Sharbern Holding Inc. Appellant v. Vancouver Airport Centre Ltd., Larco Hospitality Management Inc.,, 2011 SCC 23

SUPREME COURT OF CANADA Citation: Sharbern Holding Inc. v . Vancouver Airport Centre Ltd., 2011 SCC 23, [2011] 2 S.C.R. 175 Date: 20110511 Docket: 33280 Between: Sharbern Holding Inc. Appellant and Vancouver Airport Centre Ltd., Larco Hospitality Management Inc., MM&R Valuation Services Inc. doing business as HVS International — Canada and HVS International — Canada Respondents Coram: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ.

Reasons for Judgment: (paras. 1 to 178) Rothstein J. (McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron and Cromwell JJ. concurring) Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. , 2011 SCC 23, [2011] 2 S.C.R. 175 Sharbern Holding Inc. Appellant v. Vancouver Airport Centre Ltd., Larco Hospitality Management Inc., MM&R Valuation Services Inc. doing business as HVS International — Canada and HVS International — Canada Respondents Indexed as: Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. 2011 SCC 23 File No.: 33280. 2010: October 6; 2011: May 11.

Present: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ. on appeal from the court of appeal for british columbia Commercial law — Property — Disclosure statements — Company developing and marketing two hotels on same property — Purchasers of strata units in each hotel entering into differing agreements with developer — Purchasers of Hilton units not informed of different financial arrangements offered to purchasers of Marriott units — Hilton not performing as expected and owners of Hilton units incurring losses — Whether developer liable for misrepresentation under B.C.

Real Estate Act for material false statements — Whether developer able to avail itself of statutory defence — Whether deemed reliance under Real Estate Act was rebuttable — Real Estate Act, R.S.B.C. 1996, c. 397, s. 75 .

Torts — Negligent misrepresentation — Disclosure statements — Company developing and marketing two hotels on same property — Purchasers of strata units in each hotel entering into differing agreements with developer — Purchasers of Hilton units not informed of different financial arrangements offered to purchasers of Marriott units — Hilton not performing as expected and owners of Hilton units incurring losses — Whether developer liable for negligent misrepresentation under common law.

Fiduciary duty — Agent — Company developing and marketing two hotels on same property — Purchasers of strata units in each hotel entering into differing agreements with developer — Purchasers of Hilton units not informed of different financial arrangements offered to purchasers of Marriott units — Developer entering into non-competition agreements with owners of Marriott units on behalf of owners of Hilton units without prior consent — Hilton not performing as expected and owners of Hilton units incurring losses — Whether developer owed a fiduciary duty to owners of Hilton units — If so, whether developer was in breach of its fiduciary duty.

The respondent developer Vancouver Airport Centre Ltd. (“VAC”) was incorporated for the purpose of developing and marketing two hotels on the same property: a Marriott hotel and a Hilton hotel. The two hotels were essentially identical and were joined by a concourse of shops and other amenities. Purchasers of strata lots in each hotel entered into separate Hotel Asset Management Agreements with VAC. The two hotels were marketed and developed at different times, resulting in differences in the financial arrangements offered to the purchasers of each hotel.

VAC offered purchasers in the Marriott hotel a guarantee and VAC was entitled to a monthly management fee of a percentage of the gross rental revenue as well as an incentive management fee. VAC did not offer purchasers in the Hilton hotel a guarantee, and VAC’s monthly management fee for the Hilton was lower than for the Marriott. The Hilton Disclosure Statement did not disclose the differences in financial arrangements as between the Hilton Owners and the Marriott Owners. The Hilton Owners incurred losses. S represents a class of investors who purchased strata lots in the Hilton hotel from VAC.

S claimed that VAC was liable for failing to disclose details about differences in the financial arrangements given to the Hilton Owners and those given to the Marriott Owners. S alleged that the differences resulted in an undisclosed conflict of interest in that they created an incentive for VAC to favour the Marriott over the Hilton in its operation and management of the two hotels. The trial judge concluded that the undisclosed differences in financial arrangements gave rise to at least a potential conflict of interest, particularly in view of the potential for common management of the two hotels.

She then concluded that VAC negligently misrepresented both the absence of an actual or potential conflict of interest and the nature of the agreements between VAC and the Marriott Owners and found both misrepresentations material. While her reasons were not entirely clear, it appears she found VAC liable both under common law and under the Real Estate Act . The trial judge concluded that under the Real Estate Act the investors were deemed to rely on material misrepresentations by VAC and that such deemed reliance was a non-rebuttable presumption.

The trial judge also found that in its capacity as manager, VAC was a fiduciary of the Hilton Owners, that a conflict existed with respect to VAC’s interests as between the Hilton and the Marriott, and that VAC was liable for breach of fiduciary duty because it did not disclose that conflict. She also found that VAC was liable for breach of fiduciary duty as manager. The Court of Appeal allowed VAC’s appeal. The appellate court found that the details of the financial arrangements between the two hotels were not material.

As to breach of fiduciary duty, the Court of Appeal determined that there was no breach by VAC. Held : The appeal should be dismissed. Both the Securities Act and the Real Estate Act governed VAC’s disclosure obligations. VAC’s disclosure obligations were limited to disclosing specific prescribed matters. VAC issued one document that combined the two Acts’ requirements: the Hilton Disclosure Statement.

S claims that VAC is liable for misrepresentations found in the Hilton Disclosure Statement which resulted in the non-disclosure of a material conflict of interest leading to two potential causes of action: one under s. 75 of the Real Estate Act , and the other at common law under the tort of negligent misrepresentation. Under the Real Estate Act , a material false statement in a disclosure statement will result in the developer being liable to investors for any resulting loss they may have sustained.

However, s. 75 also contains a defence which provides that if the developer had reasonable grounds to believe and did believe that the material false statement was true, it would not be liable. A materiality standard is a legislated and regulatory balancing between too much and too little disclosure. The jurisprudence has recognized that it is not in the interests of investors to be buried in trivial information that will impair decision making.

The Real Estate Act does not define what is meant by the term “material” when it is used in the context of the “material false statement” required for liability under s. 75. Information is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision to invest. In other words, information is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Materiality is a question of mixed law and fact, and except in those cases where common sense inferences are sufficient, the party alleging materiality must provide evidence in support of that contention. In carrying out a materiality assessment, a court must first look at the information disclosed to investors at the time they made their investment decision. The next step is to consider the omitted information against the backdrop of what was disclosed. As part of this second step, a court may consider contextual evidence which

helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of thedisclosed information. Investors’ behaviour evidence is relevant to the materiality assessment. Evidence of common knowledge or,depending upon the circumstances, knowledge specific to particular investors would also be admissible. Nonetheless, in considering thequestion of materiality, the predominant focus is on the disclosed and omitted information. The trial judge erred in law with respect to assessing the materiality of the alleged false statements in three ways.

First, once shehad determined that the differences in financial arrangements created a potential or actual conflict of interest, she found that there was anobligation to disclose them as if they were inherently material. This approach misinterprets the statutory requirement as well as the testfor materiality. While it is true that in certain situations, common sense inferences will be sufficient to establish materiality, in this case,there was evidence to support the opposite inference that the omitted information was not material in the context of what had alreadybeen disclosed.

Therefore, a more detailed analysis of the evidence constituting the total mix of information was required in order tomake a determination about what a reasonable investor would have considered significant. Second, the trial judge erred by reversing the burden of proof of materiality from the plaintiff to the defendant. Once the trialjudge was satisfied that S had proven the existence of a conflict of interest, she turned to VAC to show why it was not material.

Theresult was that she made the determination that the conflict of interest was material without requiring S to satisfy its burden, as plaintiff,of proving materiality. Third, the trial judge erred when she failed to consider all of the evidence relevant to the determination of materiality.

