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Court Limits Plaintiff’s Ability to Access Corporate Documents in Securities Class Action

Overview

In Mask v. Silvercorp Metals Inc. [1] released on July 18, 2014, the Ontario Superior Court of Justice considered whether a plaintiff seeking leave to commence a secondary market liability action under the Securities Act [2] is permitted to obtain corporate documents from the defendant before the leave motion has been adjudicated.

After reviewing the case law applicable to Requests to Inspect Documents (the “Requests”) pursuant to Rule 30.04(2) and the broader policy concerns regarding leave motions under section 138.8 of the OSA, Justice Belobaba held that the Rule cannot be used as a fishing rod, especially before cross-examinations have been conducted in an OSA leave motion.

Background

The plaintiff, a former shareholder of the defendant mining company, seeks to bring a class action against the company and two senior executives for alleged misrepresentations regarding the mineral resources in the defendants’ mines in China and the accounting treatment of certain third-party dealings.

The motions for leave to commence a secondary market liability action under Part XXIII.1 of the OSA and for certification of the action as a class proceeding under the Class Proceedings Act, 1992 [3] are scheduled to be heard in September 2014.

The defendants filed affidavits opposing the plaintiff’s leave and certification motions. The plaintiff, in turn, served Requests under Rule 30.04(2) of the Rules of Civil Procedure, [4] asking that hundreds of documents mentioned in these affidavits be produced for inspection prior to the cross-examinations. The defendants declined to do so, arguing that the plaintiff’s Requests amounted to a fishing expedition.

Discussion

As a preliminary matter, the Court noted that, at best, it was unclear that a Request to Inspect can be used by a shareholder (who is, at most, a putative plaintiff) to augment a pending OSA leave motion. Unless and until leave is granted, the defendant is not yet a “party” to the OSA action, and a “non-party” cannot be forced to produce documents pursuant to the Rule.

Apart from this preliminary issue, the Court noted that the Requests ran afoul of legal principles with respect to specificity, relevance, proportionality, timeliness, prejudice and privilege. The Court agreed with the defendants that allowing the putative plaintiff to conduct a broad examination before the leave motion “in order to rummage through a large volume of (confidential corporate) documents to find evidence that could support the proposed OSA leave motion would seriously prejudice the defendants”.

The Court further held that it would have dismissed the plaintiff’s motion in any event on the basis of broader policy concerns about the nature of the OSA leave motion. The proper scope of cross-examination on an affidavit is always defined by the context of the proceeding itself. In this case, the underlying policy of the leave motion provides some measure of protection against the potentially coercive nature of secondary market claims by discouraging investors from pursuing unsupported actions to the detriment of the shareholders of the target company.

The Court concluded that the Request to Inspect Documents must be restricted in scope and content to a “manageable dimension” that accords both with first principles of documentary production, as well as the statutory language and underlying policy of the OSA leave provisions.

Comment

In arriving at his conclusion, Justice Belobaba referred to a series of Part XXIII.1 cases where Ontario Courts have consistently restricted the examination rights of moving parties to accord with the policy behind the OSA leave motion. This case, while novel in its application to Requests to Inspect Documents, simply reaffirms an existing trend that, in the context of OSA leave motions, a moving party is restricted from compelling oral and documentary evidence from respondents in an effort to make a case from their evidence.

[1] 2014 ONSC 4161.
[2] R.S.O. 1990, c. S.5 (“OSA”).
[3] S.O. 1992, c. 6.
[4] R.R.O. 1990, Reg. 194, as amended (the “Rules”).

Court Limits Plaintiff’s Ability to Access Corporate Documents in Securities Class Action

Court of Appeal Clarifies Directors’ Fiduciary Duties and the Business Judgment Rule for Executive Compensation Matters

Overview

The Court of Appeal for Ontario recently affirmed the nature of directors’ and officers’ fiduciary duties and clarified the application of the business judgment rule in the context of a dispute regarding executive compensation. The decision in Unique Broadband Systems, Inc. (Re) [1] (“Unique Broadband”) is significant from the perspective of corporate governance and shareholders’ rights in the following respects:

  • First, independent or third-party advice may be necessary to justify executive compensation.
  • Second, the business judgment rule has no application where directors and officers make decisions that have no legitimate business purpose and are in breach of their fiduciary duties.
  • Finally, executive compensation agreements that are inconsistent with statutory fiduciary duties will not be enforced by the courts.

Factual Background

The individual respondent (the “Respondent”) was the former CEO and a director of Unique Broadband Systems Inc. (“UBS”). The terms of a management services agreement provided him with enhanced termination benefits in particular situations. UBS instituted a share-appreciation rights plan (the “SAR Plan”) for its directors and members of senior management. Under the SAR Plan, unit holders would be compensated based on the market trading price of a UBS share after certain specified events.

