The Court visits the Court
This past Tuesday, a group of student editors from The Court, along with our faculty advisor, Simon Fodden, took a visit to the Supreme Court of Canada. We attended the hearing in Kerr v Daniel Leather, a securities case dealing with an issuer’s disclosure obligations during the prospectus process. Simon Archer, who came along for the ride, provides an excellent summary of the facts and issues arising from the case in his post earlier this week.
My first trip to the SCC cleared up several misconceptions I had about what occurs within its hallowed walls. Looking from outside the massive building with its clean Art Deco lines, I had thought it would house a grand and spacious courtroom befitting Canada’s highest court. As I walked into the courtroom, I was surprised to discover a modest but dignified room, not much larger than a law school classroom. Much of the courtroom, from the walls to the furniture, is covered in dark mahogany-like wood and the upholstery is in red leather, giving the room a warm and rosy glow. Further, there is some type of fixture hanging from the ceiling which contains a pattern that looks similar to a maple leaf. There is definitely a “Canadian” feel to the setting.
I was somewhat disappointed to learn that during hearings, the Supreme Court justices do not wear the bright scarlet and white “Santa Claus” robes I have seen in their photographs. Apparently, these are dress robes only worn for special occasions (Christmas perhaps?). Instead, the robes are in the more solemn hue of black. Fortunately, the colour of their robes was not reflective of their personalities. Most of the justices appeared not to take themselves too seriously, flashing an easy smile or making the occasional quip.
Similar to a sporting event, there are several monitors placed around the room which show close up images of the action for the benefit of those sitting in the nosebleeds (not really, since we were only around 10 meters away). These images are captured by automatic cameras placed around the room which are activated by sounds picked up on the microphones. On several occasions throughout the hearing, the monitors would unceremoniously cut from a speaker to the image of a justice coughing or blowing his or her nose. I wonder if such shots make it into the recorded version or it they edit them out.
Speaking of technology, I also found it interesting that Justice Charron was the only judge to bring a laptop to the hearing. Perhaps she is a pioneer in that regard. Since she is one of the younger and newer members of the group, it is understandable that she might be more technologically savvy than some of the older justices. Perhaps, one day in the future, lawyers at a hearing before the SCC will look up and see all nine justices looking down on their laptop screens, possibly playing solitaire or chatting with a friend on MSN. Probably not. But modern law students know the dangers of having laptops in class.
As for the hearing itself, I was extremely impressed with the level of advocacy presented by counsel on all sides. They were all experienced litigators who had very polished presentation styles and appeared unfazed by questions coming from all nine justices.
My general impression of the case was that it would be difficult for the plaintiffs to succeed in their appeal. From the type of questions addressed to counsel, it appeared the judges had difficulty with several aspects of the appellants’ submissions. For instance, several of the judges questioned the appellant’s characterization of the new financial information received by Danier as a “material fact.” In a somewhat bizzare exchange, Justice Rothstein repeatedly insisted that this was a “material change” while the appellant counsel steadfastly held to his assertion that this information was a “material fact.”
Of course, the plaintiffs would have preferred that the SCC had found this to be a material change because then their case would have been much easier. There is an explicit requirement under s. 57(1) of the Ontario Securities Act, RSO 1990, c S-5, that issuers must file an amendment when there is a material change. There is no such requirement for a material fact. Section 56(1) only requires that a prospectus provides “full, true and plain disclosure of all material facts.”
The general distinction made between a material fact and a material change is that a material fact is a fact external to the company that may affect its value while a material change is a change in the “business, operations or capital of the issuer” or a decision to make such a change by the company. It appears the plaintiffs had given up on attempting to argue that this was a material change, having lost this argument both at trial and at the Court of Appeal. However, based on the SCC’s reaction to this position, I wonder if the justices would have preferred if the appellants had made submission on the basis that this was a material change.
Instead, the appellants apear to have adopted the position contained in the trial judge’s decision as their own, which put them in the situation where they must defend several difficult assertions. They start from the premise that the new financial information was a “material fact” that had become “untrue” (and thus a misrepresentation) after the prospectus had been preprared when the new financial information was received. However, as the Chief Justice observed, this is a very strange use of the word “untrue” when talking about a forecast of what may happen in the future.
Another attempt to bring the financial information within the meaning of misrepresentation was based on the second part of the definition: “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”. Here, much was made by one judge of the phrase “in light of the circumstances in which it was made”, and the appellant’s counsel was asked whether this phrase was redunant or whether it indicated that such misrepresentation only related to misleading statements at the time that they were made.
Further, the fact that Danier almost met its projected forcast by the end of the fiscal year had more of an impact than perhaps it should have from a strictly legal perspective. While misrepresentation should be judged at the time they were made, the Chief Justice, from the very start, found it difficult to find a misrepresentation when Danier provided an opinion about what their future earnings would be at the end of the fiscal year and then substantially achieved this. This “elephant in the room”, as counsel for the respondent called it, was not really one that people were ignoring. There are many fluctuations in the market from various material facts and the danger would be that issuers would be required to file an amendment each time such a fact arose.
For the respondents, the questions from the justices did not appear to challenge their position so much as seek further explanation. The only time the questions started picking up was in relation to the respondents’ position that the business judgment rule should apply to the business judgment exercised by issuer in making forecasts for a prospectus.
The OSC, as intervenors, made submissions that much of the rationale behind deferring to the business judgement of directors in running their business is absent in the securities context and such application of the rule would undermine the ability of securities regulation to protect investors. It appears some justices were swayed by these arguments because they vigorously challenged the respondents’ lawyer on this point. However, the business judgment rule is not an automatic defence but only creates a deference towards the expertise of managment. Danier does not necessarily need to rely on this deference in order to suceed if the appellant is unable to establish a misrepresentation took place.
Of course, it is impossible to know what is really going on in the minds of the esteemed justices until a judgment is released. These are simply my impressions of what occurred at the hearing. For further insight and information about this hearing, please check out Simon Archer’s blog, which includes a list of all of the questions the justices asked.