In the following guest post, Deepshikha Dutt, Douglas B.B. Stewart,of and Frank E.P. Bowman of the Dentons law firm review and analyze a recent decision of the Ontario Superior Court of Justice relating to the liabilities of directors and officers under Ontario statutory law for misrepresentations in offering statements. This article is republished here with permission from Dentons. I would like to thank Deepshikha, Douglas, and Frank for allowing me to publish their article here. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit an article. Here is Deepshikha, Douglas, and Frank’s article.
For the first time, the Ontario Superior Court of Justice released a decision that considered issues of statutory misrepresentation in an offering statement under the Credit Unions and Caisses Populaires Act, 1994[i] (Act). Polla v. Croatian (Toronto) Credit Union[ii] also provides extensive guidance on issues of directors’ and officers’ liability more generally. There is very limited jurisprudence in this area, and this landmark decision is expected to provide valuable guidance to boards and insurers on risk prevention. This insight provides a high-level overview of the decision.
The plaintiff, Ferdinando Polla (Polla), invested CA$5 million in the Croatian Credit Union (CCU) after the struggling credit union filed an offering statement in order to raise funds. The process was heavily supervised by CCU’s regulators, the Deposit Insurance Corporation of Ontario (DICO) and the Financial Services Commission of Ontario (FSCO). However, as a result of various transactions that followed the investment in which Polla was personally involved, as well as Josip Vinski, CCU’s former chief executive officer, the credit union was put into administration by DICO and subsequently liquidated.
Following liquidation, additional and separate issues were discovered at the CCU involving a fraudulent mortgage scheme. Polla commenced an action against the board of directors of CCU (Board) under s. 82(3)(c) of the Act, which provides a direct cause of action if a misrepresentation in the offering statement can be proved. Over the course of the trial, Polla abandoned his original claims of misrepresentation and negligence against the defendants, and sought an amended statement of claim at trial that added a new allegation that the defendants misrepresented CCU’s lending services in the offering statement. Ultimately, the remaining issue was whether the description of CCU’s lending services as being based on a property’s “appraised value” in the offering statement was a material misrepresentation.
Polla brought his claim against the Board under s. 82(1) of the Act, which provides that “if an offering statement … contains a misrepresentation, a purchaser of a security shall be deemed to have relied upon the misrepresentation if it was a misrepresentation when the purchase was made.” Section 82(3) granted Polla the right to pursue action against the Board[iii]. Section 82(6) of the Act defines a misrepresentation as 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 was made. If such a misrepresentation is established, s. 82(5) of the Act states that there will be no liability if it can be demonstrated that the defendants did not believe, nor had any reasonable grounds to believe, that there had been a misrepresentation.
- Common law negligence – A high threshold
Polla failed to establish that the directors, in their individual capacity, owed him a duty care, which is necessary for a successful claim for common law negligence. The Court affirmed that the threshold to commence such a claim against directors is extremely high, and arises in instances where the directors’ conduct is tortious, or exhibits an interest that is separate and distinct from that of the entity.[iv]
Relying on evidence that showed “the Board was not involved in the day-to-day operations of CCU, … obtained reasonable assurances from various sources and experts, received and reviewed numerous reports from numerous entities and audits,” and sought to address concerns raised by such reports, the Court found the Board acted diligently and that the claim against the directors in common law negligence could not proceed.[v]
- Statutory misrepresentation
A significant issue that evolved in this case was whether the offering statement contained a misrepresentation with respect to CCU’s lending services, and whether the defendants were liable for misrepresenting the CCU’s lending policies and practices. Polla submitted that the defendants knew mortgages were being approved without third party appraisals, and that it was misleading for the offering statement to provide that mortgage loans were limited to 75 percent of the “appraised value” of the property if no appraisal was obtained. Additionally, Polla asserted that because the offering statement referenced undisclosed policies, the defendants were liable under the Act because it would be unfair to require a complainant to inquire about unspecified policies.[vi]
The Court disagreed with Polla and found there was no material misrepresentation pursuant to s. 82(1), given the expansive nature of what constitutes an “appraisal” in the contextual circumstances. Further, it would be impossible and undesirable for there to be an obligation that all day-to-day operations and policies be specifically disclosed in an offering statement.[vii]
The trial judge further acknowledged that even if there was a misrepresentation, the Board could avail itself of the statutory defence established under s. 82(5) of the Act for the following reasons:[viii]
- Preparation of the offering statement was supervised by lawyers, auditors and regulators, including DICO and FSCO.
- The Board could rely on the oversight of the external auditor, lawyers, DICO and FSCO, such that these parties would not have approved the offering statement if it contained a material misrepresentation.
- The evidence indicated that the parties involved in drafting the offering statement were committed to making full, true and plain disclosure in compliance with the Act.
Although the trial judge took note of the objectives of the statutory framework, she ultimately assessed what was fair and reasonable for the Board, given the practical realities of preparing the offering statement, especially given the massive oversight role undertaken by third party experts and regulatory bodies. Key takeaways for directors and insurers arising from this case include the following:
1. If allegations of specific misrepresentation are not pursued early on by a plaintiff, such allegations may be statute-barred, as each misrepresentation forms a separate cause of action.
2. The statutory regime makes it necessary that plaintiffs rebut the presumption of deemed reliance and the defence provided by the defendants.
3. It is important to establish multiple sources of information and review within the corporation, including separate and distinct roles for directors and officers, in order to demonstrate that the directors have obtained reasonable assurance.
4. Similarly, layers of oversight by third parties, such as experts and regulators, demonstrates that the directors obtained reasonable assurance in the circumstances.
[i] SO 1994, c 11.
[ii] 2018 ONSC 1641.
[iii] Supra note 1, s 82(3)(c).
[iv] Supra note 2, paras 183-184.
[v] Ibid at para 185.
[vi] Ibid at para 195.
[vii] Ibid at para 198.
[viii] Ibid at para 207.