After the share price failed to rise as expected, the directors of UBS unanimously resolved to cancel the SAR units and establish a SAR cancellation payment program that compensated unit holders, including the Respondent, based on a unit price of $0.40 per share. The market price was actually $0.15 per share. The directors also considered and awarded bonuses for the Respondent and other personnel.

UBS shareholders called a special shareholders’ meeting and removed the Respondent and others from their positions as directors of the company. The Respondent resigned as the CEO and commenced an action against UBS for, inter alia, the SAR cancellation payments, the bonus award, and enhanced termination benefits.

Independent Advice on Executive Compensation

The Court of Appeal determined that the Respondent breached his fiduciary duties with respect to the SAR cancellation payments and the bonus award. The Court held that directors and officers must avoid conflicts of interest with the corporation and not take advantage of their position for personal gain.[2]

The SAR cancellation payment program was adopted without any independent or third-party advice and was motivated by the Respondent’s self-interest at the expense of UBS. The bonus awards were equally problematic. The Respondent and the other directors failed to seek or receive any advice on appropriate bonus awards. They did not consider comparable marketplace data regarding executive compensation and did not document performance criteria. There was also no evidence to explain how the bonus awards were quantified.

Business Judgment Rule

The Court of Appeal rejected the Respondent’s argument that his actions were protected by the business judgment rule. The business judgement rule is a rebuttable presumption that directors and officers act in an informed manner, in good faith, and in the best interests of the corporation. “Courts will defer to business decisions honestly made, but they will not sit idly by when it is clear that a board is engaged in conduct that has no legitimate business purpose and that is in breach of its fiduciary duties.”[3]

Since the Respondent had not acted in the best interests of the corporation, the business judgment rule was of no assistance to him.

Contracting out of Statutory Corporate Obligations

The Court of Appeal overturned the lower court’s decision on the only issue that the Respondent succeeded on at trial; that is, the interpretation of the management services agreement that provided the Respondent with enhanced termination benefits notwithstanding his corporate malfeasance.

According to the Court of Appeal, the agreement had to be interpreted in light of section 134(3) of the Ontario Business Corporations Act[4] (the “OBCA”), which provides that no term in a contract “relieves a director or officer from the duty to act in accordance with this Act and the regulations or relieves him or her from liability for a breach thereof.”[5] The Court of Appeal held that a contractual provision that excluded a director’s breach of fiduciary duties as a ground for termination would “eviscerate the prohibition found in s. 134(3).”[6]

Although not necessary to its decision, the Court of Appeal noted that a contract which provided a director with enhanced termination benefits which were contrary to his or her breach of fiduciary duties may constitute oppression pursuant to section 248 of the OBCA.[7]

Comment

The Court of Appeal’s decision in Unique Broadband establishes that directors and officers will not be permitted to hide behind the business judgment rule where their conduct serves no legitimate business purpose and is in breach of fiduciary duties. Directors and officers cannot contract out of their fiduciary duties and personal employment contracts or management service agreements will be interpreted in accordance with their statutory obligations.

[1] Unique Broadband Systems, Inc. (Re), 2014 ONCA 538 [Unique Broadband].

[2] Ibid at para 45.

[3] Ibid at para 72.

[4] Business Corporations Act, RSO 1990, c B.16 [OBCA].

[5] Unique Broadband, supra note 1 at para 95.

[6] Ibid at para 96.

[7] Ibid at para 107.

Court of Appeal Clarifies Directors’ Fiduciary Duties and the Business Judgment Rule for Executive Compensation Matters

Are Fairness Opinions Admissible on a Plan of Arrangement Hearing?

Overview

Differing viewpoints have recently arisen in the Ontario Superior Court of Justice (Commercial List) as to whether fairness opinions are admissible during court approval of plans of arrangement. In Champion Iron Mines Limited (Re), 2014 ONSC 1988, Justice Brown held that in order for a fairness opinion to be considered by the court it must meet the requirements for the admission of expert evidence. By contrast, in Bear Lake Gold Ltd. (Re), 2014 ONSC 3428 and in Re Patents Royal Host Inc., 2014 ONSC 3323, Justices Wilton-Siegel and Justice Newbould, respectively, concluded otherwise.

Discussion

Champion Iron related to a plan of arrangement involving a third party acquiring all the outstanding common shares of the company in exchange for shares of the third party. As is customary, the applicant submitted a fairness opinion (which had been included in the management proxy circular). While Justice Brown approved the plan of arrangement, he placed no weight on the fairness opinion, holding that for the fairness opinion to be admissible, it needed to satisfy the applicable requirements regarding the admissibility of expert evidence set out in the Rules of Civil Procedure (the “Rules”). The fairness opinion simply contained the usual conclusory statement as to fairness and did not include the “expert’s reasons for his or her opinion”, as required by the Rules.

