Canada's high court sides with Danier Leather

Source: Exec Digital Canada

Date :10/15/2007 4:26:36 AM

The Supreme Court of Canada has ruled that Danier Leather did not mislead investors in revenue forecast case.

Nine years ago, investors felt the company failed to reveal that its revenue forecast in the initial prospectus could be affected by a weather-related drop in sales.

In a unanimous ruling that will clarify companies' disclosure obligations when they do an initial public offering, the court ruled that Toronto-based Danier was not required to inform investors of a drop in sales because it didn't involve a material change in the company's business, operations or capital.

The allegations in the long-running legal saga stretch back to Danier's IPO in 1998.

Investors claimed they were provided with inaccurate or incomplete financial information when they first bought shares in the company.

But Canada's highest court ruled Friday that the 1998 fourth-quarter sales drop at the upscale leather apparel retailer constituted a material fact, but not a "material change." Legislation requires companies to disclose significant changes.

"The problem for the appellants is that when a prospectus is accurate at the time of filing," wrote Justice Ian Binnie, "the act limits the obligation of post-filing disclosure to notice of 'material change' (in business operations) expected to have a significant effect on the market price."

Danier welcomed the ruling, saying the decision "removes any uncertainty and allows Danier to continue to build and grow its business."

Danier CEO Jeffrey Wortsman noted that at the time of the IPO's closing "management's analysis showed that the forecast would be achieved and it was in fact achieved."

The class-action suit was brought by lead plaintiffs Douglas and Grace Kerr and James Fredrick Durst. The suit was filed on behalf of investors who bought the stock at the issue price of $11.25 a share for a total of $65 million.

In the May 6, 1998, prospectus, Danier had projected revenues of $5 million for its fiscal fourth quarter, but a company internal analysis four days before the IPO's May 20 closing showed the forecast could be 24 per cent off because unseasonably warm weather was cutting into sales.

Danier issued a revised forecast on June 4, 1998, causing shares to drop to $8.90.

In a civil trial before the Ontario Superior Court, Justice Sidney Lederman awarded damages that could have totalled $12 million for the plaintiffs, but that judgment was overturned by the Ontario Court of Appeal, leading to a final appeal to the Supreme Court.

"Our client is disappointed, obviously," said George Glezos, who represented the investors. "We lost on the main point that after the filing of a prospectus, there is no obligation on the part of an issuer to disclose material facts that arise after the filing but before the close of (stock) distribution."

Glezos claimed a minor victory on the business judgment rule that if there was a duty to disclose material facts, they would have to be disclosed. regardless of the judgment of management.

Danier Leather said it had set aside a provision of $18 million, less future taxes of approximately $4.6 million, related to this action, but as a result of Friday's decision, the provision will be reversed in the first quarter of 2008 and shareholder's equity will increase by about $2 a share.

Danier, which requested that its shares be halted on Friday at 9:45 a.m. ET at the Toronto Stock Exchange to await the court's ruling, had closed at $9.95 on Thursday afternoon. After trading resumed Friday, the stock gained 55 cents or 5.5 per cent.

October 15 2007

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Danier Leather

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