Piercing the Corporate Veil

The Alberta Court of Appeal has recently released a decision that adds much needed clarity to when an officer or director of a corporation will be personally liable for torts committed by a corporation. In Hogarth v. Rocky Mountain Slate Inc., 2013 ABCA 57, the Court was tasked with determining whether certain promotional materials created to solicit investments constituted negligent misrepresentations, and to what extent the individual directors who assisted in the preparation of those promotional materials could be personally liable for their actions.

At trial, the Alberta Court of Queen’s Bench held that the statements made in the promotional materials were negligent misrepresentations and where an individual director or officer was involved in communicating the misrepresentations, the ‘corporate veil’ could not shield that individual from liability.

After a lengthy review of the common law in the area of the personal liability for directors and officers, the Court of Appeal reversed the trial Judge’s decision, finding that the lower court failed to properly consider the economic and societal importance of the notion of a limited liability corporation.  Specifically, the Court of Appeal determined that there are important policy reasons for the use of limited liability corporations, namely the ability for individuals to raise capital and take entrepreneurial risks without fear of legal repercussions if the business venture is ultimately unsuccessful. For an individual director or officer to be found liable for a tortious act they have committed in the course of their duties, the act must be such that it was made an on independent, individual basis.  Where it is clear that the director or officer was clearly acting on behalf of the corporation, and all relevant parties understood that the director or officer was acting on behalf of the corporation, and not in their personal capacity, generally no personal liability will be found.

Landon M. Miller

 

Insider Trading — Better Safe Than Sorry

A series of recent Alberta Securities Commission decisions recently underscored the inherent dangers of buying or selling securities of companies in which one is an insider.  The risk is that while the insider may legitimately believe they have no undisclosed material information when they trade, a regulator can later take a different view of the same information.

In its April 10, 2013 decision Re Stan, the respondent insiders were acquitted of insider trading or tipping after a 14-day hearing, but incurred defence and expert witness costs reputed to be in seven figures. The allegedly undisclosed material information involved internal sales and production forecasts. ASC staff believed the internal information to be sufficiently material to preclude trading but the respondents (and the Panel) disagreed.

In Re Keith, a 2012 decision in which BLG acted for one of the respondents, insiders and family members were similarly acquitted of insider trading and tipping arising out of a corporate takeover. The allegedly improper trading took place in the period immediately prior to the announcement of the takeover. There, too, ASC staff believed that the insiders had certain material information not yet generally disclosed. The Panel found that the insiders did not have as much information about the takeover as Staff alleged and what they did have was not material.

An example of a different outcome was Re Kapusta in which insiders traded while in possession of certain information pertaining to an oil discovery.  Staff contended the information was material and the respondents countered that the information was contingent, speculative and not material to the company as a whole in any event. 

The Panel undertook a detailed review of the information, concluded some of it was at a certain point material and determined some of the trades to have contravened the Securities Act.

The lesson is “better safe than sorry”. Insiders always know something that the public doesn’t, so if there is the slightest doubt of whether information is material, the company should consider disclosing it, absent which insiders should think very hard about whether to trade even if they believe they have no undisclosed material information.

John D. Blair, QC
403.232.9723
jblair@blg.com

 

The Roles of the UDP and CCO — Perfection is Not the Standard

The importance of a working understanding of compliance and supervisory obligations of IIROC-regulated entities or Dealer Members cannot be underestimated.  In particular, the roles and responsibilities of the Ultimate Designated Person (the “UDP”) and the Chief Compliance Officer (“CCO”) have been scrutinized in recent decisions of the Investment Industry Regulatory Organization of Canada (“IIROC”).  For example, IIROC released two decisions in 2012 in which the UDP and/or the CCO of IIROC-regulated entities faced disciplinary proceedings in relation to compliance and supervision. BLG was involved in both decisions including securing an acquittal on behalf of top officers of an investment firm. The first, Re Carbonelli & Conway, 2012 IIROC 56 (“Conway & Carbonelli”), was decided on October 5, 2012 and featured the BLG-represented UDP and the CCO of Evergreen Capital Partners Inc. (“Evergreen”). The Notice of Hearing alleged failures on the parts of the UDP and the CCO to establish and maintain adequate internal controls for the use and operation of Evergreen’s client accumulation accounts, contrary to IIROC’s Dealer Member Rule 17.2A. 