In Bear Lake, approval of a similar plan of arrangement was before the court. Justice Wilton-Siegel did not share Justice Brown’s concerns in the context of an M&A transaction involving the acquisition of securities of an issuer by a third party. His Honour held that fairness opinions, while not expert evidence, are relevant to courts in two respects. First, the special committee or board of directors considered the fairness and reasonableness of the proposed transaction objectively; and second, the publication of the fairness opinion in the information circular allowed the shareholders to reach their own conclusions regarding both the integrity of the directors’ recommendations and the fairness of the transaction to them. As such, the absence of shareholder objection may be relied upon as an implicit shareholder endorsement of the directors’ views on the fairness and reasonableness of the transaction.

Justice Wilton-Siegel cautioned that when the plan of arrangement is contested if a fairness opinion is to be qualified as expert evidence, the detailed analysis that grounds the fairness opinion must be available to securityholders.

In Royal, released one day after Bear Lake, Justice Newbould stated that he agreed with Justice Wilton-Siegel’s decision.

Comment

There would appear to be a real divide among certain Commercial List judges on this issue. Accordingly, until an appellate court weighs in, caution must be exercised when dealing with court approval of plans of arrangement, especially where there is a dispute as to the fairness thereof.

Are Fairness Opinions Admissible on a Plan of Arrangement Hearing?

Court Refuses to Invalidate Proxies Obtained Via Deficient Proxy Circular

Overview

In Weyburn Inland Terminal Ltd. v The Director of Corporations for Saskatchewan, 2014 SKQB 46, the Court of Queen’s Bench for Saskatchewan ordered dissident shareholders of Weyburn Inland Terminal Ltd. (the “Company”) to revise their proxy circular which suggested how shareholders should vote but not why they should vote against a certain transaction proposed by the Company.  However, the Court did not go the extra step of disallowing proxies which had been obtained pursuant to the deficient circular.

Discussion

The Company called a special meeting of shareholders (the “Meeting”) in order to obtain approval for a plan of arrangement with respect to a sale of all the outstanding shares of the Company (the “Plan”). Certain of the Company’s shareholders and former directors (the “Dissidents”) opposed the Plan and began soliciting proxies for the Meeting. The Dissidents’ proxy circular (the “Circular”) stated that its purpose was to solicit votes against the Plan.  The Circular also set out procedural information for voting but did not provide information explaining why shareholders should vote against the Plan. The Company applied for the court’s intervention in respect of the solicitation.

The Court held that the Circular was deficient as it did not provide any information setting out the Dissidents’ plan for the Company and thus, did not allow shareholders to form a reasoned and informed judgment of the Plan. The Court ordered that the Dissidents cease soliciting proxies based on the Circular and amend it to include the Dissidents’ proposals for the Company in the event the Plan was defeated. The Court further ordered the Dissidents to distribute the revised Circular together with a letter of explanation and a revocation of proxy form. The Court made this order pursuant to its general remedial jurisdiction, sections 144 and 148 of The Business Corporations Act (Saskatchewan), the regulations thereunder and applicable securities legislation.

The Court expressly refused to invalidate proxies obtained pursuant to the Circular or halt future proxy solicitation by the Dissidents, as the order would address any deficiencies which might have misled a shareholder.

Comment

Although this case was decided pursuant to the SBCA, the relevant provisions are essentially identical to those in the Canada Business Corporations Act (the CBCA contains certain exceptions which are not relevant to the facts in this case). This case demonstrates that the purpose of the court’s supervision of proxy fights is to ensure that shareholders are able to make a reasoned and informed judgment, not to ‘punish’ a party for providing deficient materials. Here, the Court took the least intrusive step in ordering that shareholders be provided with additional information and did not impose further sanctions. However, the deficiencies in this case were those of omission, not commission. Had the Dissidents provided inaccurate (as opposed to incomplete) information, the Court may not have allowed previously solicited proxies to stand.

Court Refuses to Invalidate Proxies Obtained Via Deficient Proxy Circular

CHANGING COST TRENDS IN CLASS ACTIONS

Introduction

In 2013, Justice Belobaba released five decisions that addressed legal principles relating to awards of costs on class action certification motions. These cases sent a clear message to the class action bar: “[a]ccess to justice, even in the very area that was specifically designed to achieve this goal, is becoming too expensive.”[1] Justice Belobaba observed that, in some cases, overzealous counsel may be partially responsible for this trend. Using similar reasoning and language in Rosen v BMO Nesbitt Burns Inc., [2] Crisante v DePuy Orthopaedics,[3] Dugal v Manulife Financial, [4] Brown v Canada (Attorney General), [5] and Sankar v Bell Mobility Inc., [6] (collectively called the “Pentalogy”) Justice Belobaba recommended changes to the prevailing approach to cost awards on certification motions that, if followed, would turn Ontario into a “no cost regime”.

