Public companies in Canada can reasonably expect a degree of scrutiny by market participants. Analysts might question fiscal projections. Shareholders might question board decisions. Regulators might question the adequacy of the company’s disclosure. But perhaps no class of commentator can create more anxiety to a public company than a well-known short-seller issuing a highly critical report. As we have seen in Canada, such reports have resulted in the total collapse of major public companies.
When a short-seller issues a damning report, the company will almost always pursue a public relations response, out of necessity. But inevitably the Board that has been targeted will ask the question: how do we sue the short-seller? Alternatively, the Board may believe the short-seller report contains material misrepresentations and inaccuracies, and will consider complaining to securities regulators.
No consensus has emerged about what response makes sense from a strategic business standpoint. Some believe that if the Board truly has the courage of its convictions, it will not hesitate to advance claims in the courts or before regulators. Others believe that the diversion of management time and energy to chasing short-sellers sends a terrible message to the market that the company is distracted and not properly executing its business strategy.
Layered onto those business concerns is a new legal concern: in Ontario, defamation claims against short-sellers might get summarily dismissed under the province’s new anti-SLAPP (strategic lawsuits against public participation) statute. This statute has only been used once in Ontario by a short-seller, and in that case, the CEO’s claim against the short-seller survived the preliminary motion. But that outcome arguably turned on the specific facts of that case, and the anti-SLAPP statute still presents a possible challenge to defamation claims against short-sellers.
Canadian companies have yet to find a clear legal path to address short-sellers who issue reports containing facts the company believes to be untrue. And to the extent that a defamation claim was the best option, the viability of that option may have become even less clear.