Conway & Carbonelli involved a complex fact scenario. In brief, Evergreen, through its Carrying Broker, conducted a large volume of trades with relatively high purchasing costs, for institutional clients. The time to fill each trade order would customarily extend over a period of time, resulting in partially filled trade orders being recorded in an average price inventory account (an “API”). The ordinary process would be for the partial orders to stay in the API accounts until they were filled and booked out through the Carrying Broker. This became problematic when large sums began to remain in the API accounts and were not being booked out.  The growing value of the un-booked amounts in the API accounts, combined with the significant economic downturn in 2008 proved disastrous when the securities were eventually marked to market and the clients rejected the trades as unauthorized.  Ultimately, it was discovered that the head trader of Evergreen had perpetrated a fraud that, together with the un-booked trades accumulated in the API accounts and the market downturn, created the “perfect storm” for Evergreen’s collapse.

With respect to the responsibilities of the UDP and the CCO of Evergreen, the IIROC Hearing Panel concluded that “the standard to be applied to the Respondents is not one of perfection”. Specifically, the Panel stated that “[t]he standard to be applied is not whether or not the Respondents could have done something that might have provided a better result. Instead, the standard expected of the Respondents is that they act as reasonably proficient and diligent individuals…”  The counts against the UDP and CCO in Conway & Carbonelli were ultimately dismissed.

A month later, on November 10, 2012, the disciplinary decision, Re Northern Securities, 2012 IIROC 63 (“Northern Securities”) was decided involving a UDP and CCO that had both failed in many respects in their supervisory and compliance obligations. BLG represented IIROC in this proceeding which saw sanctions levied on the UDP and CCO in question.

Conway & Carbonelli and Northern Securities were decided based on the Dealer Member Rules and in particular Dealer Member Rule 38 which provides the framework for Compliance and Supervision generally.  Since these decisions, though, IIROC has made recent statements which elaborate on and clarify the responsibilities of specific individuals which it appears to view as manning the compliance and supervisory frontlines. On December 17, 2012, IIROC issued a Dealer Member Rule Rules Notice 12-0379 entitled “The Role of Compliance and Supervision” (the “Rules Notice”) which instructed that it was to be read in conjunction with Dealer Member Rule 38. The Rules Notice expressly maintains that the responsibility for compliance generally, extends to “each individual acting on behalf of a firm”.  Notwithstanding this shared responsibility however, the Rules Notice makes it clear that titles such as UDP, CCO and CFO carry specific compliance obligations. In brief, these specific obligations include but are not limited to the following:

UDP:

  • Supervision of the compliance-related activities of the Dealer Member and individuals acting on its behalf;
  • Promotion of compliance by the Dealer Member and individuals acting on its behalf;
  • Establishment and maintenance of an effective compliance system and a compliance culture at the firm;
  • Communication and reinforcement of the importance of compliance within the firm;
  • Ensuring that all staff understand the importance of consulting with the Compliance Department;
  • Ensuring that effective procedures for identifying and escalating all instances of non-compliance are in place; and
  • Ensuring the timely resolution of all instances of non-compliance.

CCO:

  • Establishment and maintenance of policies and procedures for assessing compliance by the Dealer Member and individuals acting on its behalf;
  • Monitoring and assessing the Dealer Member’s compliance with its requirements and applicable securities laws and reporting of the results of the assessment to the board of directors at least annually;
  • Reporting of all material incidents of non-compliance to the UDP;
  • Provision of the board of directors with reasonable assurance that all standards and requirements of applicable securities laws and regulations and the Dealer Member’s requirements are met; and
  • Identification and discussion of material findings contained within IIROC compliance reports, early warning designations, gatekeeper reports, disciplinary actions, compliance risk trend report results and other relevant items in the CCO’s annual report.

CFO:

  • Establishment and maintenance of policies and procedures for the Dealer Member relating to financial requirements; and
  • Monitoring adherence to the Dealer Member’s policies and procedures as necessary to provide reasonable assurance that it complies with all relevant requirements.

The Rules Notice ultimately serves as a concise culmination of statements made and themes captured in Conway & Carbonelli and Northern Securities. It, along with Conway & Carbonelli, Northern Securities and Dealer Member Rule 38 are surely required reading for IIROC-regulated UDPs and CCOs in terms of compliance and supervision.

Loni da Costa
403.232.9696 
ldacosta@blg.com

 

Editor

David Di Paolo
416.367.6108 
ddipaolo@blg.com

Authors

John Blair QC
JBlair@blg.com
403.232.9723

Loni da Costa 
LdaCosta@blg.com
403.232.9696

David Di Paolo 
DDiPaolo@blg.com
416.367.6108

Other Author

Landon Miller

Expertise

Securities, Capital Markets and Public Companies
Securities Litigation