Background

In 1982, the Province of Ontario sought recommendations from various legal organizations to consolidate all procedural and substantive matters relating to class actions into a single statute, which led to the enactment of the Class Proceedings Act, 1992 (the “CPA”). [7]

One of the recommendations that the provincial legislature received was from the Ontario Law Reform Commission (the “OLRC”, now the Law Commission of Ontario). The OLRC identified three major goals of a class action regime: judicial efficiency; increased access to courts; and behaviour modification. In order to achieve these objectives, the OLRC recommended enactment of class action legislation with a “no-costs” regime as a general rule, whereby costs would not be awarded to any party in a class action at any stage of the proceedings, including an appeal, in order to meet the goals of judicial efficiency and increased access to justice. [8]

Justice Belobaba had these objectives in mind when he wrote his decisions in the Pentalogy. Justice Belobaba wrote that over the years he had spoken to many members of the class actions bar, and had come to appreciate and endorse the implementation of a “no-costs” regime that had been supported by the OLRC. His Honour’s reasons in Rosen included the following mea culpa:

I also wish that the recommendations on costs as set out in the Ontario Law Reform Commission’s Report on Class Actions had been accepted. Instead, the provincial legislature decided to adopt the views of the Attorney-General’s Advisory Committee and continue the “costs follow the event” convention for the very different world of class actions as well. I was a member of that Advisory Committee. I now realize that I was wrong and that the OLRC was right. I understand that the provincial Law Commission is undertaking a review of the Class Proceedings Act, including the costs provisions. Hopefully, our mistake will be corrected. [9]

Analysis

Justice Belobaba provided the court with statistics and directions that the judges should follow as part of the determination of costs on class certification motions. The starting point of Justice Belobaba’s analysis was Rule 57.01 of the Rules of Civil Procedure, which lists various factors that the court may consider in exercising its discretion to award costs. According to Justice Belobaba, the biggest limitations in the current jurisprudence on costs are the absence of reliable metrics and unclear analysis of the principles relied upon by the court while awarding costs. In order to create a clear and complete regime for awarding costs on such motions, Justice Belobaba:

1. Identified factors that the court should consider while deciding a costs award for a certification motion; and

2. Performed an analytical review of costs awards for certification motions over the past six years and developed a chart with various costs ranges for specific certification motions. [10]

In laying down his directions, Justice Belobaba recognized that a certification motion is one of the most important steps in any class action litigation and it requires a lot of preparation. Therefore, inevitably, the cost awards are higher in certification motions than in most other motions. Nonetheless, the costs must be reasonable. In order to determine whether costs are reasonable, Justice Belobaba suggested that the courts should take into account the amount of costs that an unsuccessful party could reasonably expect to pay and also undertake a comparative analysis of costs awarded in closely comparable cases. Above all, the courts should keep in mind that a fundamental objective of the CPA is to provide enhanced access to justice. [11]

In order to ensure that access to justice is achieved, Justice Belobaba also suggested that courts should rely less on the costs outlines submitted by counsel. Justice Belobaba indicated that he would accept cost outlines, but would not ask the lawyers to submit their actual dockets. After ensuring that the cost outlines are not unreasonable, he stated that he would do a comparative historical review of costs in order to make the process more transparent. Justice Belobaba collected data from the cost awards rendered in the past six years and stated that:

a. For the plaintiff’s side, on average, if the costs award sought was less than $500,000 then the amount awarded would be 63% of the costs sought. However, if the costs sought were more than $500,000, then the costs awarded would be 62% of the costs sought.

b. For the defendant’s side, on average, if the costs award sought was less than $500,000 then the costs awarded would be 50% of the costs sought. However, if the costs sought were more than 500,000, then the costs awarded would be 39% of the costs sought. [12]

Applying the principles and the analysis of past costs awards described above, Justice Belobaba assessed costs sought in each of the cases in the Pentalogy. Justice Belobaba reviewed each case to determine whether the lawyers charged their time at rates consistent with the suggested hourly rates [13] or if they sought excessive costs. Justice Belobaba then compared the costs being sought with similar cases and reviewed each of the cases in the light of his chart of prior costs awards. Above all, in each of the decisions, he sought to ensure that the costs awarded were fair and reasonable and satisfied the objectives of the CPA. [14]

Conclusion

Whether Justice Belobaba’s suggestions and directions usher in a no cost regime remains to be seen. A decision of Justice Perell released soon after the Pentalogy signals that the courts may be adopting a more conservative approach towards awarding costs. [15] In Drywall Acoustic, Justice Perell echoed the concerns raised by Justice Belobaba and stated:

{16} While I would not express the point the same way as do the Plaintiffs, the Plaintiffs make a pertinent point in their observation that the costs in class proceedings raise access to justice concerns for plaintiffs. I agree, but I would add that access to justice is an entitlement of defendants just as much as it is for plaintiffs and the spiralling costs in class proceedings have become a threat to the viability of the class action regime […]

