Why Canada’s constitution is driving D&O losses

Would directors’ and officers’ liability costs be lower if Canada had a national securities regulator?

D&O liability insurance kicks in when shareholders go to court alleging a company misrepresented the true state of its financial affairs at the time they bought their shares.

Shareholders’ misrepresentation lawsuits are often filed against the same defendants in multiple provinces, said securities litigation lawyer Shara Roy, partner with Lenczner Slaght Royce Smith Griffin LLP.

In the event of a shareholders’ class-action lawsuit, “you will end up having legal action in every province in which the company has shareholders,” Ian Fraser, assistant vice president of technology, cyber and professional lines at Sovereign Insurance, said Monday in an interview.

For the defendants – and by extension their D&O liability insurers – defence costs are higher than if a lawsuit was filed in just one province.

“I think this is having a significant impact in the uptick of the severity of claims,” Fraser said. “There needs to be a shift with how the courts are viewing these matters.”

Roy echoed Fraser’s concern.

“It’s something, from our position as defence counsel, that needs to be addressed,” said Roy.

Unlike the United States, Canada does not have one national law protecting shareholders’ rights. This is because the 1867 Constitution Act (originally dubbed the British North America Act) gives provinces jurisdiction over property and civil rights.

Ontario’s Securities Act lets shareholders sue corporate directors and officers if they bought shares between the time a misrepresentation was made and a misrepresentation was corrected.

Laws in other provinces are “are very similar,” Roy said.

Canadian companies that are publicly traded tend to have shareholders living in different provinces.

There is a movement afoot for a national securities regulator.

A Supreme Court of Canada decision released earlier this month paved the way for the proposed Cooperative Capital Markets Regulatory System. The vision of CCMR is a single regulator for the jurisdictions (British Columbia, New Brunswick, Ontario, Prince Edward Island, Saskatchewan and the Yukon Territory) that are participating in CCMR. Notably absent are Quebec and Alberta.

The Nov. 9 Supreme Court of Canada ruling – dubbed Reference re Pan‑Canadian Securities – “has the possibility” to make securities laws “more uniform” from province to province “but it doesn’t impose anything on any of the provinces,” Roy said last week in an interview.

The case arose from a “legal reference” from the Quebec government. This means the Quebec government asked a court whether a Canada-wide securities regulation can be established under a single regulator in the manner proposed in the CCMR model. Originally, the Quebec Court of Appeal said this would be unconstitutional. But that ruling was overturned by the Supreme Court of Canada.

The Quebec Court of Appeal had argued that a memorandum of understanding – among CCMR participants – prohibited the provinces participating in CCMR from changing their own securities laws without the consent of a “council of ministers.”

But the Supreme Court of Canada countered that the council of ministers could only propose amendments to a Model Provincial Act and a federal act. The CCMR memorandum of understanding does not imply that amendments would be binding on the provinces, the Supreme Court of Canada said.

In Reference re Securities Act, released Dec. 22, 2011, the Supreme Court of Canada ruled that a federal securities act proposed at the time was unconstitutional. At that time, the Ontario and federal governments were arguing that a federal securities act was not unconstitutional because the BNA Act gives the federal government jurisdiction over trade and commerce.

But in 2011, Supreme Court of Canada sided with the Quebec and Alberta governments, which opposed national securities regulator.

“Individuals engaged in the securities business are still, for the most part, exercising a trade or occupation within the province,” the Supreme Court of Canada wrote in 2011. The court rejected the federal government’s argument “that the securities market has been so transformed as to make the day-to-day regulation of all aspects of trading in securities a matter of national concern.”