Why Publicly Traded Companies Must Explain Why Their C-Level Executives Abruptly Depart: Like a Canary in a Mine

Investors filed a shareholder class action against Colt Resources, Inc. (“GTP”). The Ontario Superior Court of Justice published Kauf v. Colt Resources, Inc., 2019 ONSC 2179, confirming that companies must disclose the material facts as to why the C-Level Executive departed.

“This decision is critically important for in-house counsel and members of companies’ disclosure committees,” said Andrew Morganti, a leading investor protection lawyer who practices in Ontario, Canada, and Washington, District of Columbia. Andrew had an opportunity to sit down with a former client, who was also a member of a board of directors of a publicly traded company listed on the TSXV, to discuss a new investigation of a situation whereby a CFO ended his relationship with a publicly traded company months prior to the company announcing that it would likely restate its financial statements for the prior year.

Question:

Must publicly traded companies explain why C-Level Executives abruptly end their relationship with a publicly traded company?

Answer:

Yes, when a responsible issuer releases a statement announcing the abrupt departure of a C-level executive, it must disclose all material facts about why the departure was sudden. The company cannot announce the departure while knowing the Board of Directors invited the C-Level Executive to resign or fired the C-Level Executive for cause, such as learning from the independent auditor that the CFO was grossly negligent in reporting the past 3 quarters of financial statements.

Question:

Have you seen other companies try to mislead investors about C-level executive departures?

Answer:

Yes. As in Kauf v. Colt Resources, Inc., I see this happen multiple times a year. Either a company announces a C-level executive departure, and months later it announces a materially adverse event. This is what happened in Colt Resources, Inc.

By way of a recent example, this situation seems to have happened at Goeasy Ltd. On September 16, 2025, goeasy updated the total mix of information to the market about its operations by reporting that its CFO would be resigning upon the release of goeasy’s 3Q 2025 financial results and MD&A. On March 10, 2026, Goeasy released a document, “New management takes action to prepare goeasy Ltd. for the Future,” reporting numerous adverse material facts linked to the former CFO's functions. The market impact of this negative material-fact news was harsh and immediate on the price of Goeasy’s securities, sending Goeasy’s share price from $115.55 to $49.72, a 59% drop in value. Following Colt Resources, Inc. jurisprudence, there seems to be a reasonable possibility that Goeasy Ltd. knew that its previously released financial statements had errors and, if so, there should have been additional material facts disclosed as to why the CFO ended his relationship.

The other situation I see is when a company announces an adverse material fact and, months later, announces the abrupt departure of a C-level executive for reasons linked to the first release of negative news. This situation is what happened in Stajic v. Wayland Group Corp., 2026 ONSC 647, at paragraph 7.

On April 23, 2019, Wayland reported that it was forced to delay the publication of its F/2018 audited financial statements. Naturally, the market reacted negatively, but optimism remained. Neither the financial statements for F/2018 nor its 1Q 2019 financial statements were published. However, on August 2, 2019, Wayland reported that Benjamin Ward, its CEO for years, was abruptly resigning and that it was changing auditors. MNP LLP, the former auditor, reported that Ward intentionally hindered its ability to complete the audit of the F/2018 numbers. The analogy to Colt Resources Inc. is that, before April 23, 2019, Wayland’s Board of Directors had already retained MNP LLP to conduct a forensic investigation of Ward and fraudulent conduct that took place in 2018 and 2019. This fact is reported at Stajic v. Wayland Group Corp., 2025 ONSC 6233, at paragraphs 6-7. But to obtain a $53 million default judgment, had investors been forced to continue litigating against Ward, I’m confident the court would have followed Kauf v. Colt Resources Inc., 2019 ONSC 2179.

In his decision in Kauf v. Colt Resources Inc., the Honorable Justice Glustein, Ontario Superior Court of Justice, held:

• [183] Additionally, the legal arguments presented by the Defendants clash with the foundational investor safeguard tenets of the Act. Colt must not be permitted to profit from strategically isolating adverse developments through "storm warnings" that trigger market conjecture regarding [former CEO]’s behavior, only to later assert a lack of connection because they withheld the fact that the Turcolt Investment lacked authorization. This strategy would encourage entities to publish press communications that obscure material realities and foster market doubt about the specifics of wrongful actions, while then using that lack of transparency to argue that no damages are recoverable because of a supposed absence of linkage.

• [184] The framework proposed by the Defendants fails to advance the objectives articulated in s. 1.1 of the Act, and reinforced in Pezim and Theratechnologies, which seek to (a) shield shareholders from inequitable, unsuitable, or deceptive activities; (b) promote equitable and high-functioning capital markets alongside public trust; and (c) support financial stability while mitigating broader systemic hazards.

In Kauf, the Court held that companies cannot benefit from omitting material facts from news releases of when a C-Level executive abruptly resigns when, as here, the company released additional information in a subsequent news release that it had a reasonable possibility of having that information when it released the first news release. The relevant paragraphs of the court decision are:

• [33] In its press release dated December 21, 2016, Colt announced that (i) its board had named Mr. John Gravelle ("Gravelle") to act as Interim President and CEO; (ii) Colt was "review[ing] its strategic options" and (iii) [former CEO] was leaving Colt with "[t]erms and conditions of his role [during the transition] currently under negotiation."

• [34] There had been no prior indications from Colt or otherwise that its former president, CEO and co-founder [] had any intention of stepping down.

• [37] On January 31, 2017, Colt issued a press release disclosing that the former CEO had used corporate funds to make an unauthorized and undocumented investment in a third company.