{18} The assessment of costs (and of lawyer’s fees) must adapt to a changing and evolving class action regime and every case requires individual treatment. [16]

By tightening the costs strings, courts potentially reduce the risk for plaintiffs in class actions to bring forward their claims and for plaintiffs’ counsel to pursue these claims. Further, a more restrictive approach to cost awards for certification motions may also make investing in plaintiffs’ class action litigation more attractive to third party investors and funders. However, some members of the plaintiffs’ class action bar have argued that by reducing costs awards, access to justice may actually be further reduced. [17] Some plaintiffs’ counsel have also suggested that, in fact, plaintiffs’ counsel principally bear the costs of class action litigation, and Justice Belobaba’s costs regime could result in plaintiffs’ counsel making a much greater investment in time and disbursements on certification motions than they could ever recover from the defendants. [18] Therefore, a more restrictive approach to awards of costs may increase the risk borne by plaintiffs’ counsel and force them to be more cautious before accepting the professional obligations associated with representation of the representative plaintiff in a class action.

On the other hand, in Justice Belobaba’s analysis of past costs awards, there is a greater disparity between the costs sought and those awarded to a successful defendant on a certification motion than between amounts sought and awarded to a successful plaintiff. For the defendants who are forced to litigate a class claim, which has yet to be tested on its merits, the prospect of a reduced recovery of costs would increase the financial risks that defendants’ lawyers or third party investors have to bear. Further, the risk of high costs awards have always acted as a reminder to plaintiffs of the penalty they may face for bringing an unmeritorious action. Therefore, reducing costs consequences could leave defendants more vulnerable to unmeritorious law suits, and possibly hold them hostage to legal proceedings without the plaintiffs risking significant financial consequences if they are unsuccessful.

How the costs regime for certification motions develops, and whether Justice Belobaba’s Pentalogy will affect the checks and balances for parties in class action litigation, can only be ascertained once other judges have had the opportunity to consider and apply, or choose not to apply, the principles laid down in the Pentalogy. However, Justice Belobaba’s Pentalogy has certainly succeeded in bringing back attention to one of the core objectives of class actions: providing access to justice at reasonable cost.

 

[1] Rosen v. BMO Nesbitt Burns Inc., 2013 ONSC 6356 [Rosen] at para 1.

[2] Ibid.

[3] Crisante v. DePuy Orthopaedics, 2013 ONSC 6351 [Crisante].

[4] Dugal v. Manulife Financial, 2013 ONSC 6354 [Dugal].

[5] Brown v. Canada (Attorney General), 2013 ONSC 6887 [Brown].

[6] Sankar v. Bell Mobility Inc., 2013 ONSC 6886 [Sankar].

[7] Class Action Proceedings Act, S.O. 1992, CHAPTER 6

[8] Ontario Law Reform Commission, Report on Class Actions, Ministry of the Attorney General Volume 1, 1982.

The OLRC recommendations stated:

s. 2(1) party and party costs should not be awarded to a party at the certification hearing or at the common questions stage of a class action, except

(a) at the certification hearing, where it would be unjust to deprive the successful party of costs, or

(b) in the event of vexatious, frivolous, or abusive conduct on the part of any party” Nonetheless, the legislature did not adopt the OLRC’s recommendations in this regard.

[9]Rosen, Supra note i at para. 2.

[10] Rosen, Supra note 1 at paras. 4-5.

[11] Ibid. at para 4.

[12] Ibid. at para. 5.

[13] The suggested guidelines for determining hourly rates for lawyers depending upon their years of experience can be found in the Information for the Profession released by the Costs Subcommittee of the Rules of Civil Procedure.

[14] Ibid. at paras. 8-17.

[15] The Trustees of the Drywall Acoustic Lathing and Insulation Local 675 Pension Fund v. SNC Group Inc., 2013 ONSC 7122. [Drywall Acoustic].

[16] Ibid. at para. 16 and 18.

[17] Kristen A. Thoreson, “Class Action Costs Orders Aim to Provide Greater Access to Justice”, The Advocates Society

[18] Julius Melnitzer quoting Kim Orr, “Judge takes aim at class counsel in lowering costs”, The Law Times, November 18, 2013

 

CHANGING COST TRENDS IN CLASS ACTIONS

Ontario Securities Commission Willing to Accept “No-Contest” Settlements

On March 11, 2014, the Ontario Securities Commission (the “OSC”) adopted the following enforcement initiatives aimed at encouraging cooperation from market participants and streamlining its dispute resolution process:

  1. A new program to facilitate the settlement of appropriate enforcement cases in circumstances where the respondent does not make formal admissions respecting its misconduct (sometimes referred to as no-contest settlements);
  2. A new program for explicit no-enforcement action agreements;
  3. A clarified process for self-reporting under Staff’s credit for cooperation program; and
  4. Enhanced public disclosure by Staff of credit granted to persons for their cooperation during enforcement investigations.[1]

Perhaps most noteworthy among these four new initiatives, which are set out in OSC Staff Notice 15-702, is that the OSC is now willing to resolve certain enforcement matters on the basis of a settlement agreement in which the respondent does not make formal admissions regarding its alleged misconduct or contravention of Ontario securities law. [2]

Historically, the OSC, and other regulatory organizations, refused to enter into settlement agreements without an acknowledgment of wrongdoing. This approach often stymied settlement discussions as formal admissions could (and likely would) be admissible in any related civil proceeding.

This new policy to accept no-contest settlements fosters the efficient resolution of regulatory disputes and is ultimately a positive development. It enables market participants to enter into settlement agreements, in proper circumstances, without the risk of admissions against interest (a constant feature of all settlement agreements in the old regime) being used against them in subsequent civil proceedings.

However, the OSC indicated that no-contest settlement agreements would not be appropriate in serious cases where:

  1. the person has engaged in abusive, fraudulent or criminal conduct;
  2. the person’s misconduct has resulted in investor harm which has not been addressed in a satisfactory manner; and
  3. the person has misled or obstructed Staff during its investigation. [3]

In the United States, the Securities and Exchange Commission has entered into no-contest settlements for many years. Yet, this approach has been controversial. In U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., for example, Judge Rakoff refused to approve a $285 million no-contest settlement agreement as it was “neither reasonable, nor fair, nor adequate, nor in the public interest.” [4]

One hopes that the OSC’s adoption of no-contest settlement agreements reflects a trend among regulatory bodies. It remains to be seen whether other provincial securities regulators and/or the Investment Industry Regulatory Organization of Canada—the national, self-regulatory organization charged with the oversight of investment advisors and trading activity on Canada’s debt and equity marketplaces—will follow suit.

 

[1] Ontario Securities Commission, News Release, “OSC Proceeds with New Initiatives to Strengthen Enforcement” (11 March 2014), online: OSC

[2] Ontario Securities Commission, “OSC Staff Notice 15-702, Revised Credit for Cooperation Program” 37 OSCB 2583 (13 March 2014), online: OSC 

[3] Ibid at para 20.

[4] U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11 Civ. 7387 (2011).

Ontario Securities Commission Willing to Accept “No-Contest” Settlements

Company Press Releases during Proxy Fights may not be Proxy Solicitations

Overview

In Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc., 2014 ONSC 324, the Ontario Superior Court of Justice held that a press release issued by Equity Financial Holdings Inc. (the “Company”) which defended its board’s actions was not a proxy solicitation and was thus permitted under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”).

Discussion

Smoothwater Capital Partners LP I, a dissident shareholder of the Company (the “Dissident”), issued a press release critical of the Company’s board and soliciting proxies in support of its efforts to replace the board. The Company responded with its own press release defending its board’s actions and criticizing the Dissident (the “Press Release”). The Press Release stated that the Company would “provide a management information circular that will be mailed to shareholders”. It did not contain a request for proxies.

The Dissident applied to Court for an order that the Company comply with, and be restrained from, acting in breach of s. 150 of the CBCA. The Dissident asserted that section 150 of the CBCA prohibited the Press Release, as the Company solicited proxies before delivering a management proxy circular. The Company responded that the Press Release was intended to inform its shareholders and rebut inaccurate statements made in the Dissident’s press release, but did not solicit proxies.

Justice McEwen held that while “solicitation” under the CBCA should be defined broadly, no such solicitation had taken place in this case. The test of whether a document solicits proxies is based on its “principal purpose”, not whether it had been created during a proxy fight. In the context of this case, the principal purpose of the Press Release was to provide certain explanations and defend the Company’s historical position, not to solicit proxies. Justice McEwen found that the Company was thus entitled to respond to the Dissident’s allegations in a single press release, but noted that he was not asked to consider whether multiple press releases could constitute a proxy solicitation.

Justice McEwen distinguished the decisions in Western Mines Ltd. v. Sheridan, [1975] B.C.J. No. 54 (S.C.), Brown v. Duby, 1980 CanLII 1734 (Ont. S.C.J.) and Polar Star Mining Corporation v. Willock, 2009 CanLII 11436 (Ont S.C.J.) as the press releases in those cases expressly referenced an intention to solicit. He further distinguished these cases – and an additional American case cited by the Dissident – on the grounds that the press releases therein were issued by shareholders and there was thus no corporate position to defend.