Relevantevidence was available concerning the general economic climate at the time the strata lots were sold, the financial arrangements offeredto Hilton Owners, the disclosure made by VAC of common management and risk factors, and the limited extent of VAC’s ability to actupon the differences in financial arrangements in its own interests. There was also evidence of the conduct of fully informed investors,either prior to making their investment decisions or subsequent to their investment, when they had learned of the guarantee given to theMarriott Owners.

This evidence was relevant to the trial judge’s materiality assessment. While S was not required to prove that investors would not have purchased the Hilton strata lots had they known about thedifferences in financial arrangements, it did have the burden of proving materiality, on a balance of probabilities. S failed to adduceevidence to prove the materiality of the differences in financial arrangements. Even if VAC were shown to have made a material false statement, the statutory defence contained in s. 75(2)(b)(viii) of the RealEstate Act would preclude VAC from being found liable under s. 75(2).

To rely on the defence, VAC had to show that it subjectivelybelieved the representations it made were true and that it objectively had reasonable grounds for such a belief. The statutory defencedoes not appear to have been considered by the trial judge.

Evidence of common industry practices and of VAC’s limited practicalmeans and incentives to prefer the Marriott hotel over the Hilton hotel indicates that VAC subjectively believed, and objectively hadreasonable grounds to believe, that it was making true statements when it did not disclose the details of the differences in financialarrangements and represented in the Hilton Disclosure Statement that it had entered into agreements with the Marriott that were similarin form and substance to those governing the Hilton and that it was not aware of any existing or potential conflicts of interest.

The presumption of deemed reliance under the Real Estate Act was rebuttable when it could be proven, on a balance ofprobabilities, that the investor had knowledge of the misrepresented or omitted facts or information at the time the investor made thepurchase. While the Real Estate Act did not expressly provide for a rebuttable presumption, the use of the word “deemed” does notalways result in a conclusive, non-rebuttable presumption. It is the purpose of the statute that must be examined in order to determine ifthe presumption is rebuttable. VAC is also not liable for the tort of negligent misrepresentation.

The trial judge did not consider whether VAC breached thestandard of care. S’s failure to demonstrate how VAC breached the standard of care is fatal to its common law claim. Although VAC, as manager of the Hilton, had fiduciary obligations to S, S did not discharge its onus of proving a breach offiduciary duty. The nature and scope of the fiduciary duty owed by VAC must be assessed in the context of the contract giving rise tothose duties. When VAC was acting as an issuer, its relationship with S was not fiduciary in nature.

However, when VAC began actingas S’s agent under the Hotel Asset Management Agreement, a fiduciary relationship arose. VAC’s position of conflict in managing boththe Hilton and the Marriott hotels had already been disclosed to S. The disclosure obligations with respect to VAC’s fiduciary duty are different from the disclosure obligations under the RealEstate Act.

As a fiduciary, VAC was obligated to disclose any material facts or information, such as if there was a substantial risk thatVAC’s fiduciary relationship with the Hilton Owners would be materially and adversely affected by VAC’s own interests or by VAC’sduties to another. VAC’s statutory duty was simply to disclose to investors certain prescribed information, without making material falsestatements. It is also necessary to inquire whether circumstances changed during the course of the fiduciary relationship such as torequire VAC to make additional disclosure and obtain renewed consent.

S did not adduce evidence to establish that the different financial arrangements constituted material facts or information beyondwhat had already been disclosed by VAC. S also failed to establish the materiality of the non-competition agreement implemented byVAC to prevent the Hilton and Marriott hotels from undercutting each other’s room rates. The evidence before the trial court could notsupport a finding that VAC was liable for a breach of fiduciary duty either for failing to disclose the differences in financialarrangements or in implementing the non-competition policy. Cases Cited Discussed: Kerr v.

Danier Leather Inc., 2007 SCC 44, [2007] 3 S.C.R. 331; TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438(1976), rev’g 512 F.2d 324 (1975); Queen v. Cognos Inc., (SCC), [1993] 1 S.C.R. 87; referred to: Sparling v. RoyalTrustco Ltd. (1984), (ON CA), 6 D.L.R. (4th) 682, aff’d (SCC), [1986] 2 S.C.R. 537; Harris v.Universal Explorations Ltd. (1982), 1982 ABCA 87 , 17 B.L.R. 135; Inmet Mining Corp. v. Homestake Canada Inc., 2003BCCA 610, 189 B.C.A.C. 251; Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (1973); Mills v. Electric Auto-Lite Co., 396 U.S. 375(1970); Basic Inc. v.

Levinson, 485 U.S. 224 (1988); Maple Leaf Foods Inc. v. Schneider Corp. (1998), (ON CA), 42

O.R. (3d) 177; Van de Perre v. Edwards, 2001 SCC 60, [2001] 2 S.C.R. 1014; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235;Hollis v. Dow Corning Corp., (SCC), [1995] 4 S.C.R. 634; St. Peter’s Evangelical Lutheran Church v. Ottawa, (SCC), [1982] 2 S.C.R. 616; R. v. Loxdale (1758), 1 Burr. 445, 97 E.R. 394; Nova, an Alberta Corp. v. Amoco CanadaPetroleum Co., (SCC), [1981] 2 S.C.R. 437; Frame v. Smith, (SCC), [1987] 2 S.C.R. 99; Galambos v.Perez, 2009 SCC 48, [2009] 3 S.C.R. 247; McGuire v. Graham (1908), 11 O.W.R. 999; R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631.

Statutes and Regulations Cited Class Proceedings Act, R.S.B.C. 1996, c. 50, s. 37. Real Estate Act, R.S.B.C. 1996, c. 397 [rep. 2004, c. 42, s. 146], ss. 66, 75. Real Estate Development Marketing Act, S.B.C. 2004, c. 41, ss. 22(3), (5). Securities Act, R.S.B.C. 1996, c. 418, ss. 45(2)(5), 74(2)(4), 131. Authors Cited British Columbia. Securities Commission. Notice and

Interpretation Note No. 96/36. “Real Estate Securities”, October 10, 1996(online: www.bcsc.bc.ca/print.asp?id=3727). Canadian Securities Administrators. National Policy 51-201 Disclosure Standards, July 12, 2002. Ng, Michael. Fiduciary Duties: Obligations of Loyalty and Faithfulness. Aurora, Ont.: Canada Law Book, 2003 (loose-leaf updatedMay 2007). Reynolds, F. M. B. Bowstead and Reynolds on Agency, 17th ed. London: Sweet & Maxwell, 2001. United States. Securities and Exchange Commission. SEC Staff Accounting Bulletin: No. 99 — “Materiality”, August 12, 1999(online: www.sec.gov/interps/account/sab99.htm).

Waters’ Law of Trusts in Canada, 3rd ed. by Donovan W. M. Waters, Mark R. Gillen and Lionel D. Smith. Toronto: ThomsonCarswell, 2005. APPEAL from a judgment of the British Columbia Court of Appeal (Ryan, Chiasson and D. Smith JJ.A.), 2009 BCCA 224, 57B.L.R. (4th) 1, 93 B.C.L.R. (4th) 256, 271 B.C.A.C. 116, 458 W.A.C. 116, [2009] B.C.J. No. 1007 (QL), 2009 CarswellBC 1337,reversing a decision of Wedge J., 2007 BCSC 1262, 38 B.L.R. (4th) 171, [2007] B.C.J. No. 1845 (QL), 2007 CarswellBC 1948, withsupplementary reasons, 2008 BCSC 245 . Appeal dismissed. Stephen R. Schachter, Q.C., and Geoffrey B.

