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This thread is over a month old! I have a new problem though, if you want.It's pretty much straight law though, and I doubt you'll want to read it. Here.
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Home Range Beef Inc. is a producer of beef and a packer of beef products that specializes in premium free-range beef. The company was incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCAâ€) in 1992. Home Range has one facility just outside Vancouver and another just outside of Toronto. The company is registered in British Columbia and has its headquarters in Vancouver. In 1998, Home Range made an initial public offering of common shares on the Toronto Stock Exchange (“TSXâ€). The company’s fiscal year for 2006 ended March 31, 2006.
In early July 2006 Home Range’s shares were trading at $10 per share. Home Range issued its annual report for the 2006 fiscal year on July 10, 2006. A forecast was included in the Management Discussion and Analysis (“MD&Aâ€). The forecast stated that “management expects that Home Range will increase revenue in the 2007 fiscal year by at least 10% over the 2006 fiscal yearâ€. The forecast also stated that management expected significant increases in earnings before interest, taxes, depreciation, and amortization (“EBITDAâ€) and earnings per share (“EPSâ€) over the previous fiscal year. While this was the first time the company had made a forecast, the predictions were comparable to Home Range’s financial results from previous years. The forecast in the annual report included cautionary language that detailed several risk factors that could affect the accuracy of the estimated figures in the forecast. The forecast did not mention bovine spongiform enchaphalitis (“BSE†or “mad cow diseaseâ€) or disease in general as risk factors. It also contained the following disclaimer:
"This report contains certain forward-looking statements which reflect our current expectations with respect to future events and performance. Wherever used, the
words 'may', 'will', 'anticipate', 'intend', 'expect', 'plan', 'believe' and similar
expressions identify forward-looking statements. Forward-looking statements
should not be read as guarantees of future performance or results, and will not
necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved. We are under no obligation (and we
expressly disclaim any such obligation) to update or alter the forward-looking
statements whether as a result of new information, future events or otherwise.
Forward-looking statements are based on information available at the time they
are made, assumptions made by management, and management's good faith
belief with respect to future events, and are subject to the risks and uncertainties
outlined in this analysis that could cause actual performance or results to differ
materially from those reflected in forward-looking statements, historical results or
current expectations."
Ronald Ribeye is the President and Chief Executive Officer of Home Range, and also one of its directors. Corinne T-Bone is the Vice-President Finance and the Chief Financial Officer of Home Range. Ribeye and T-Bone are Home Range’s principal managers. Ribeye and T-Bone did not trade in Home Range’s shares during the period of time in question.
In the spring of 2006, bovine flu was detected in Canada in buffalo being raised for meat. The virus was a strain that did not threaten the cattle of most domestic beef producers. Still, Home Range thought its cattle were more at risk to contract the virus than those of conventional producers because the cattle were allowed to free-range outside, where the buffalo roam. By June 2006, the threat of bovine flu to domestic cattle producers had grown more prominent. Approximately 100 kilometres from Home Range’s Vancouver facility, a small flock of domestic cattle contracted bovine flu and was destroyed. It could not be determined whether the strain of the virus contracted by the cattle was the same as the strain first identified, which was considered not especially virulent. One of Home Range’s Vancouver facility workers became ill with bovine flu. The worker had been buffalo hunting the week prior in the same region as the infected buffalo. Although neither the cattle at Home Range’s Vancouver facility, nor those of other producers in the area showed signs of infection, the incident demonstrated that transmission of bovine flu to humans was possible for at least one strain of the virus. Media coverage of the incident increased public awareness of the bovine flu in Canada.
By July 2006, the bovine flu pandemic became a significant health threat. A new, virulent strain of the virus surfaced and domestic herds of cattle became infected. Some herds near Home Range’s operations had to be destroyed on July 25, 2006. Several farm workers who handled the infected cattle became seriously ill. When bovine flu was first detected in the spring of 2006, Home Range decided that the threat required close attention. The company hired a renowned consultant with expertise in diseases affecting domestic animals. The consultant was hired, not only to advise Home Range in bovine flu matters, but also to assist the company in dealing with wildlife authorities and health protection authorities. When the situation became increasingly dire in July, Home Range confined all of its free-range cattle to its barns to eliminate the possibility of interaction with infected buffalo or cattle. Home Range also vaccinated its entire flock of cattle against the newly discovered dangerous strain of the virus. This was the first time Home Range had to employ precautionary measures to all cattle at a particular facility or confine the herds continuously indoors. These safety precautions required significant additional cost of about 8% of normal production cost. None of these measures was disclosed by Home Range.
