Supreme Court clarifies financial disclosure obligations in Kerr

A change in intra-quarterly results does not necessarily signal a material change that requires public disclosure, the Supreme Court of Canada has ruled in Kerr v. Danier Leather Inc.
The courts decision in the securities case related to financial disclosure might have some bearing on directors and officers insurance in the future.
In Kerr, the Supreme Court dismissed a shareholders class-action lawsuit against Danier Leather and two of its executives.
Danier made an initial public offering of its shares through a prospectus. The prospectus contained a forecast that included Daniers projected results for the fourth quarter of the fiscal year.
An internal company analysis prepared before its public offering closed showed that Daniers fourth-quarter results were lagging behind its forecast. Danier did not disclose its intra-quarterly results before closing.
Shareholders brought a class proceeding for prospectus misrepresentation under s. 130(1) of the Ontario Securities Act. They argued the poor fourth-quarter results were material facts required by s. 130(1) to be disclosed before closing.
The Supreme Court ruled a change in intra-quarterly results is not itself a change in the issuers business, operations or capital and, for that matter, does not necessarily signal that a material change has occurred. Sales often fluctuate (as here) in response to factors that are external to the issuer. The trial judge rightly found that Danier experienced no material change.
Although it sided with Danier in Kerr, Canadas high court nevertheless reiterated that judges and politicians, not business executives, have the final word on the scope of disclosure. The court rejected Daniers argument that the Business Judgment Rule trumps disclosure obligations under the Securities Act.
While forecasting is a matter of business judgment, disclosure is a matter of legal obligation, Supreme Court of Canada Justice Ian Binnie wrote for the court. It is for the legislature and the courts, not business management, to set the legal disclosure requirements.