The recent unanimous decision of the United States Supreme Court in MacQuarie Infrastructure Corporation et al. v. Moab Partners, L.P. et. al (2024) 144 S.Ct. 885 highlights a key distinction between when an issuer's failure to disclose required information is actionable pursuant to private rights of action under U.S. federal securities legislation as compared to statutory secondary market causes of action in Canadian provincial securities laws.
In MacQuarie, the United States Supreme Court ("Court") determined that an issuer's "pure omission" to disclose in its MD&A information required under Item 303 of Securities and Exchange Commission Regulation S-K ("Item 303")[1] did not give rise to a private cause of action under Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act of 1934 (the "1934 Act"). Rule 10b-5(b) (the "Rule") makes it unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading".[2]
The Court observed that the Rule prohibits two things: (1) making an untrue statement of material fact, and (2) omitting to state a material fact necessary to make a statement not misleading. According to the Court, "[l]ogically and by its plain text, the Rule requires identifying affirmative assertions...before determining if other facts are needed to make those statements 'not misleading'". While "half-truths", or "representations that state the truth only so far as it goes, while omitting critical qualifying information" are actionable, pure omissions are not.
Further, the Rule and section 10(b) of the 1934 Act do not create "an affirmative duty to disclose any and all material information". Even where there is a duty to disclose information under other provisions of US federal securities law, Rule 10b-5(b) does not "automatically render silence misleading". Accordingly, a failure to disclose information required by Item 303, which requires an MD&A to disclose all known trends and uncertainties, can support a claim under the Rule "only if the omission renders affirmative statements made misleading".
In reaching its conclusion concerning the meaning of the words of Rule 10b-5(b) the Court considered and contrasted the language of section 11(a) of the Securities Act of 1933 which prohibits any registration statement that "contain[s] an untrue statement of material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading".[3] According to the Court, unlike Rule 10b-5(b), "[b]y its terms, in addition to proscribing lies and half-truths, [section 11(a)] also creates liability for failure to speak on a subject at all".
Accordingly, in order for a claimant to sustain an omissions based claim under Rule 10b-5(b), it will be incumbent upon it to plead an affirmative statement that is rendered misleading by the alleged failure to disclose.
By contrast, the scope of civil liability for omissions based secondary market misrepresentation claims under rights of action in provincial securities legislation in Canada is considerably broader.
Part XXIII.1 of the Ontario Securities Act[4] (the "Act") creates a statutory right of action for damages against specified defendants in respect of the release by a responsible issuer[5] of a document[6] that contains a "misrepresentation"[7]. The definition of "misrepresentation" in section 1.1 of the Act is similar to section 11(a) of the Securities Act of 1933: It is "an untrue statement of material fact, or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it is made".
Other provisions of Ontario securities law impose obligations on reporting issuers to disclose "material facts" and information in their periodic disclosure documents, such as in their MD&A.[8] Ontario courts have recognized that a failure to disclose a material fact that is required to be disclosed is actionable under Part XXIII.1.[9] In the language of the United States Supreme Court in Macquarie, this constitutes liability for a "pure" omission.
In addition, Part XXIII.1 creates a separate statutory cause of action against a responsible issuer for failure to make a "timely disclosure".[10] Under section 75 of the Act where a "material change" occurs in the affairs of a reporting issuer, it is required to forthwith issue and file a news release disclosing the nature and substance of the change. Ontario courts have recognized that an issuer's failure to promptly issue a news release announcing a material change in its business, operations or capital is actionable under section 138.3(4).[11] This also exposes responsible issuers to liability for "pure" omissions.
Key Takeaway
It is important that counsel involved in the defence of parallel securities class actions against the same issuer in Canada and the US arising from the same disclosures understand the differences in the available causes of action in each jurisdiction for the purpose of developing a global defence strategy. The scope of liability for omissions is but one example.
Footnotes
1. Item 303 requires disclosure of "known trends or uncertainties that have had or that are reasonably expected to have a material favourable or unfavourable impact on net sales or revenues or income from continuing operations" in periodic filings with the SEC.
2. emphasis added, 17 C.F.R. 240.10b-5(b)
3. emphasis added, 15 U.S.C. 77k(a)
4. R.S.O. 1990, c. S.5, as amended.
5. Defined in section 138.3 to mean a reporting issuer and any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded.
6. Defined in Section 138.3(1) to include documents filed with the Ontario Securities Commission ("Commission") or required to be filed with the Commission.
7. Section 138.3(1). "Responsible issuer" is defined in section 138.1 as meaning a reporting issuer or "any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded.
8. See National Instrument 51-102 – Continuous Disclosure Obligations.
9. See, for example, Dugal v. Manulife Financial Corp., 2013. O.J. No. 3455 (S.C.J.); upheld 2014. O.J. No. 981 (Div. Ct.)
10. Section 138.3(4) of the Act.
11. See, for example, Markowich v. Lundin Mining Corporation, 2023 ONCA 359.
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