• [38] On February 1, 2017, the TSX Venture Exchange halted trading of Colt's securities. There has been no trading in Colt's securities since that date.

• [55] Similarly, in Theratechnologies Inc. v. 121851 Canada Inc., [2015] 2 S.C.R. 106, [2015] S.C.J. No. 18, 2015 SCC 18 ("Theratechnologies"), Abella J. spoke for the court and held, at para. 25, that the statutory requirements for continuous disclosure through periodic and timely disclosure are designed to create a "level playing field" where all investors have access to the same information, and all pricing and investment decisions are made from the same starting point.

• [85] [CFO] submits that there is no reasonable possibility a claim against him could succeed for misrepresentation in the December 2016 Press Release. He submits:

• [87] [CFO] submitted that there was no "credible evidence" that could support a "plausible analysis" of s. 138.4(1) to establish a "reasonable possibility" that Jaffrey, as of the December 2016 Press Release, either knew that the Turcolt Investment was unauthorized or deliberately avoided acquiring such knowledge. I do not agree.

• [88] The [CFO] certified that the information in the Q3 2016 Disclosure contained no misrepresentations. Consequently, there is evidence that he was aware of all the details set forth in the Q3 2016 Disclosure.

• [155] Considering the "total mix" of information (Sharbern, at para. 6) is necessary to determine the linkage between the alleged misrepresentation and the alleged corrective statement. That mix includes the information disclosed in the Q3 2016 Disclosure.

• [156] Colt in effect advised its shareholders in the Q3 2016 Disclosure that there was no reason to doubt the propriety of the Turcolt Investment, stating that Colt (through Eurocolt) had made the investment.

• [157] Three weeks later, Colt advised its shareholders that [former CEO] was dismissed under adverse circumstances, with terms and conditions of Perrault's transitional role under negotiation and with Colt reviewing its strategic options. An "appropriate" inference could be open to the trial judge, as permitted under Mask CA, to find that it was only upon the December 2016 Press Release that Colt shareholders had any reason to suspect impropriety by [former CEO] with respect to the Turcolt Investment. That linkage only arose at that time.

• [159] The statements in the December 2016 Press Release sent out a "storm warning". Investors could reasonably have "connected the dots" and concluded that [former CEO] engaged in some form of negative conduct that led to his departure, given the statements that the terms and conditions of his transitional involvement had not yet been negotiated and that Colt was exploring strategic options.

• [165] Had the Defendants complied with their disclosure obligations, no speculation would have been required about the link to [former CEO]'s conduct. The full corrective information statement would have been before the market, instead of a "storm warning" that created market speculation and arguably caused a 22 percent decrease in share value.

• [176] Contrary to the Defendants' submission, it is not necessary to rely on the subsequent January 2017 Press Release to establish a partial correction in the December 2016 Press Release. The January 2017 Press Release only stated what Colt and Jaffery could have stated earlier, if the trial judge finds that they knew the investment was unauthorized. The subsequent conduct "shed[s] light on potential or actual behavior of persons" at the relevant disclosure time (Sharbern, at para. 60), but is not the basis upon which the link is made.

• [177] Consequently, as in Swisscanto, the announcement of [former CEO]'s departure under negative circumstances, resulting in Colt reviewing its strategic alternatives, [at para. 73] "when read in context, can fairly and reasonably be said to be a public correction" of the misrepresentation that the investment was authorized, by disclosing to the reader that [former CEO] had acted improperly in some manner, only three weeks after announcing a major investment by the company.

• [178] I also do not agree with the Defendants that expert or shareholder evidence is required to determine the market effect of a press release. There was no evidence before Belobaba J. in Swisscanto of the market effect of the "passing reference" in the press release.

• [180] In the present case, no expert evidence is required to establish materiality of the "unauthorized investment" misrepresentation issue, as the Defendants acknowledge that it is material for the purposes of the motion.

• [181] In Swisscanto, no expert evidence was provided on the effect of the public correction on investors. Belobaba J. drew a common sense inference that the press release could reasonably be linked to the misrepresentation.

• [183] Additionally, the legal arguments presented by the Defendants clash with the foundational investor safeguard tenets of the Act. Colt must not be permitted to profit from strategically isolating adverse developments through "storm warnings" that trigger market conjecture regarding [former CEO]’s behavior, only to later assert a lack of connection because they withheld the fact that the Turcolt Investment lacked authorization. This strategy would encourage entities to publish press communications that obscure material realities and foster market doubt about the specifics of wrongful actions, while then using that lack of transparency to argue that no damages are recoverable because of a supposed absence of linkage.

• [184] The framework proposed by the Defendants fails to advance the objectives articulated in s. 1.1 of the Act, and reinforced in Pezim and Theratechnologies, which seek to (a) shield shareholders from inequitable, unsuitable, or deceptive activities; (b) promote equitable and high-functioning capital markets alongside public trust; and (c) support financial stability while mitigating broader systemic hazards.

Andrew is licensed to practice law in Ontario, Canada, and Washington, D.C. and represented investors in the development of the pro-investor case law as reflected in Kaynes v. BP, plc; Pannicia v. MDC Partners Inc; Stevens v. Ithaca Energy Inc; Kauf v. Colt Resources, Inc; Auxly Cannabis Group Inc; and Stajic v. Wayland Group Corp. Morganti & Co. was recognized by Institutional Shareholder Services ("ISS") within the top 50 securities class action firms measured by recoveries in 5 different years. In Canada, Andrew is a member of Milosevic & Associates, a leading trial and appellate law firm focused on litigating civil fraud claims.

To learn more about Morganti & Co., please visit our website at www.morgantico.com.