Gomery, for the appellant. Peter A. Gall, Q.C., Donald R. Munroe, Q.C., M. Ali Lakhani and Edward Iacobucci, for the respondents. The judgment of the Court was delivered by Rothstein J. — TABLE OF CONTENTS Paragraph

I. Introduction .................................................................................................... 1 II. Facts ................................................................................................................ 9 A. The Hilton and Marriott Hotels ....................................................................... 9 B. Procedural Background ................................................................................ 17 III. Lower Court Decisions ................................................................................. 19 A.

British Columbia Supreme Court, 2007 BCSC 1262, 38 B.L.R. (4th) 171 ... 19 B. British Columbia Court of Appeal, 2009 BCCA 224, 57 B.L.R. (4th) 1 ....... 23 IV. Issues ............................................................................................................ 26 V. Analysis ........................................................................................................ 27 A. Misrepresentation Under the Real Estate Act ............................................... 27

(1) VAC’s Statutory Disclosure Obligations ..................................................... 27

(2) Liability Under the Real Estate Act .............................................................. 37

(3) Materiality ..................................................................................................... 40

(4) The Test for Materiality ................................................................................ 44

(5) Analysis of the Trial Judge’s Materiality Assessment .................................. 62 (

a) The Economic Environment .......................................................................... 74 (

b) Financial Benefits to Hilton Owners ............................................................. 75 (

c) Disclosure of Common Ownership and/or Management and Risk Factors .. 76 (

d) VAC Had No Practical Means or Incentive to Favour the Marriott ............. 78 (

e) Evidence of Conduct of Fully Informed Investor ........................................... 81 (

f) Evidence of the Investor Committee Meetings ............................................... 82

(6) Sharbern’s Burden of Proof .......................................................................... 86

(7) Conclusions on Materiality ........................................................................... 91 B. The Statutory Defence ................................................................................... 92

(1) The Legal Test .............................................................................................. 92

(2) Common Industry Practice Evidence ........................................................... 97

(3) Evidence of Limited Practical Means and Incentives to Prefer ................. 102

(4) No Evidence to Negate the Defence .......................................................... 109 C. Deemed Reliance ........................................................................................ 112 D. Common Law Negligent Misrepresentation ................................................ 120 E. Breach of Fiduciary Duty ........................................................................... 131

(1) Lower Court Treatment of the Fiduciary Duty Issues ............................... 132

(2) A Fiduciary Relationship Existed ............................................................... 138

(3) Distinguishing the Misrepresentation and Fiduciary Duty Claims ............. 144

(4) Disclosing the Compensation Differences .................................................. 147

(5) The Non-Competition Agreement .............................................................. 161 VI.

Summary and Conclusions ......................................................................... 168

[ 1 ] I. Introduction [1] When securities are offered to the general public, the rule of caveat emptor no longer applies. Securities legislation imposes on issuers a statutory duty of disclosure. That duty may vary in detail from one Act to another or from one jurisdiction to another. However, the common theme is that issuers must disclose to potential investors information affecting their investment decision.

Even so, issuers are not subject to an indeterminate obligation, such that an unhappy investor may seize on any trivial or unimportant fact that was not disclosed to render an issuer liable for the investor’s losses.

Rather than issuers being required to provide unlimited disclosure, disclosure obligations have been enacted to provide a balance between too much and too little disclosure. [ 2 ] The appeal arises from a class action lawsuit in which the appellant, Sharbern Holding Inc. (“Sharbern”), represents a class of investors who purchased strata lots in a Hilton hotel (the “Hilton Owners”) from the respondent developer, Vancouver Airport Centre Ltd. (“VAC”).

Sharbern claimed that VAC was liable for failing to disclose details about differences in the financial arrangements given to the Hilton Owners, and those given to purchasers of strata lots in the adjacent Marriott hotel (the “Marriott Owners”) that VAC was developing on the same property. Sharbern alleged that the differences resulted in an undisclosed conflict of interest in that they created an incentive for VAC to favour the Marriott over the Hilton in its operation and management of the two hotels. [ 3 ] Two main questions are raised on appeal.

The first is whether VAC is liable for alleged misrepresentations contained in the offering memorandum and disclosure statement (the “Hilton Disclosure Statement”) that VAC used to sell the Hilton strata lots. The second is whether VAC is liable for breach of fiduciary duty when it acted as manager of the Hilton under an agreement (the “Hotel Asset Management Agreement”) entered into between VAC and the Hilton Owners, including Sharbern.

In the reasons that follow, I conclude that Sharbern’s claims fail on both grounds, and I would dismiss the appeal. [ 4 ] As to the first question, I am of the opinion that the trial judge erred in law in concluding that VAC is liable for misrepresentation, either under the statutory cause of action found in the Real Estate Act , R.S.B.C. 1996, c. 397, or under the common law of negligent misrepresentation. [ 5 ] Under s. 75 of the Real Estate Act , VAC could only be liable if it is found to have made material false statements to Sharbern, and cannot rely on the defence contained in the section.

I am of the respectful view that the trial judge erred in law with respect to the materiality of the alleged false statements. The legal errors were: treating the conflict of interest as inherently material; reversing the burden of proof of materiality from the plaintiff to the defendant; and failing to consider all of the evidence relevant to the determination of materiality.

She further erred in not considering the statutory defence which would avail to the benefit of VAC. [ 6 ] Although this Court has previously dealt with the issues of materiality and disclosure obligations in the context of securities law, this case represents the first time that the Court has considered the common law test for materiality. Even though the test is not new in Canadian law, this case represents an opportunity to clarify important aspects of the test. [ 7 ] Under the common law of negligent misrepresentation, the trial judge erred by not considering whether VAC breached the standard of care.

As there is no evidence capable of supporting a finding of breach of standard of care, her finding under the common law of negligent misrepresentation cannot stand. [ 8 ] As to the second question, although VAC, as manager of the Hilton, had fiduciary obligations to Sharbern, Sharbern did not discharge its onus of proving a breach of fiduciary duty. A fiduciary is required to disclose material facts and information, and conflicts of interest. VAC’s position of conflict in managing both the Hilton and the Marriott hotels had already been disclosed to Sharbern.

The trial judge again failed to consider all the relevant evidence on the issue of materiality that was before her, and Sharbern did not adduce evidence to support a finding that the different financial arrangements constituted material facts or information beyond what had already been disclosed by VAC. II. Facts A. The Hilton and Marriott Hotels [ 9 ] VAC is owned by Larco Investments Ltd. (“Larco Investments”), a company involved in real estate and hotel development. By the mid 1990s, there was an extraordinary boom in the Richmond hotel market. Larco Investments already owned the

Best Western Richmond Inn in that market, and decided to develop and market two additional hotels on the same property. Itincorporated VAC for that purpose. The Marriott hotel, a strata-titled hotel tower marketed through an offering memorandum anddisclosure statement issued September 11, 1996, opened for business in June 1998. A second, identical strata-titled hotel tower was builtand marketed through the Hilton Disclosure Statement issued February 3, 1998. It opened as a Hilton hotel in June 1999.

The two hotelswere essentially identical and were joined by a concourse of shops and other amenities. [10] Purchasers of strata lots in each hotel entered into separate Hotel Asset Management Agreements with VAC,whereby VAC was given exclusive management of the hotel for 20 years, with an option to renew.

In return, VAC contracted to, amongother things, use commercially reasonable efforts to rent out the strata units, maximize each owner’s proportionate share of moniesavailable for distribution, and faithfully perform its duties and responsibilities and supervise and direct hotel operations. [11] The two strata unit hotels were marketed and developed at different times, resulting in differences in the financialarrangements offered to the purchasers of each hotel.

Since the popularity of marketing a strata unit hotel in an urban area solely for theincome stream was unknown, VAC offered purchasers in the Marriott hotel a gross operating guarantee.

