Ontario Court of Appeal Clarifies Definition of “Promoter”

In Goldsmith v. National Bank of Canada,[1] the Ontario Court of Appeal clarified the definition of “promoter” in the context of a proposed secondary market class action under Part XXIII.1 of the Ontario Securities Act.[2] The decision provides comfort to financial institutions and others in the capital markets that deliver traditional commercial lending and investment advisory services to public companies. Further, it provides useful guidance for prospectus filing requirements for issuers and others involved in the creation or reorganization of an issuer’s business.


Goldsmith was one of 13 class actions commenced in Alberta, Ontario and Quebec following the collapse of Poseidon Concepts Corp. (“Poseidon”), an Alberta-based energy company. Poseidon was created in 2011 through a reorganization of Open Range Energy Corp. (“Open Range”). Before the reorganization, Open Range had two separate business segments: a tank rental business and an oil and natural gas exploration and production business. In Q2 2011, Open Range’s board of directors concluded that the trading price of the company’s shares did not reflect the aggregate value of the two business lines and that separating the two business segments would enhance shareholder value. Open Range, with the assistance of advisors, developed a plan of arrangement (the “Arrangement”) to spin off the oil and natural gas business into a new company with Poseidon carrying on the tank rental business. After the spin-out, in January 2012, Poseidon raised $82.5 through a public offering (the “Offering”) in a bought deal.[3]

In a series of corrective disclosures made between November 2012 and February 2013, Poseidon revealed that it had materially overstated revenues and accounts receivable for the tank rental business in its audited financial statements. Shortly thereafter, Poseidon filed for protection under the CCAA. Poseidon was delisted by the Alberta Stock Exchange in May 2013. A multitude of class actions ensued.[4]

In the Goldsmith action, the plaintiff alleged that National Bank of Canada (“NBC”) – either directly, or through its capital markets subsidiary, National Bank Financial (“NBF”) – was liable under s. 138.3(1) of the OSA. Section 138.3(1) provides a cause of action against each “influential person” who “knowingly influenced” an issuer to release a document containing a misrepresentation. An “influential person” includes a “promoter”. The plaintiff alleged that NBC was a “promoter” and that it “knowingly influenced” the release of the Circular (issued in connection with the Arrangement) and the Prospectus (issued in connection with the Offering). Both documents incorporated Poseidon’s audited financial statements by reference, which were alleged to be false or misleading.

A “promoter” is defined in s. 1 of the OSA as a person who “acting alone or in conjunction with one or more other persons, companies, or a combination thereof, directly or indirectly, takes the initiative in founding, organizing or substantially reorganizing the business of an issuer.” The facts said to have made NBC a “promoter” were wide-ranging but centered around the following:

  • NBC’s credit relationship with Open Range and Poseidon, both alone and as part of a lending syndicate, including its consent to the Arrangement;
  • NBF’s role as lead underwriter in the Offering and in prior equity issuances by Open Range;
  • NBF’s role as an exclusive investment advisor to Open Range in connection with the Arrangement; and
  • NBF’s provision of a fairness opinion (which was annexed to the Circular) to Open Range’s board in connection with the Arrangement.

The plaintiff also relied on a number of emails in support of a generalized allegation that individuals at NBC and NBF had “significant and longstanding relationships” with individuals at Open Range.

The motion judge dismissed the plaintiff’s motion for leave to proceed under s. 138.8(1) of the OSA, finding that the plaintiff’s claim had no reasonable possibility of success at trial. The Court of Appeal agreed that the plaintiff’s claim that NBC and/or NBF was a “promoter” that “knowingly influenced” the Circular or Prospectus had no reasonable possibility of success and should be dismissed.

Guidance on the Definition of Promoter

The Court of Appeal in Goldsmith held that to be a “promoter”, one must do more than simply “influence[] the decision maker’s actions”, “indirectly participate[] in the initiative” or “influence or participate with the decision makers” in the founding, organization or reorganization of an issuer’s business.[5] The phrase “[taking] the initiative” connotes “a form of active and autonomous involvement in the organization or reorganization of a company.”[6] A “promoter”, like a “control person”, “insider” or “investment fund manager” – all of whom are “influential persons” under the OSA – is one who “exercise[s] meaningful control over a reporting issuer’s business”.[7]

A “promoter” thus “play[s] a driving role in founding the issuer and consequently wields influence comparable to that of an officer and director”.[8] Mere involvement in an organization or reorganization is not sufficient, “even if that involvement involves important services and support”. To qualify as a “promoter”, the individual or entity must be an “active participant” or a “driving force” behind the reorganization; i.e. at the “very heart of the issuer and the organization”.[9]

Goldsmith makes clear that a bank is not a “promoter” by merely providing financing to an issuer[10] or its consent to a reorganization involving the reallocation of assets and debt.[11] Similarly, financial institutions do not qualify as promoters by providing financial advice to a board of directors[12] or delivering a fairness opinion to the board regarding a plan of arrangement.[13]

The meaning given to the word “promoter” in the Court’s decision has important implications not only for secondary market liability claims, but also for prospectus offerings. Section 58(1) of the OSA requires a “promoter” to sign a prospectus, which exposes a promoter to substantial risk with respect to any misrepresentations in the prospectus. Goldsmith makes clear that a person will be considered a promoter only if it has had active and autonomous involvement in the organization or reorganization of a public company.

[1] 2016 ONCA 22 [Goldsmith].

[2] R.S.O. 1990, c. S-5 [OSA].

[3] Goldsmith, supra note 1 at ¶ 2-5.

[4] Ibid. at ¶ 6.

[5] Goldsmith, at ¶ 35 and 40.

[6]  Ibid. at ¶ 39.

[7] Ibid. at ¶ 42-43.

[8] Ibid. at para. 45.

[9]  Ibid. at ¶ 53, vide Re Gordian Financial Group Inc., 1995 LNABASC 250.

[10] Ibid. at ¶ 71. See also: Ingenito v. Bermec Corp., 441 F. Supp. 525 (S.D.N.Y. 1977), referred to with approval in Goldsmith, ibid., at ¶ 51.

[11] Ibid. at ¶ 72.

[12] Ibid. at ¶ 73

[13] Ibid. at ¶ 75.