On July 28, 2006, Home Range released its interim financial statements for the first quarter, which included new MD&A. In this MD&A, Home Range did not update the original forecast. Despite Home Range’s actions to safeguard its cattle, the company still suffered financially because of the bovine flu. Its beef sales in August declined 15% and 40% of Home Range’s customer orders for the next 3 months were cancelled. The customers’ main concern was that they “could no longer sell Home Range’s products as ‘free-range’ when the cattle were in fact confined indoors in order to prevent infection.†To combat the impending disaster of an excess of unsold beef, on September 22, 2006, Home Range purchased a fox farm with the intention that the excess beef could be fed to the foxes. The vendor wanted to sell the farm because of a series of attacks by People for the Ethical Treatment of Animals in which his fencing had been cut through and large numbers of his foxes had escaped. Ribeye and T-Bone were optimistic that purchase of the farm would, in addition to providing a place unused beef could be utilized, diversify their risk and allow the company to realize its forecast. Home Range disclosed the acquisition in a press release on September 23, 2006 saying: "Home Range believes that this acquisition represents a diversification opportunity in an industry where Home Range can bring to bear its expertise in animal husbandry to create additional high-value products.". It made no mention of the feeding of unused beef to the foxes as a reason for the acquisition.
On October 4, 2006, a newspaper published its interview with a well-known market analyst who questioned the validity of Home Range’s July forecast in light of the bovine flu crisis. Home Range’s share price suffered a loss of 25% over the next two trading days. The analyst highlighted the unpopularity of beef generally, and identified two critical factors that could affect the appeal of Home Range’s free-range beef to its target customer base: the administration of antibiotics to the cattle and the confinement of the cattle to barns.
On October 13, 2006, Home Range issued a press release indicating that financial predictions in the current fiscal year were no longer accurate “due to the impact of the bovine flu pandemicâ€. The press release listed some negative consequences to Home Range that could be caused by the bovine flu. It was silent on the positive factors underlying management’s continued optimism. The release also indicated that management was no longer able to predict its financial results for the year, notwithstanding management’s optimistic viewpoint (internally) that the original forecast would be achieved.
At the end of October, the price of Home Range shares had stabilized at a new low of $5 per share. Ribeye and T-Bone still hoped the predictions would be satisfied, but they were concerned that the company could suffer criticism and legal liability should their optimistic stance prove erroneous. Ribeye and T-Bone had several reasons for their continued optimism. The farm in Toronto was largely unaffected, and customers in that region were not deterred from consuming beef. The bovine flu threat was negatively affecting sales and orders at the Vancouver operation, but the beef there had, so far, been protected. The consultant had advised that the threat would likely not last beyond the onset of winter. More importantly, management was of the opinion that a substantial profit could be realized by selling the pelts obtained from the fox farm acquisition.
Home Range was unable to charge the usual premium prices for the beef from Vancouver because much of it had to be frozen due to the market conditions at the time. Still, once the crisis had subsided, its Toronto operation was well positioned to take advantage of the increased demand for beef by charging higher prices. The increased prices more than compensated for the decreased margins from its beef in Vancouver. Home Range was also able to profit from the fox pelts. Luckily, the fox farm specialized in a type of pelt that was attracting very favourable attention from the international fashion world. The last quarter of the fiscal year was the best on record for Home Range, and as a result, its financial forecast was, in effect, achieved. At the end of December 2006, the share price had recovered and increased to roughly 110% of the share price existing at the time when the forecast was issued.
Your firm has been retained to advise on the merits of bringing a class action under the Ontario Securities Act for misrepresentation in disclosures. The class being considered are those persons who bought or sold shares of the company at any time from July 10, 2006 to October 31, 2006. Your principal, Ms. Analise Advocate has asked you to write a memorandum of statutory interpretation on section 138.3 & 138.4 of the Ontario Securities Act. [Ms. Advocate is writing a memorandum on class action proceedings and the provisions of the Securities Act dealing with damages and procedural matters, so you do not need to research or address those issues].