For the first five years of thehotel’s operation, VAC guaranteed a gross return of 12% of the purchase price of the owner’s unit, so that each strata lot owner’s annualproportionate share of funds available for distribution after projected operating expenses and other deductions was a projected net returnof 8.29%. [12] Under the Hotel Asset Management Agreement entered into between the Marriott Owners and VAC, VAC wasentitled to a monthly management fee of 5% of the gross rental revenue, and an incentive management fee equal to 25% of the amountby which the owners’ net annual return on investment exceeded 8%. [13] VAC’s evidence was that it intended to market the Hilton with a guaranteed rate of return, but was advised by LarcoInvestments’ securities solicitor that changes to securities regulations precluded making reference to a guarantee in the Hilton DisclosureStatement.

Instead, VAC marketed the Hilton on the basis of projections.

In an effort to increase the projected return for potentialinvestors of the Hilton strata units, VAC increased the revenue available to them by including food and beverage revenues (which wereretained by VAC for the Marriott hotel), decreasing the management fee charged by VAC under the Hotel Asset ManagementAgreement to 3%, and removing the hotel lobby lease expense. [14] The guaranteed gross return offered to Marriott Owners, and the 5% gross rental revenue and added incentiveprovided to VAC as its fee for managing the Marriott versus the 3% management fee provided to VAC for managing the Hilton(collectively the “Compensation Differences”), are the differences in the financial arrangements made with purchasers of the two hotelsthat are the essential focus of Sharbern’s claims on appeal. [15] While the Hilton Disclosure Statement disclosed that VAC owned the Best Western Richmond Inn and that VACwas currently developing the adjacent Marriott hotel, it did not disclose the Compensation Differences as between the Hilton andMarriott Owners. [16] The marketing of the Hilton strata units was not as successful as that of the Marriott, in which all of the units weresold within a few hours.

At some point, VAC decided to retain the last 24 Hilton units rather than continue to incur significantmarketing costs. Ultimately, neither hotel achieved their anticipated financial performances. By 2001, the Richmond hotel market wasone of the weakest hotel markets in Canada. The hotel market was further weakened by the events of September 11, 2001. The Marriottdid not achieve a 12% gross return on investment for any of the years covered by the 5-year guarantee. As a result, VAC sustainedliability of over $13 million under the guarantee, which was ultimately paid by Larco Investments.

The Hilton Owners incurred lossesinstead of obtaining the projected 16.6% returns. The Hilton did not perform as well as the Marriott. B. Procedural Background [17] On June 16, 2003, Sharbern brought an action against VAC, HVS International — Canada (“HVS”) and LarcoHospitality Management Inc. (formerly known as HMS Hospitality Management Services Ltd. (“HMS”)). HVS was the company thatprepared the financial projections for the Hilton hotel that were included in the Hilton Disclosure Statement.

HMS was an affiliate ofVAC that carried out the day-to-day management of the Hilton hotel, the Marriott hotel and the Best Western Richmond Inn. [18] Sharbern obtained certification of the action as a class proceeding under the Class Proceedings Act, R.S.B.C. 1996,c. 50, on behalf of approximately 200 unit owners (Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2005 BCSC 232 ,aff’d 2006 BCCA 96, 223 B.C.A.C. 80). Twenty-four common issues on liability were certified.

The trial judge summarized what shecalled the “central contentious” common liability issues (2007 BCSC 1262, 38 B.L.R. (4th) 171, at para. 10 and Appendix A), which Iparaphrase as: 1. Whether the financial projections made by HVS were negligent misrepresentations, and whether the investment returns projectedby VAC in the Hilton Disclosure Statement constituted fraudulent or negligent misrepresentations. 2. Whether VAC’s representations about conflicts of interest and the nature of the financial arrangements as between the Hilton andMarriott hotels were fraudulent or negligent. 3.

Whether the members of the Hilton class could be deemed to have relied on any of the impugned representations pursuant to s.75(2) of the Real Estate Act and the effect of the repeal of the Real Estate Act. 4. Whether VAC and HMS owed fiduciary and/or trust duties to the members of the Hilton class, and if so, whether they breachedthose duties. III. Lower Court Decisions A. British Columbia Supreme Court, 2007 BCSC 1262, 38 B.L.R. (4th) 171

[19] Madam Justice Wedge made a number of findings that are not at issue in this appeal. She determined that neitherVAC nor HVS were liable for negligent misrepresentation concerning the financial projections. She observed that the allegation offraud against VAC with respect to the projected investment returns had been withdrawn by Sharbern. She found that HMS did not owefiduciary duties to Sharbern.

In supplemental reasons, she also clarified that VAC was not liable for fraudulent misrepresentation withrespect to its conflict of interest representations because Sharbern did not “prove that VAC did not have an honest belief in therepresentation and either intended to deceive investors or was reckless as to whether it did so” (2008 BCSC 245 , at para. 12). [20] With respect to her findings that are at issue in this appeal, Wedge J. concluded that the undisclosed CompensationDifferences gave rise to at least a potential conflict of interest, particularly in view of the potential for common management of the twohotels.

She then concluded that VAC negligently misrepresented both the absence of an actual or potential conflict of interest and thenature of the agreements between VAC and the Marriott Owners. She found both misrepresentations material. It is not entirely clearfrom Wedge J.’s reasons whether she found VAC liable under the common law or under the Real Estate Act, although I proceed on thebasis that she found VAC liable under both. [21] Wedge J. concluded that under the Real Estate Act, the investors were deemed to rely on material misrepresentationsby VAC.

She determined that such deemed reliance was not a rebuttable presumption, irrespective of the actual knowledge of theinvestors. [22] She also found that in its capacity as manager, VAC was a fiduciary of the Hilton Owners, that a conflict existedwith respect to VAC’s interests as between the Hilton and the Marriott, and that VAC was liable for breach of fiduciary duty because itdid not disclose that conflict.

Finally, she found that VAC was also liable for breach of fiduciary duty as manager, because of a non-competition arrangement that it put in place between the Marriott and the Hilton, preventing each hotel from competing for certaincustomers with the other or with the Richmond Inn. B. British Columbia Court of Appeal, 2009 BCCA 224, 57 B.L.R. (4th) 1 [23] VAC appealed and Sharbern cross-appealed aspects of the trial decision. The Court of Appeal allowed VAC’sappeal, overturning Wedge J.’s findings with respect to misrepresentation, deemed reliance and breach of fiduciary duty.

Sharbern’scross-appeal was dismissed. [24] On the issue of misrepresentation, Chiasson J.A. found that the details of the financial arrangements between thetwo hotels were not material. He observed that at trial “VAC relied on the extensive factual and expert evidence it adduced concerningactual and industry practice in the management of multiple hotels by a single entity” and that “[t]here was no evidence to the contraryand no evidence objectively to support the conclusion a reasonable investor would be concerned about the details of the financialarrangements” (para. 76).

He found that [h]aving made the disclosure [VAC] did, recognizing industry and actual practice and considering the subjective belie[f] of[VAC’s officers and employees], VAC did not misrepresent that it was unaware of any conflict that reasonably could affect materiallythe investment decisions of the Hilton Hotel investors. [para. 84] He therefore ruled that the trial judge had erred in concluding VAC materially misrepresented its conflict of interest and its agreementswith the Marriott Owners. [25] As to breach of fiduciary duty, Chiasson J.A. determined that there was no breach by VAC.

He observed that theanswer to whether VAC was “obliged to tell the Hilton Hotel unit owners the details of its financial arrangements with the Marriott Hotelunit owners . . . depends on whether that information was material” (para. 98). He went on to conclude that “in the circumstances of thiscase, the information objectively was not material” (para. 99). In his view, “the consent given to VAC to act for competing hotels is ananswer to any contention the implementation of the price competition policy was per se a breach of fiduciary duty” (para. 104).

