overriding error" has become the standard most favoured for appellate review of such findings: see Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, at p. 256 S.C.R.; Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 44 B.L.R. (3d) 165 (C.A.), at paras. 289-309. While that is the case, however, the Supreme Court of Canada has lately held that palpable and overriding error "should not be thought to [page363] displace alternative formulations of the governing standard" and that the test will still be met if the findings are "clearly wrong" or "can properly be characterized as aeunreasonable' or 'unsupported by the evidence'": H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401, [2005] S.C.J. No. 24, at paras. 55 and 56. This is because a circumstance that evokes one of these appellations will likely evoke the others. In summing up this point, Fish J. noted, in H.L. at para. 56:

But as a matter of principle, it seems to me that unreasonable findings of fact -- relating to credibility, to primary or inferred "evidential" facts, or to facts in issue -- are reviewable on appeal because they are "palpably" or "clearly" wrong. The same is true of findings that are unsupported by the evidence. I need hardly repeat, however, that appellate intervention will only be warranted where the court can explain why or in what respect the impugned finding is unreasonable or unsupported by the evidence. And the reviewing court must of course be persuaded that the impugned factual finding is likely to have affected the result.

(Emphasis in original)

[172] Here, with respect, the trial judge's finding that the Forecast was not objectively reasonable as of May 20, 1998, is itself unreasonable. It must be set aside, for the reasons set out above. In the end -- even if the trial judge was correct in law in holding that Danier's prospectus contained an implied statement of fact that the Forecast was objectively reasonable as of May 20, 1998 -- we are satisfied that he made palpable and overriding errors in finding that the implied statement was false in the circumstances of this case. Accordingly, we would set aside the judgment on this ground as well.

F. Damages and Costs

[173] Given our disposition of the liability issues, it is unnecessary for us to deal with the appellants' attacks on the damage award at trial, and we decline to do so.

[174] The appellants also argue that the trial judge erred in giving the respondents a premium as part of their costs award. Although we think it doubtful that a premium can be properly awarded in a class proceeding (where there are other cost mechanisms to deal with the risk of litigation), here too it is unnecessary for us to decide the issue given the result of the appeal, and we decline to do so.

G. Conclusion

[175] In our view, the appeal must be allowed on any one of the following three grounds: [page364]

(1) The trial judge erred in concluding that, under the OSA, Danier had a continuing obligation to disclose material facts occurring between the date of its prospectus (May 6, 1998) and the date of closing (May 20, 1998). He therefore erred in concluding that because the appellants did not disclose Danier's Q4 results to the date of closing, they were liable for prospectus misrepresentation;

(2) The trial judge erred in law in concluding that Danier's prospectus contained the implied representation that the Forecast was objectively reasonable.

(3) The trial judge erred in failing to give any deference to the business judgment of Danier's senior management and in failing to take into account that the Forecast was substantially achieved. He therefore erred in concluding that the Forecast was not objectively reasonable on May 20, 1998.

Accordingly, the trial judgment is set aside, and the action must be dismissed.

[176] The parties can make written submissions on the appropriate disposition of costs both at trial and in this court, recognizing that the panel is in no position to fix the costs at trial. Those submissions should be no more than 15 pages and should be filed within three weeks of the release of these reasons.

Appeal allowed.

Notes

[^1]: Under s. 52, distribution means a distribution to the public.

[^2]: Ontario Securities Commission, Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements (Toronto: Dept. of Financial and Commercial Affairs, 1970) ("Merger Report").

[^3]: Toronto Stock Exchange, Committee on Corporate Disclosure, Final Report: Responsible Corporate Disclosure: A Search for Balance (1997) ("Allen Report").

[^4]: Ontario, Five Year Reviewing Committee, Final Report: Reviewing the Securities Act (Ontario) (Toronto: Queen's Printer, 2003) ("Crawford Report").

[^5]: See Budget Measures Act (Fall), 2004, S.O. 2004, c. 31, Sch. 34 (Amendment to the Securities Act).

[^6]: Esso Petroleum Co. Ltd. v. Mardon, [1976] 2 All E.R. 5, [1976] Q.B. 801.

[^7]: Here, the reverse is the case. Subsequent events demonstrated that the determination of Wortsman and Tatoff was correct.

[^8]: The monthly sales budget prepared by Danier for the periods leading up to the sale of its securities.