Most corporate directors wouldn’t dream of making late-night forays down back alleys in the seamier districts of third-world capitals. But they often do the corporate equivalent – signing on as directors of emerging-market companies whose operations and inner financial workings are less than perfectly transparent.
Alex Cobb, of Osler, Hoskin & Harcourt LLP in Toronto, says “everybody took note” of the Puda ruling but he thinks its influence in Canada will be limited. Canada, he says, would likely not go so far as to require a regular physical presence of directors in a foreign country or that they speak the language there.
On the other hand, Cobb says, “the fact that operations are taking place where everybody speaks a language you don’t speak is just not an excuse. If you’re a director, you have to know what’s going on, who’s doing it, pursuant to what rules, how much money is being spent and what it’s being spent on. If you need to work a little harder to find those things out, so be it,” he says. ‘‘And don’t sign anything that’s written in Cyrillic.”
He notes that the OSC was already in the midst of an Emerging Markets Issuer Review when the Sino-Forest scandal broke and that they’ve since released a Guide for Issuers Operating in Emerging Markets. It calls on directors to “exercise additional diligence” to ensure that companies meet OSC requirements. The guide recommends securing independent translators; being wary of over-dependence on local management; exercising scepticism whenever corporate structures appear unusually complex; giving special attention to related-party transactions; identifying and disclosing all risks and particularly those unique to the operating jurisdiction; ensuring timely disclosure and remediation of risks and weaknesses in the business; careful evaluation of credentials of professional experts; and paying special attention to the capabilities of the underwriter and outside auditor, relative to the foreign jurisdiction.
“In the US, discovery [of witnesses] is essentially unlimited,” Cobb says. “In Canada, you get to examine one person. You don’t get these marathon depositions of 25 people.” This, he says, may work as an incentive for plaintiffs to sue individual directors in order to force them into discovery.
Differences in director liability between the two countries are sometimes subtle - and sometimes not, Cobb says. Making this point with an investigator from the US Securities and Exchange Commission (SEC), he put it this way: “We’re a real country – with a flag and everything.”
American citizens can find themselves facing director’s liabilities in several ways under Canadian laws, Cobb says. First, and most obviously, if a company is incorporated under the CBCA or provincial statute, directors can be liable under Canadian law regardless of nationality. Directors of any company acting as an employer in Ontario can be liable for unpaid wages or payroll deductions under the Ontario Employment Standards Act, no matter where the company is incorporated. Any company listed on the TSX is subject to the Securities Act(Ontario) and other “real and substantial connections” to Ontario may also make directors liable in provincial courts. This includes liability for the accuracy of disclosures by issuers of any securities traded within the province, regardless of where the issuer is listed.
“If there is a ‘real and substantial connection’ to Ontario, then an Ontario court may consider that it has jurisdiction,” he says.
Where criminal proceedings are concerned, Cobb notes that there’s a very important difference between the OSC and the SEC. While the SEC has been very successful using no-contest agreements to impose fines and settle cases against companies and individuals for various misdeeds, the OSC is not currently permitted to accept no-contest settlements.
“In order for the OSC to accept a settlement, they need to find fact,” Cobb says. “Any facts you agree to ... will find their into other proceedings [such as civil litigation, and] as a practical matter that means you want to settle with them last.” To change this dynamic, the OSC has proposed allowing no-contest settlements, except where a person has engaged in “egregious, fraudulent or criminal conduct.” But a June 17 hearing on the matter encountered heated opposition from investor advocates and the plaintiffs’ class action bar.
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