Theissue was again reduced to the question of whether VAC was required to disclose the details of its financial arrangements with theMarriott. Chiasson J.A. concluded it was not. IV. Issues [26] This appeal raises five issues, which I will address in turn: 1. Did the trial judge err in finding that VAC was liable under s. 75 of the Real Estate Act for material false statements? 2. Did the trial judge err in not considering the statutory defence available to a developer under s. 75(2)(b)(viii) of the Real Estate Act,and whether VAC could avail itself of that defence? 3.

Did the trial judge err in finding that the deemed reliance under s. 75(2)(

a) of the Real Estate Act was non-rebuttable? 4. Did the trial judge err in finding that VAC was liable for negligent misrepresentation under the common law? 5. Did the trial judge err in finding VAC liable for breach of fiduciary duty? V. Analysis

A. Misrepresentation Under the Real Estate Act

(1) VAC’s Statutory Disclosure Obligations [ 27 ] I commence with a

summary of the statutory disclosure requirements that were applicable in the context of this case. [ 28 ] The Hilton hotel strata lots were a combination of an interest in real estate and an interest in a rental pool, governed by the Securities Act , R.S.B.C. 1996, c. 418, and the Real Estate Act . Both statutes governed VAC’s disclosure obligations.

Pursuant to those obligations, VAC marketed the strata lots using a document that was a combination of both a Securities Act “offering memorandum” and a Real Estate Act “disclosure statement”. [ 29 ] As to VAC’s disclosure obligations under the Securities Act , the strata lots were marketed on the basis of exemptions then found in ss. 45(2)( 5 ) and 74(2)( 4 ) of that Act. Section 45(2)( 5 ) provided that VAC did not have to register with the British Columbia Securities Commission to trade in the strata lots.

Section 74(2)( 4 ) provided that VAC did not have to provide a Securities Act prospectus for the strata lots.

Both exemptions applied to trades — such as those involving the strata lots — in which a person purchased the security as a principal and the security had an aggregate acquisition cost of not less than a prescribed amount, in this case $97,000. [ 30 ] The minimum acquisition cost and the requirement that the purchaser be acting as principal imply that these conditions serve as a proxy for a degree of sophistication on the part of the investor, justifying a more defined disclosure obligation than that found under the prospectus requirements.

Because the strata lots fell under these Securities Act exemptions, VAC was only required to submit an offering memorandum (British Columbia Securities Commission, Notice and

Interpretation Note No. 96/36, “Real Estate Securities” (online)). VAC’s disclosure obligations under an offering memorandum were limited to disclosing specific matters that were prescribed by the B.C. Securities Commission in a document referred to as Form 43B. [ 31 ] As to VAC’s disclosure obligations under the Real Estate Act , s. 66(1) of that Act provided that the Superintendent of Real Estate could permit VAC to issue a disclosure statement as opposed to a prospectus. The Superintendent of Real Estate appears to have exercised that discretion in this case .

VAC’s disclosure obligations in a disclosure statement were limited to specific matters that were prescribed by the Superintendent of Real Estate (pursuant to Real Estate Act , ss. 66(3)(

a) and (c)). [ 32 ] Rather than issuing a separate offering memorandum and a separate disclosure statement, the Superintendent of Real Estate and the Securities Commission appear to have allowed developers to issue one document that combined the two. The Hilton Disclosure Statement was such a document. In that document, as I have just explained, VAC was only required to disclose certain prescribed matters.

Of those prescribed matters, the only two of relevance to this appeal are Items 9 and 13 of Form 43B. [ 33 ] Item 9 of Form 43B required VAC to include a statement drawing attention to the speculative nature and inherent risks of a real estate investment and to disclose specific factors that “make the offering a risk or speculation”: ITEM 9 Risk Factors

(1) State: A real estate investment is, by its nature, speculative. If a purchaser is purchasing the real estate as an investment, the purchaser should be aware that this investment has not only the usual risks when purchasing real estate, but also those risks that are inherent to the nature of real estate securities.

(2) Disclose the risk factors that make the offering a risk or speculation.

Instructions: Risk factors may include but are not limited to such matters as risks associated with real estate investments generally, reliance on the developer/managers efforts, ability and experience, inexperience of management, lack of financial expertise, reliance on the financial strength of the person offering the guarantee or financial commitment, cash flow and liquidity risks, financing risk, potential liability to make additional contributions beyond initial investments, restricted rights of a holder in the management and control of the strata corporation or business, inability to change the manager, restrictions on resale of the real estate securities, developer/manager conflicts of interests, and where the offering provides holders with a means to participate financially in a business such as a hotel, motel, resort or apartment hotel or other commercial enterprise, the general risks of the business, absence of an operating history of the business, and competition.

(3) If the real estate securities include a rental pool, state: The success or failure of the rental pool will depend in part on the abilities of the manager of the rental pool.

(4) If the owner will be responsible for paying a portion of the costs of the operation of the rental pool, state: If the revenue generated from the rental pool is less than the costs of operating the rental pool, then the purchaser must make additional contributions over and above the purchasers initial investment and financing costs.

(5) If the real estate securities include a guarantee or other financial commitment, state: The ability of [the person providing the guarantee] to perform under the [guarantee or other financial commitment] will depend on the financial strength of [the person]. See [the persons] financial statements on page [*].

There is no assurance that [the person] will have the financial ability to be able to satisfy its obligations under the [guarantee or other financial commitment] and therefore you may not receive any return from your investment. [Text in brackets in original.] [ 34 ] Item 13 of Form 43B required VAC to include a statement describing conflicts of interest and provided: ITEM 13 Conflicts of Interest

Describe any existing or potential conflicts of interest among the developer, manager, promoter . . . in connection with the real estate securities which could reasonably be expected to affect the purchaser’s investment decision. [ 35 ]

Article 4.9(

i) of the Hilton Disclosure Statement is related to the Item 9 obligation to disclose risk factors: 4.9 Risk Factors . . . (

i) Liabilities and Obligations of the Developer. The Developer is currently developing the Vancouver Airport Marriott, a 237 room full service hotel, on the Parent Property. The Vancouver Airport Marriott is scheduled for completion in or about June of 1998. In this regard, the Developer has entered into purchase agreements, ancillary documents similar in form and substance to the Agreements, and certain additional agreements with purchasers of strata lots comprising the Vancouver Airport Marriott, all of which give rise to certain liabilities and obligations of the Developer which could impact upon its ability to perform its obligations under the Agreements. (A.R., vol. II, at p. 164)

Article 4.1 of the Hilton Disclosure Statement provided that “Agreements” meant “the Bylaws, the Hotel Asset Management Agreement, the Hotel Use Covenant, the Joinder in Covenant Agreement and the Purchase Agreement”. [ 36 ]

Article 4.11 is related to the Item 13 obligation to disclose conflicts of interest: 4.11 Conflicts of Interest The Developer is not aware of any existing or potential conflicts of interest . . . that could reasonably be expected to materially affect the purchaser’s investment decision. . . .

(2) Liability Under the Real Estate Act [ 37 ] Sharbern claims that VAC is liable for misrepresentations contained in arts. 4.9(

i) and 4.11 of the Hilton Disclosure Statement in that they resulted in the “non-disclosure of a material conflict of interest” (A.F., at para. 1). There are two potential causes of action here: one under s. 75 of the Real Estate Act , and the other at common law under the tort of negligent misrepresentation. I will first deal with the cause of action under the Real Estate Act . [ 38 ]

Section 75 of the Real Estate Act provides the statutory mechanism pursuant to which an investor can hold a developer liable with respect to the representations found in a disclosure statement. Under the Real Estate Act , if a “material false statement” is contained in a disclosure statement, the developer will be liable to investors for any resulting loss they may have sustained, and investors are deemed to have relied upon the representations made in the disclosure statement.