Comment

This case stands for the proposition that a corporation is entitled to defend itself from attacks during a proxy fight provided that the principal purpose of the communication is not to solicit proxies. It appears that the Company’s decision not to request proxies in the Press Release and not to issue further press releases on this matter were factors in Justice McEwen’s finding that the Press Release was not a proxy solicitation.

Company Press Releases during Proxy Fights may not be Proxy Solicitations

Green v. CIBC: Court of Appeal Revisits Limitation Period for Secondary Market Securities Class Actions and Limits Common Law Negligent Misrepresentation Class Actions

Overview

The Court of Appeal for Ontario’s recent decision in Green v. Canadian Imperial Bank of Commerce [1] (“Green”) is significant in two respects.

First, the Court clarified the limitation period applicable to securities class actions under the secondary market liability provisions of the Ontario Securities Act [2] (the “Act”).

Second, the Court also determined that common law negligent misrepresentation claims could not be certified as class actions on the basis of “fraud on the market” or “efficient market” economic theories. In other words, the question of individual reliance cannot be supplanted by the notion of inferred group reliance except in very limited circumstances.

Court of Appeal Overrules its Earlier Decision in Sharma v. Timminco

In Sharma v. Timminco [3] (“Timminco”), the Court of Appeal held that a plaintiff in a secondary market misrepresentation claim must obtain leave from the Court to proceed with such a claim w Basithin the three-year limitation period established in the Act and that it was not sufficient to simply issue a statement of claim alleging that the defendants were liable under the secondary market provisions of the Act. The Court held that section 28 of the Class Proceedings Act [4] (“CPA”), which suspends the limitation period for claims which are the subject of a class action, did not operate to suspend the limitation period for secondary market liability claims because leave of the Court is required to proceed with such claims. Thus, a plaintiff had not obtained leave to proceed with the claim within three years of the date the document containing the misrepresentation was released, the claim was time-barred.

In Green, the Court of Appeal determined that its earlier decision in Timminco was incorrect and had the following unintended consequences:

• it deprived class members of an important benefit of the class action regime; that is, the suspension of the limitation period under section 28 of the CPA; and

• it undercut the ability of investors to initiate class actions in compliance with the limitation period.

The Court of Appeal overruled Timminco and held that when a representative plaintiff brings a secondary market misrepresentation class action and pleads the statutory cause of action, the facts on which the claim is based, and the intention to seek leave, the limitation period is suspended. Therefore, a plaintiff has three years from the date a misrepresentation is made to commence a secondary market misrepresentation claim (as opposed to three years to both commence a claim and obtain leave to pursue it).

Reliance in Common Law Negligent Misrepresentation Claims

In addition, the Court of Appeal considered whether common law negligent misrepresentation claims could be certified on the basis of “fraud on the market” or “efficient market” economic theories. Under these theories, it is unnecessary for investors to demonstrate that they relied on the specific alleged misrepresentation in purchasing securities. The question of reliance is significant as securities class actions in Canada which asserted common law negligent misrepresentation claims, typically faltered on the basis that an investor’s reliance was an individual issue unsuitable for determination in a class proceeding. Certain class action judges in Canada, while rejecting the “fraud on the market” theory to supplant an analysis of individual reliance were nonetheless certifying common law negligent misrepresentation claims, even where an investor’s reliance would otherwise be an individual issue.

In Green, the Court upheld the motion judge’s decision declining to certify common law negligent misrepresentation claims on the grounds that reliance was an individual issue. While the Court held that in certain limited circumstances inferred reliance could provide a basis for a negligent misrepresentation claim, and certain issues related to the negligent misrepresentation claim could be certified as common issues, it rejected the inferred reliance argument in the context of the common law negligent misrepresentation claim in Green.

Comment

In Green, the Court of Appeal adopted a purposive approach to class action procedure and focused, in large part, on the objective of providing access to justice for plaintiffs. The Court held that the three-year limitation period for securities class actions will be suspended when a representative plaintiff pleads: the statutory cause of action, the underlying facts, and the intent to seek leave.

However, while the Court made it easier for plaintiffs to proceed with statutory secondary market securities claims, it also imposed a significant limit on common law negligent misrepresentation claims. This distinction is important. The statutory regime imposes limits on damages for responsible issuers, directors, officers, and experts, such as auditors and lawyers, except in the case of fraud. Plaintiffs sought to avoid these damages caps by pursuing common law claims. However, the Court’s decision in Green limits the ability of plaintiffs to pursue such claims.

 

 

[1] Green v Canadian Imperial Bank of Commerce, 2014 ONCA 90 [Green].

 

[2] Securities Act, RSO 1990, c s.5, Part XXIII.1.

 

[3] Sharma v Timminco, 2012 ONCA 107, leave to appeal to SCC refused, [2012] SCCA no 157 [Timminco].

 

[4] Class Proceedings Act, 1992, SO 1992, c 6 [CPA].

