The ABC of CPP – L

While the Canada Pension Plan (CPP) may be pretty much immune from direct litigation, some energy companies are facing litigation over environmental degradation; cities are now holding fossil fuel companies accountable for impacts within their jurisdiction, and some citizens in the U.S. have joined class-action lawsuits against local polluters all greatly increasing the risk involved in investing in such companies, as the Canada Pension Plan Investment Board (CPPIB) routinely does.

If a company, and its directors and officers, are fined or charged by a regulatory body, or sued in civil court, this poses a substantial risk for those invested in that company and for those invested in the insurers who insure those directors and officers (‘D&O’ liability insurers).

According to Canadian Underwriter, a class action lawsuit by shareholders against five directors and officers of a Vancouver-based mining firm may reach the Supreme Court of Canada.

Directors and officers are at risk of being sued by shareholders if the company’s share price drops; in such cases, D&O liability insurers can be on the hook for millions. In some instances, shareholders may allege that the company and its individual directors and officers misrepresented the financial health of the company at the time the shareholders bought stock in the company.

One such lawsuit is in the works against SouthGobi Resources Ltd., a Vancouver-based coal supplier publically listed on the Toronto Stock Exchange.

SouthGobi gets its revenue from coal mining in Mongolia. The company would stockpile coal in a yard where customers would pick it up. Initially SouthGobi recognized revenue when the coal was dropped to the stockpile. It later changed its accounting method so that revenue was recognized only after the customer loaded coal to their trucks from the stockpile.

Some of their Mongolian customer were not paying their bills and in late 2013 SouthGobi restated its results from previous years. Their share price dropped by 18%. The firm said at the time in a press release that some public statements made earlier were “no longer accurate and should not be relied upon.”

Shareholders of SouthGobi sued the firm, its officers, and directors. In 2015 Ontario Superior Court Justice Edward Belobaba found that a 2013 press release from SouthGobi announcing a restatement of earlier financials “was never put to the Board of Directors before being released and was drafted exclusively” by management.

In 2017, the Court of Appeal for Ontario, in a unanimous decision, granted the shareholder plaintiffs leave to proceed with their lawsuit against individual directors and officers of SouthGobi, in addition to the corporation itself. SouthGobi has appealed this ruling to the Supreme Court of Canada.

The full text of this article, entitled: “Judges at odds on liability of directors and officers in shareholders’ lawsuit” by Greg Meckbach of Canadian Underwriter can be found at:    

https://www.canadianunderwriter.ca/insurance/judges-at-odds-on-liability-of-directors-and-officers-in-shareholders-lawsuit-1004131297/