However, s. 75 also contains a defence which provides that if the developer had reasonable grounds to believe and did believe that the material false statement was true, it would not be liable. (Although s. 75 uses the term “prospectus”, a disclosure statement is deemed under s. 66(2) of the Real Estate Act to be a prospectus for the purposes of the section.) The relevant parts of s. 75 of the Real Estate Act provide: 75

(1) In this section, “prospectus” includes every statement and report and

summary of report required to be filed with the prospectus under this Part.

(2) If a prospectus has been accepted for filing by the superintendent under this Part, (

a) every purchaser of any part of the subdivided land, shared interests in land or time share interests to which the prospectus relates is deemed to have relied on the representations made in the prospectus whether the purchaser has received the prospectus or not, and (

b) if any material false statement is contained in the prospectus , (

i) every person who is a director of the developer at the time of the issue of the prospectus, (ii) every person who, having authorized the naming, is named in the prospectus as a director of the developer, (iii) every person who is a developer , and (iv) every person who has authorized the issue of the prospectus is liable to compensate all persons who have purchased the subdivided land, shared interests in land or time share interests for any loss or damage those persons may have sustained, unless it is proved . . . (viii) that, with respect to every untrue statement not purporting to be made on the authority of an expert, or of a public official document or statement, the person had reasonable grounds to believe and did, up to the time of the sale of the subdivided land, shared interests in land or time share interests believe that the statement was true . . . . [ 39 ] Under s. 75(2)(

b) of the Real Estate Act , Sharbern has the onus to demonstrate that either or both of arts. 4.9(

i) and 4.11 contained a “material false statement”. As the plaintiff, Sharbern bears this onus under the principle that the party who alleges a fact has the burden of proving it. Nothing in the language of s. 75 suggests that a plaintiff advancing a statutory cause of action under the Real Estate Act does not bear this onus. In order for art. 4.9(

i) to contain a material false statement, the representation that VAC made

indicating that it had entered into agreements with the Marriott that were “similar in form and substance” to those governing the Hiltonmust be shown to be a material false statement. For art. 4.11 to contain a material false statement, VAC’s representation that it was “notaware of any existing or potential conflicts of interest . . . that could reasonably be expected to materially affect the purchaser’sinvestment decision” must be found to be a material false statement. If Sharbern satisfies that onus, VAC must then demonstrate that ithad reasonable grounds to believe and did believe that the material false statements were true, in order to rely on the defence.

(3) Materiality [40] In Kerr v. Danier Leather Inc., 2007 SCC 44, [2007] 3 S.C.R. 331, Binnie J. wrote that “disclosure lies at the heartof an effective securities regime” and that the extent of disclosure is a matter of legislative policy that involves “[b]alancing the needs ofthe investor community against the burden imposed on issuers” (para. 5).

The materiality standard for disclosure “supplants the ‘buyerbeware’ mind set of the common law with compelled disclosure of relevant information” while “recogniz[ing] the burden” that is placedon issuers to provide such disclosure (para. 32). [41] A materiality standard is a legislated and regulatory balancing between too much and too little disclosure. As theSupreme Court of the United States cautioned in TSC Industries, Inc. v.

Northway, Inc., 426 U.S. 438 (1976), at pp. 448-49: . . . if the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected toliability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause itsimply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking. [42] Sharbern argues that in a prospectus context under the Real Estate Act, “asymmetries in knowledge andvulnerability” exist which would suggest that the materiality standard of disclosure should be high (A.F., at para. 32).

I infer that it isSharbern’s position that when balancing the requirement to disclose in a prospectus context, the emphasis should be on more disclosure. Although Sharbern does not suggest that VAC, in its capacity as developer, was acting as a fiduciary, Sharbern does say that VAC’sdisclosure obligations should be the same as that of a fiduciary. [43] Potential investors are indeed vulnerable to the superior knowledge of an issuer as to what need and need not bedisclosed. That is the reason for legislated disclosure obligations in a securities context.

However, the jurisprudence has recognized thatit is not in the interests of investors to be buried “in an avalanche of trivial information” that will impair decision making (TSCIndustries, at p. 448). As I will explain, the materiality standard calls for the disclosure of information that a reasonable investor wouldconsider important in making an investment decision.

(4) The Test for Materiality [44] The Real Estate Act does not define what is meant by the term “material” when it is used in the context of the“material false statement” required for liability under s. 75. The parties submit that in interpreting materiality under s. 75, the Courtshould adopt the approach set out by the Supreme Court of the United States in TSC Industries.

In that case, the materiality of anomitted fact in a proxy solicitation context was determined based on whether there was a substantial likelihood that the disclosure of theomitted fact would have assumed actual significance in the deliberations of a reasonable investor. [45] The materiality test was described by the U.S. Supreme Court in TSC Industries: . . . An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider itimportant in deciding how to vote.

This standard is fully consistent with Mills’ general description of materiality as a requirement that“the defect have a significant propensity to affect the voting process.” It does not require proof of a substantial likelihood that disclosureof the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of asubstantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations ofthe reasonable shareholder.

Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would havebeen viewed by the reasonable investor as having significantly altered the “total mix” of information made available. [Emphasis inoriginal; p. 449.] The U.S. Supreme Court characterized materiality “as a mixed question of law and fact, involving as it does the application of a legalstandard to a particular set of facts” (p. 450). [46] The TSC Industries test is not a new concept in Canadian securities law. The test has been adopted by a number ofCanadian appellate courts: see Sparling v.

Royal Trustco Ltd. (1984), (ON CA), 6 D.L.R. (4th) 682 (Ont. C.A.), aff’d (SCC), [1986] 2 S.C.R. 537; Harris v. Universal Explorations Ltd. (1982), 1982 ABCA 87 , 17 B.L.R. 135(Alta. C.A.); and Inmet Mining Corp. v. Homestake Canada Inc., 2003 BCCA 610, 189 B.C.A.C. 251. [47] A disclosure statement under the Real Estate Act is analogous to the proxy solicitation in TSC Industries. Theanalogy exists because the two documents share similar characteristics. That is, both are (

i) prepared unilaterally by management or adeveloper, (ii) prepared pursuant to statutory and/or regulatory obligations, (iii) used to provide information to investors (current orpotential) to allow them to make informed choices, and (iv) used by investors in making decisions (either deciding how to vote orwhether to invest). Both are used by investors to make informed investment decisions based on information provided to them by a partythat unilaterally controls what specific information to disclose, pursuant to statutory obligations.

Therefore, it is appropriate to considerthe TSC Industries test to determine the materiality of the representations under the Real Estate Act. [48] The U.S. Supreme Court indicated that it was “universally agreed” that the question of materiality is objective (TSCIndustries, at p. 445). Materiality is based on an examination of how the information would have been viewed by a “reasonableinvestor”. The U.S.

Supreme Court concluded that the objective standard formulated in TSC Industries “best comports with the policies”(p. 449) of the proxy disclosure rules — the purposes of which were “not merely to ensure by judicial means that the transaction, whenjudged by its real terms, is fair and otherwise adequate, but to ensure disclosures by corporate management in order to enable theshareholders to make an informed choice” (p. 448).

[49] In order to define the appropriate threshold as to “just how significant a fact must be” (TSC Industries, at p. 445) to areasonable investor before it becomes material, the court imposed a standard that requires that there must be a “substantial likelihood”that an omitted fact “would” be considered important. This standard was imposed rather than the lesser standard which would requiredisclosure if an omitted fact “might” have been considered important. In adopting the “would” standard, the U.S. Supreme Courtapproved of the words of Chief Judge Friendly of the U.S.

Second Circuit Court of Appeals in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d1281 (1973), where he wrote: We think that, in a context such as this, the “might have been” standard . . . sets somewhat too low a threshold; thevery fact that negligence suffices to invoke liability argues for a realistic standard of materiality. . . . While the difference between“might” and “would” may seem gossamer, the former is too suggestive of mere possibility, however unlikely.

