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Background

The plaintiffs sued Danier, its President/CEO and its CFO under the section of the Act dealing with liability for a misrepresentation in a prospectus in relation to a financial forecast contained in the IPO final prospectus dated May 6, 1998 (the "Prospectus").

Pursuant to the Act, a "misrepresentation" is a) an untrue statement of material fact, or b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made.

The Prospectus contained a forecast for the fourth quarter and the 1998 fiscal year (the "Original Forecast"). The IPO closed approximately seven and one half weeks into the fourth quarter. The CFO reviewed the intra-Q4 financial results prior to closing. Despite a reduction in revenue and an estimated loss rather than a profit over the first seven weeks, the CEO and CFO remained of the view that the Original Forecast was achievable. Continuing poor sales prompted the CEO and CFO to engage in a further examination of Danier's financial situation. They concluded that unseasonably hot weather across most of Canada caused the sales decline. Danier informed the underwriters shortly after closing that the company may not meet the Original Forecast. Management then consulted legal counsel. Approximately two weeks after closing, Danier announced revisions to the Original Forecast. The revised forecast included a 28% reduction in quarterly revenues, and a threefold increase of net loss for the quarter. Notwithstanding the revised forecast, Danier substantially achieved the results of the Original Forecast by the end of the fourth quarter. Danier, its CEO and its CFO were found liable for misrepresentations.

Conclusion

The case sets an exacting standard of continuing scrutiny of the accuracy of forecasts. As well, the case's principles could have broader application. The case demonstrates how disclosure obligations can be expanded through the "omitted facts as misleading" branch of the Act's misrepresentation definition.

The case should encourage a higher level of caution by issuers and senior management, particularly in the context of using forward-looking information. If included in a prospectus, such information must be accurate as of the date of the IPO closing. Accordingly, senior management must give continuing attention to any subsequent facts that emerge prior to the date of closing and seek the appropriate consultation with professional advisors. Danier management's failure to inform, and consult with, counsel, the auditors and the underwriters (and the company's board of directors) appears to have weighed heavily against meeting a reasonable prudence standard.

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