A recently-announced agreement to settle a lawsuit valued at $500,000 shows the liability risk faced by directors of Ontario-based companies with overseas operations.

Even though four directors and officers had resigned, citing a lack of cooperation with the company’s managers in China, they still found themselves named as defendants in a lawsuit alleging misrepresentation of the company’s financial statements.

Michael Newman, Brian J. Knebel and Francesco Galati served on the audit committee of the board of directors of Toronto-based Greenstar Agricultural Corp. They resigned in September 2014. Michael Lam, Greenstar’s chief financial officer,  resigned at the same time.

These four directors and officers were among the defendants name in a 2014 class-action shareholders’ lawsuit alleging misrepresentation. The defendants denied they have made any misrepresentations.

Greenstar was ordered dissolved by Canadian regulators in 2015. Its core business was food processing through a subsidiary based in China.

The Ontario Securities Act stipulates that shareholders can sue a company and its directors and officers for allegedly misrepresenting the true state of a firm’s financial affairs. Such lawsuits, which often arise after the share price tanks, are a major factor affecting directors’ and officers’ liability insurance claims in Canada.

In Greenstar’s case, the plaintiffs and defendants reached an agreement to settle, announced by Siskinds, the London, Ont.-based plaintiff’s law firm, on July 6, 2018.

The plaintiffs are scheduled to appear in the Ontario Superior Court of Justice on Oct. 26 to ask the court to approve the settlement with Greenstar and its directors and officers.

Guan Lianyun, Greenstar’s former president and CEO, was named in the class-action lawsuit but not in the agreement to settle.

Greenstar’s share price fell 23% on Apr. 23, 2014, after it announced the release of its 2013 financial statements would be delayed. Four weeks later, the share price fell a further 29% when Greenstar announced its auditors were unable to provide an auditing opinion of the firm’s financial results.

The defendants who resigned in September 2014 alleged “a lack of co-operation” on the part of the company’s managers in China during the audit committee’s efforts to audit Greenstar’s 2013 financial statements. One factor in the resignations was an inability to get information about the bank accounts in China of Greenstar’s operating subsidiary.

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The lawsuit against Greenstar stemmed mainly from the firm’s financial statements for the three months ending Mar. 31, 2012. In those statements, Greenstar mentioned a loan of about Cdn$2 million from a Chinese bank to Greenstar’s Chinese subsidiary.

But Greenstar failed to mention that the firm’s Chinese subsidiary defaulted on interest payments due in February 2012, the plaintiffs alleged in the class-action lawsuit. The defendants deny making any misrepresentations, notes the settlement agreement announced on July 6, 2018.

Of the Canadian audit committee members named as defendants, Galati had been chief financial officer of the grocery division at Maple Leaf Foods and later managing partner of Bedford Group’s resource practice. Knebel is a former CFO of The Skor Food Group Inc. and Newman had been acting CEO of Caldera Geothermal.

Greenstar was ordered to cease trading on Canadian stock exchanges on June 3, 2014. In August of that year, the firm’s annual general meeting scheduled Sept. 19 was cancelled. The meeting had initially been postponed from June 26.

On Sept. 11, three days before the directors’ resignations, Greenstar announced it had just found out that its Chinese subsidiary had been put up for auction by a Chinese financial institution. The press release noted that Canada-based officials were trying to get more details.