News Alert to Canadian Publicly Listed Companies: Continuous Disclosure Obligations Trump the Business Judgment Rule

(March 7, 2019).  Morganti & Co. is please to announce that it represented investors against Ithaca Energy Inc. (“Ithaca Energy”) in Alberta’s first “leave to proceed” motion to advance to trial hearing.  Prior to going to trial the plaintiff investor (a/k/a, representative investor) must obtain leave to proceed to trial from the judge.  This requires the investor to provide evidence that there is reasonable possibility of success that he/she would succeed at the trial, e.g., which is materially less than “on a balance of probabilities” or 51% or more that the company’s document(s) contains a misrepresentation and the public corrective statement(s) is related, e.g., not a mirror-image but merely related, to those misrepresentations.  A misrepresentation is defined as an untrue fact or omitted fact that would significantly alter the total mix of information to the reasonable investor reading that particular document(s) released by the corporation.

In the matter of the leave to proceed hearing against Ithaca Energy, it argued that certain adverse facts about the status of its large scale project (e.g., it was disputing with its engineering firm, labour shortages, and always being approximately 10% behind schedule) were omitted from its news releases and quarterly reports because its senior management relied upon the business judgment rule to subjectively believe that the third party engineering firm was posturing against Ithaca Energy to increase the contract price.  This line of defense is comparable to what we successfully disputed against another company, which argued that its senior management relied upon the business judgment rule to omit adverse facts from its news releases because they subjectively believed the adverse facts were not reliable.

Morganti & Co. and JSS lawyers argued that Ithaca Energy’s position directly violated the famous Supreme Court of Canada case of Kerr v. Daniel Leather Inc., 2007 SCC 44, at paragraphs 54 and 55, which was first followed in the context of a leave to proceed motion in Wong v. Pretium Resources Inc., 2017 ONSC 3361, at paragraphs 31 and 38.  Specifically, potential and the then current investors of Ithaca Energy should have been given all the then current material facts so they could make their own judgment about whether to accept or not management’s business judgment about the future outcome of the identified problems.

The parties anticipate the court’s decision to be released prior to the summer.  This decision will be the first court decision in Alberta on the topic of leave to proceed to trial with a statutory secondary market shareholder claim.

The investors are represented by Morganti & Co. lawyers Andrew Morganti and Ian Literovich as well as JSS Barristers (Calgary, AB) lawyer Gavin Price.