When account is taken ofthe heavy damages that may be imposed, a standard tending toward probability rather than toward mere possibility is more appropriate.[p. 1302] [50] At the same time, the U.S. Supreme Court clarified that a shareholder is not required to prove that the omitted factwould have caused a reasonable investor to change his or her vote. What is required is proof of a substantial likelihood that the omittedfact would have assumed actual significance in the deliberations of a reasonable shareholder.

The standard was seen as consistent withthe court’s description of materiality in its earlier decision in Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970), that the defect oromission “have a significant propensity to affect the voting process” (p. 384 (emphasis in original)). [51] Given that materiality is determined objectively, from the perspective of a reasonable investor, I would add that thesubjective views of the issuer do not come into play when assessing materiality.

As I will discuss later, with respect to VAC’s liabilityunder the Real Estate Act, VAC’s subjective views only are taken into account when considering the defence under s. 75(2)(b)(viii), notwhen considering whether a false statement was material. I make this observation because in art. 4.11 of the Hilton DisclosureStatement VAC represented that it was “not aware of any existing or potential conflicts of interest”.

The Court of Appeal appears tohave treated this language as importing a subjective element into the analysis of VAC’s conflict representation, rather than treating it asan element of the statutory defence. [52] Finally, the U.S. Supreme Court indicated that the importance of an omitted fact must be considered in the light ofwhether it would be viewed by a reasonable investor as having “significantly altered the ‘total mix’ of information made available”. Incertain situations, evidence of the information made available may be such that common sense inferences will be sufficient to establishmateriality.

In other cases, where there is evidence that supports competing inferences, a court may be required to carry out a morecomplex analysis to determine what the reasonable investor would have considered important. For the majority of cases, materiality is acontextual matter, involving the application of a legal standard to specific facts, that must be determined in light of all of the informationthat was made available to an investor. Canadian and American authorities and commentary on materiality indicate that assessingmateriality is a “fact-specific inquiry” (Basic Inc. v.

Levinson, 485 U.S. 224 (1988), at p. 240). Materiality is “to be determined on acase-by-case basis” (p. 250) in light of all of the relevant circumstances. [53] The United States Securities and Exchange Commission (“SEC”), in SEC Staff Accounting Bulletin: No. 99 —“Materiality” (August 12, 1999 (online)), says that quantitative and qualitative factors should be considered in assessing materiality andthat this requires “a full analysis of all relevant considerations” (pp. 2-3).

The SEC wrote that “an assessment of materiality requires thatone views the facts in the context of the ‘surrounding circumstances,’ as the accounting literature puts it, or the ‘total mix’ ofinformation, in the words of the [U.S.] Supreme Court” (p. 3).

A fact-driven, contextual approach to determine materiality is alsorecommended in the Canadian Securities Administrators National Policy 51-201 Disclosure Standards (July 12, 2002). [54] Despite materiality being a question of mixed law and fact, Sharbern asserts that “there is no need for a plaintiff totender industry or expert evidence as to what would influence a reasonable investor because the question of materiality of conflicts ofinterest in a prospectus is uniquely for the court, involving a question of construction” (A.F., at para. 40).

To support this assertion,Sharbern refers to the words of Binnie J. in Kerr where he wrote that “disclosure is a matter of legal obligation” (para. 54). In Kerr,Binnie J. was writing in the context of explaining that the business judgment rule “should not be used to qualify or undermine the duty ofdisclosure” (ibid.). [55] The business judgment rule is applied by courts when they are asked to resolve disputes involving business decisionsmade by managers (Kerr, at para. 54). In Kerr, Binnie J. adopted Weiler J.A.’s description of the business judgment rule at p. 192 inMaple Leaf Foods Inc. v.

Schneider Corp. (1998), (ON CA), 42 O.R. (3d) 177 (C.A.) as follows: The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken iswithin a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events mayhave cast doubt on the board’s determination.

As long as the directors have selected one of several reasonable alternatives, deference isaccorded to the board’s decision . . . . [Emphasis deleted . . . .] [Text in brackets in original; para. 54.] [56] Binnie J. explained that the business judgment rule has been traditionally justified with respect to business decisionsbecause (i) “judges are less expert than managers in making business decisions”, and (ii) “[i]n order to maximize returns forshareholders, managers should be free to take reasonable risks without having to worry that their business choices will later be second-guessed by judges” (Kerr, at para. 58).

These traditional justifications for the rule “do not apply to disclosure decisions” (ibid.). [57] As I have explained, the question of materiality involves the application of a legal standard to a given set of facts. Judges are not less expert than business managers when it comes to the application of a legal standard to a given set of facts; neither domanagers’ assessments of risk have anything to do with meeting their disclosure obligations.

As Binnie J. observed, “[i]t is for thelegislature and the courts, not business management, to set the legal disclosure requirements” (Kerr, at para. 55). [58] Nothing in these reasons departs from the law as set out in Kerr. VAC’s statutory obligation in this case was todisclose certain prescribed matters and, in doing so, to not make material false statements. While VAC made its own assessment of whatinformation it was required to include in the Hilton Disclosure Statement, it is the court that determines whether the disclosure made

meets VAC’s legal obligations. The court must therefore inquire into what the reasonable investor would consider as significantly altering the total mix of information made available. This is a fact-specific inquiry, and except in those cases where common sense inferences are sufficient, the party alleging materiality must provide evidence in support of that contention. [ 59 ] In carrying out a materiality assessment, a court must first look at the information disclosed to investors at the time they made their investment decision.

In the present case, what I will refer to as “disclosed information” was the information contained in the Hilton Disclosure Statement. The next step in determining whether an omitted fact or information (“omitted information”) would be considered as significantly altering the total mix of information made available is to consider the omitted information against the backdrop of what was disclosed.

In the present case, the significance of the Compensation Differences must be ascertained by comparing the omitted information (the guaranteed rate of return to Marriott Owners and the 5% management fee and added incentive payable to VAC by the Marriott Owners) to the disclosed information. As part of this second step, a court may consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information.

In this case, for example, evidence about the strong economic environment at the time investors made their investment decisions would help to evaluate whether the guaranteed rate of return given to Marriott Owners would have been significant in the context of the projections for high occupancy rates for the Hilton hotel that were disclosed in the Hilton Disclosure Statement. [ 60 ] Another type of evidence relevant to the materiality assessment is evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations (“behaviour evidence”).

For example, a plaintiff would not be precluded from introducing evidence, if available, that the defendant acted on a conflict of interest even though that evidence pertained to events arising subsequent to the investors making their investment decisions. Similarly, a defendant would not be precluded from bringing evidence that investors had information not included in the disclosure documents at the time they were making their investment decisions, or that investors who had the information acted in a certain way.

Beyond this behaviour evidence, evidence of common knowledge or, depending upon the circumstances, knowledge specific to particular investors would also be admissible. Nonetheless, in considering the question of materiality, the predominant focus is on the disclosed and omitted information. [ 61 ] In sum, the important aspects of the test for materiality are as follows: i. Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor; ii.

An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available; iii.

The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investor’s deliberations; iv. Materiality involves the application of a legal standard to particular facts. It is a fact-specific inquiry, to be determined on a case- by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors; and v.

The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information.

As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer.

(5) Analysis of the Trial Judge’s Materiality Assessment [ 62 ] I now turn to the trial judge’s materiality assessment. In my respectful view, the trial judge made three interrelated errors of law in her treatment of the materiality of VAC’s alleged conflict of interest stemming from the Compensation Differences, which impact upon her assessment of whether the Hilton Disclosure Statement contained a material false statement. First, she equated the existence of a potential or actual conflict of interest with materiality, essentially treating a conflict of interest as inherently material.

