Law Note - Prospectuses: Disclosure and Cost Lessons - Another Look at Danier 

publication 

March 2008 - (Lang Michener In Brief)

Lang Michener In Brief
Almost ten years ago, Danier Leather Inc. ("Danier") issued a prospectus in connection with its initial public offering ("IPO"). The prospectus contained a forecast of anticipated revenues and earnings for the fiscal quarter ending June 27, 1998 and the usual warning that actual results could vary significantly from the forecast. 

After the final prospectus was filed on May 6, 1998, but before the IPO closed on May 20, a Danier internal report (reviewed by manage¬ment on May 16) showed that the intraquarter sales were lagging behind the forecast. The prime suspect was unusually warm weather across most of Canada. Despite the challenge, management concluded that it could still meet projections by the end of the quarter. Danier did not disclose this internal report before the IPO closing. On June 4, approximately two weeks after the closing, Danier issued a news release revising its forecast downward. This precipitated a sharp decline in the share price. By the end of the fourth quarter, sales had recovered and Danier substantially achieved its original forecast. 

A class action was launched against Danier and its senior officers alleging that, because of the internal report showing the lagging sales, the forecast in the prospectus should have been updated. Since it was not, it therefore contained a misrepresentation at the time of the closing. Over the next several years the case went to trial, was appealed to the Ontario Court of Appeal and appealed again to the Supreme Court of Canada. 

The Supreme Court of Canada decision was released in the fall of 2007 and turned down the heat under Danier and its senior officers, and significantly turned it up under the representative plaintiffs in this class action law suit. It upheld the Ontario Court of Appeal decision that Danier and its officers were not liable for misrepresentation and awarded costs to Danier and its officers (a departure from what some thought was to be expected in class actions). 

The Supreme Court also expressed the view that when a material change, as defined in securities legislation, occurs it must be disclosed. Although delivered in a case involving prospectus disclosure, the Court's comments on this point will undoubtedly impact questions relating to issuers' continuous and timely disclosure obligations as well.

By Charlotte Morganti