The Short End of the Stick: Bolstering Legal Protections for Short Sellers in Ontario’s Secondary Market

Abstract: In this paper, the author surveys Ontario’s secondary market civil liability framework. The author reviews the constituent continuous disclosure obligations as well as the enforcement mechanisms that are available under common law and statute. The author then explores how short sellers fit into Ontario’s secondary market securities laws. Avenues of legal recourse have seemingly crystallized for ordinary investors who are misled by reporting issuers in the secondary market. However, Ontario’s securities laws are unclear regarding the legal redress that is available to aggrieved short sellers who are resigned to a similar fate. To address this gap, the author argues in favour of strengthening legal protections for short sellers by: (1) recognizing a duty of care owed by public issuers to short sellers; and (2) revising the damage calculation formulas in Part XXIII.1 of Ontario’s Securities Act to ensure that they are capable of compensating short sellers in a manner that is commensurate with their investment position. In doing so, Ontario could better position itself as a robust securities market that provides adequate legal safeguards for diverse types of investors. Moreover, the implementation of remedial measures for short sellers may create market conditions that encourage the spread of negative information about stocks, paving the way for greater accuracy in the price discovery of shares and bolstered market efficiency overall.