Second, she reversed the onus on Sharbern as plaintiff to prove materiality and placed an onus on VAC to disprove materiality. Third, she failed to consider all of the evidence available to her on the issue of materiality. I will deal with these errors in turn. [ 63 ] Although much time was dedicated to the question in her analysis, the key issue before the trial judge was not whether a potential or actual conflict of interest existed. The existence of non-material conflicts of interest had been acknowledged by VAC in arts. 4.9(

i) and 4.11 of the Hilton Disclosure Statement. Rather, the key issue was whether the Compensation Differences and the potential or actual conflict of interest they created were material , thereby rendering VAC’s failure to disclose them “material false statements” attracting liability under the statute. [ 64 ] A careful review of Wedge J.’s reasons shows that once she had determined that there was a potential or actual conflict of interest, she found that there was an obligation to disclose the conflict as if the existence of the conflict itself was inherently material.

For example, before she had even considered the issue of materiality, Wedge J. states, at para. 310, that “[g]iven the existence of the conflict described above, VAC was required to disclose the nature of those agreements” evidencing the Compensation Differences. Similarly, when speaking about the evidence led by VAC concerning the benefits to the hotels of sharing resources and expenses, she determined that “[i]t is for the investor to decide whether the benefits of cost and resource sharing outweigh the detriment of the conflict.

An investor cannot engage in that weighing process unless the conflict is disclosed” (para. 304). Again, this is before the trial judge had made any determinations with respect to the materiality of the conflict of interest.

[ 65 ] Treating a conflict of interest as inherently material led the trial judge to other manifestations of the same error of law. One is that she misinterpreted the statutory disclosure requirement. She said that the conflict of interest must be disclosed so that investors can weigh its costs and benefits against those of other factors. However, the statutory requirement does not impose on issuers an obligation to disclose all facts that would permit an investor to sort out what was material and what was not.

This approach would not only result in excessive disclosure, regardless of materiality, it would overwhelm investors with information and impair, rather than enhance, their ability to make decisions. [ 66 ] Further, by holding that the failure to disclose the existence of conflict of interest is sufficient to attract liability for a material false statement, the trial judge misinterpreted the test for materiality.

If the mere existence of a potential or actual conflict of interest creates an obligation to disclose it, without a proper inquiry into the materiality of the conflict, this approaches the standard of material fact used by the Court of Appeals in TSC Industries of “all facts which a reasonable stockholder might consider important” ( sub nom. Northway, Inc. v. TSC Industries, Inc. , 512 F.2d 324 (7th Cir. 1975), at para. 3). That standard has been rejected by the U.S.

Supreme Court and now by this Court in these reasons. [ 67 ] In assessing materiality, the trial judge pointed to the test set out in TSC Industries and concluded: I am satisfied that VAC’s ability to make more money under the Marriott guarantee when a potential customer chose the Marriott over the Hilton would have assumed actual significance in the deliberations of a reasonable investor, as would the fact that VAC made more money in management fees if the Marriott revenue was relatively higher than the Hilton revenue. [para. 321] However, she does not address how or why there is a substantial likelihood that the Compensation Differences would be viewed by reasonable investors in the Hilton strata lots as significantly altering the total mix of the information made available.

She appears to make a common sense inference that the Compensation Differences would have been material, without offering any analysis of how the conflict created by the Compensation Differences would fit into the mix of all other relevant information, nor does she take notice of what the total mix of information would be. [ 68 ] There was evidence, which I will discuss more fully below, which could have supported the opposite inference, that the Compensation Differences or the omitted information were not material in the context of what had already been disclosed to investors.

For example, the disclosed information included information about the economic environment at the time of the sale of the strata lots; the financial benefits offered to the Hilton Owners, such as the management fee payable to VAC; information about common management by VAC and resulting risk factors; and information relevant to VAC’s limited ability to prefer its own interests. The trial judge also had behaviour evidence led by VAC about what the conduct of fully informed investors had been.

In my view, this evidence demonstrated that competing inferences could be drawn in this case and added a layer of complexity to the materiality analysis that took it outside the realm of drawing a simple, common sense inference. A more detailed analysis of the evidence constituting the “total mix” of information was required in order to make a determination about what a reasonable investor would have considered significant. [ 69 ] Wedge J.’s error in treating a conflict of interest as inherently material is interrelated with her second error, which was to reverse the onus of proof.

Once she was satisfied that Sharbern had proven the existence of a conflict of interest, she turned to VAC to show why it was not material. The result was that she made the determination that the conflict of interest was material without requiring Sharbern to satisfy its burden, as plaintiff, of proving materiality. [ 70 ] Having found a conflict of interest to be inherently material, the trial judge looked to VAC to show proof that it was not.

She considered VAC’s submissions that the Compensation Differences would not have been material in light of all the disclosed information about common management in the Hilton Disclosure Statement. She then stated: “I cannot agree with VAC’s submission concerning materiality” (para. 320) and concluded that “the presence of an actual or potential conflict of interest on the part of [VAC] would concern any reasonable person contemplating investing more than $100,000 in a strata unit” (para. 321).

While observing that “no expert evidence was advanced with respect to the knowledge of the reasonable investor” (para. 317), she neither proceeded with an analysis of other evidence of materiality adduced by Sharbern, nor commented upon the absence of any such evidence. As stated above, the onus of proving the materiality of a fact, statement or omission rests with the person alleging materiality. Sharbern did not adduce any evidence supporting the materiality of the Compensation Differences (other than the Hilton Disclosure Statement and the omitted information).

It did not provide evidence to explain or place the omitted information into the context of the disclosed information in a way that would show its materiality. There is nothing in the trial judge’s analysis to indicate that Sharbern satisfied its burden. [ 71 ] The third error evident from the decision of Wedge J. is that she failed to consider all the evidence available to her on the issue of materiality.

I am not unmindful that “[i]n reviewing the decisions of trial judges in all cases . . . it is important that the appellate court remind itself of the narrow scope of appellate review” with respect to factual matters ( Van de Perre v. Edwards , 2001 SCC 60 , [2001] 2 S.C.R. 1014, at para. 11 ; see also Housen v. Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235, at para. 46 ). When a question of mixed fact and law is at issue, the findings of a trial judge should be deferred to unless it is possible to extricate a legal error ( Housen , at para. 37 ).

Within this narrow scope of review, an appellate court may “reconsider the evidence” proffered at trial when there is a “reasoned belief that the trial judge must have forgotten, ignored or misconceived the evidence in a way that affected his [or her] conclusion” and thereby erred in law ( Van de Perre , at para. 15 ). As I will now explain, Wedge J. ignored and misconceived evidence relevant to the question of materiality in a way that affected her conclusions. [ 72 ] The statutory disclosure requirements only oblige issuers to disclose certain prescribed information.

Where the issuer’s disclosure is challenged, the court must determine whether the omitted information was material in the context of the “total mix” of information made available to the investor. While Wedge J. considered some evidence in relation to materiality (i.e. the language and general circumstances surrounding the Hilton Disclosure Statement), she failed to consider other relevant evidence. For example, she rejected much of the evidence adduced by VAC as being irrelevant to the issue of the existence of a conflict of interest.

There is no indication that she considered that evidence, as she was required to do, in assessing the materiality of the Compensation Differences. [ 73 ] As I will detail below, evidence of factors such as the general economic climate at the time the strata lots were sold, the financial arrangements offered to Hilton Owners, the disclosure made by VAC of common management and risk factors, and the limited extent of VAC’s ability to act upon the Compensation Differences in its own interests may be of little weight in determining

whether a potential or actual conflict of interest existed as a result of the Compensation Differences. However, as mentioned above, those factors constituted disclosed information that would come into play as relevant to the issue of whether reasonable investors would have considered the omitted information important to their investment decision. (

a) The Economic Env

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