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RSM220H1 Chapter Notes -Ontario Securities Commission, Accounts Payable, Gross Profit


Department
Rotman Commerce
Course Code
RSM220H1
Professor
Xin Baohua

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DANIER LEATHER INC: DISCLOSURE REQUIREMENTS AND LITIGATION ACCOUNTING
1
1998 was a hot year. According to Environment Canada, it was so hot that such a year can be expected only once about every 2,500
years. Between December 1997 and November 1998, average temperatures were about 2.5 degrees higher than normal, and record
high temperatures were set in almost every month of the year. In fact, July was the warmest month in Canada ever!
It was a also a record-setting year for Danier Leather Inc. In 1998, the company recorded record revenues
and profits. The company had been in the retail business since 1974 and had evolved into one of the
leading integrated designer-manufacturer-retailers of fashion leather clothing and accessories. The
company also completed an Initial Public Offering (IPO) raising $68 million and making a landmark
transition to a publicly traded company. However, the IPO also brought along a major class action lawsuit
that would take 10 years and the Supreme Court of Canada to resolve. In fact, this became a landmark
case on financial reporting and corporate disclosure responsibilities. Table 1 summarizes the key events
surrounding the IPO.
Table 1: Key events surrounding Danier's prospectus and IPO
Date
Event
May 6, 1998
Danier Leather files prospectus with the Ontario Securities Commission (OSC). Prospectus includes a
financial projection for Q4 and fiscal year ending June 27, 1998. It also includes a standard disclaimer
about forecasts that actual results could vary and that there is no guarantee of reaching the projected
results.
May 16, 1998
Danier Leather management realizes that the record heat is having a negative impact on sales.
Management notes that if such temperatures continue, the company will not meet the projected results
that were disclosed in the prospectus forecast. Management does not release this information.
May 20, 1998
IPO closing - Danier Leather raised $68 million.
June 4, 1998
Management revisits the forecast again and concludes that sales and net income will fall short of the
original forecast that was filed in the prospectus. This time, Danier issues a “material change” report and
a press release noting the change. Over the next few days, Danier’s share price drops by more than 20
percent (see Table 2).
June 27, 1998
Danier Leather Q4 and fiscal year end. Danier meets the projected results contained in the IPO
prospectus.
During the 1999 fiscal year, Danier Leather received an official Statement of Claim (under the Class Proceedings Act - Ontario)
alleging inaccuracies and lack of disclosure in the IPO prospectus. The lawsuit sought compensation for shareholders who faced
subsequent decline in value of their shares. Table 3 summarizes the key events relating to the class action against Danier Leather Inc.
Table 2: Danier Leather stock price following the forecast revision on June 4, 1998 (source: www.tmx.com)
Date
Open
High
Low
Close
Volume
% Change
06/04/1998
11.600
11.600
10.000
10.250
206,400
0.00%
06/05/1998
10.000
10.000
9.500
9.600
1,163,200
-6.34%
06/08/1998
9.600
9.600
8.600
8.650
64,600
-9.90%
06/09/1998
8.650
8.700
8.250
8.250
26,000
-4.62%
06/10/1998
8.700
8.900
8.700
8.900
54,800
7.88%
06/11/1998
9.000
9.000
9.000
9.000
1,900
1.12%
1
This case was written by Dragan Stojanovic and Francesco Bova as a basis for class discussion. Sources include:
CBC News. (2007). Danier Leather prospectus did not mislead investors, top court rules. Retrieved August 23, 2012,
from http://www.cbc.ca/news/business/story/2007/10/12/danier.html?ref=rss
Environment Canada. (2011). Canada's top ten weather stories of 1998. Retrieved August 23, 2012,
from http://www.ec.gc.ca/meteo-weather/default.asp?lang=En&n=3DED7A35-1#t2
Thacker, L. L., & Sheikh, U. M. (2008). Class Actions Beware: The Supreme Court of Canada in Kerr v. Danier Leather
inc. CCCA 2008 National Spring Conference, 36-37.
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06/12/1998
9.000
9.000
9.000
9.000
9,700
0.00%
06/15/1998
9.000
9.000
8.600
8.600
15,900
-4.44%
06/16/1998
9.100
9.100
8.700
8.700
6,000
1.16%
06/17/1998
8.600
8.750
8.600
8.700
18,600
0.00%
06/18/1998
8.750
8.750
8.750
8.750
9,900
0.57%
06/19/1998
8.750
8.750
8.750
8.750
2,200
0.00%
Table 3: Key events relating to the class action against Danier Leather Inc.
Date
Event
October 2001
Class action is certified. Therefore, trial is allowed to proceed.
May 2003
January 2004
Superior Court of Justice (Ontario) conducts the trial.
May 7, 2004
Superior Court of Justice (Ontario) rules against Danier Leather and awards damages to shareholders
who purchased shares under the IPO prospectus. Shareholders who sold their shares between June 4
and June 9, 1998, are to be compensated for the loss in value relative to the IPO purchase price.
Shareholders who continued to hold their shares or sold them after June 9, 1998 are to receive fixed
compensation of $2.33 per share. Danier Leather estimates total damages to be approximately $15
million.
June 2004
Notice of Appeal is filed by Danier Leather.
May 2005
Plaintiffs are awarded portion of costs claimed for the class action. Danier estimates costs of
approximately $3 million to $4 million.
December 2005
Ontario Court of Appeal rules in favour of Danier Leather dismisses class proceedings.
February 2006
Plaintiffs file an appeal with the Supreme Court of Canada.
October 12,
2007
Supreme Court of Canada dismisses Plaintiffs' appeal and concludes that Danier fully complied with
regulatory requirements. As a result, Danier Leather is not liable for damages, and is awarded for
compensation for costs. Danier estimates the positive impact on equity to be about $2 per share. Stock
price jumps $0.55.
DISCUSSION QUESTIONS:
1) What does this case tell you about disclosure requirements for companies pursuing an initial public offering?
2) How should the events relating to the class action lawsuit be represented in the financial statements?
3) Before the trial was concluded May 7th, 2004, did Danier expect to lose 15 Million dollars? Explain why or why not?
4) When the Supreme Court finally reversed the decision, what was the impact on the financials?
5) Why did Danier’s stock price only jump $0.55 a share on October 12, 2007 when the impact on equity was about $2/share?
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