 

Green v. CIBC: Court of Appeal Revisits Limitation Period for Secondary Market Securities Class Actions and Limits Common Law Negligent Misrepresentation Class Actions

Supreme Court defers to Securities Commission on the Interpretation of Limitation Periods in Secondary Proceedings

On December 5, 2013, the Supreme Court of Canada released its much-anticipated decision in McLean v. British Columbia (Securities Commission) [1], providing clarity on the limitation period applicable to “secondary proceedings” in the securities enforcement context. Specifically, the principal issue before the Supreme Court was when the 6-year limitation period under the B.C. Securities Act begins to run when one provincial securities regulator wishes to enforce the order of another – as of the date of the underlying misconduct or the date of the extra-provincial order? The BCSC argued that the event giving rise to the proceeding against McLean was not her original misconduct, but rather the fact of having agreed with a securities regulator to be subject to regulatory action. Writing for the majority, Justice Moldaver upheld the BCSC’s order, finding that, on a standard of reasonableness, the interpretation advanced by the BCSC should be given deference.

Background

In 2008, the appellant Patricia McLean entered into a settlement agreement with the Ontario Securities Commission (“OSC”) in respect of misconduct that predated 2001. The salient parts of the resulting OSC order [2] (the “OSC Order”) barred McLean from trading in securities for 5 years, and banned her from acting as an officer or director of certain entities registered under Ontario’s Securities Act for 10 years. In 2010, the BCSC issued a reciprocal order adopting the same prohibitions of the OSC Order pursuant to s. 161(6)(d) of its Securities Act. McLean appealed the reciprocal order on the basis that the relevant limitation period had expired: s. 159 of the B.C. Securities Act provides that proceedings “must not be commenced more than 6 years after the date of the events that give rise to the proceedings”.

The issue before the Supreme Court was whether, for the purposes of s. 161(6)(d) of the B.C. Securities Act, “the events” that trigger the 6-year limitation period in s. 159 was (i) the underlying misconduct that gave rise to the settlement agreement, or (ii) the settlement agreement itself. Under the former interpretation – advanced by McLean – the BCSC order would be statute-barred. If, however, the limitation period clock began to run on the date of the OSC Order (as the BCSC contended), the BCSC order would stand as the proceeding was commenced well within 6 years of the OSC Order.

Discussion

Moldaver J. first focused on the preliminary issue of the appropriate standard of review regarding the BCSC’s order. Contrary to the BC Court of Appeal’s decision, Moldaver J. held that the governing standard of review was one of reasonableness, not correctness, on the basis that the resolution of unclear language in an administrative decision maker’s “home statute” is usually best left to the decision maker. This approach is consistent with recent Supreme Court of Canada jurisprudence (see Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association [3]), which held that there is a presumption of reasonableness when it comes to a tribunal’s interpretation of its home statute(s).

With respect to the limitation period issue, although Moldaver J. concluded that “both interpretations are reasonable” and “both find some support in the text, context, and purpose of the statute”, he held that judicial deference must be given to the BCSC’s order:

[40] The bottom line here, then, is that the Commission holds the interpretative upper hand: under reasonableness review, we defer to any reasonable interpretation adopted by an administrative decision maker, even if other reasonable interpretations exist…Judicial deference in such instances is itself a principle of modern statutory interpretation.

[41] Accordingly, the appellant’s burden here is not only to show that her competing interpretation is reasonable, but also that the Commission’s interpretation is unreasonable

According to the Supreme Court, when faced with two competing reasonable interpretations of an administrative body’s “home statute”, the administrator – in this case, the BCSC – with the benefit of its expertise, is entitled to choose between those interpretations and “courts must respect that choice”.

Conclusion

The Supreme Court’s decision reinforces judicial deference when it comes to securities regulators dealing with their own governing statutes and regulations. The resolution of unclear language in a “home statute” is usually best left to administrative tribunals, as a tribunal is presumed to be in the best position to weigh the policy considerations in choosing between multiple reasonable interpretations of such ambiguous language. Although the interpretation of a limitation period was at issue, which is arguably a general question of law, the Court applied a reasonableness standard of review because of the tribunal’s construal of its home statute. This proposition will likely have far-reaching application.

Moreover, an important policy consideration that appears to motivate the decision is the need for inter-jurisdictional cooperation among securities regulators, given the challenges inherent in the decentralized model of securities regulation in Canada. While a securities commission cannot abrogate its responsibility to make its own determination as to whether an order is in the public interest, sections like s. 161(6) of the B.C. Securities Act obviate the need for inefficient parallel and duplicative proceedings – in this case, by providing a triggering “event” other than the underlying misconduct. It remains to be seen whether provinces can “piggy-back” on reciprocal orders sequentially, a question that the court did not want to specifically answer at this time. However, in addressing McLean’s concerns that the interpretation of the BCSC could effectively lead to indeterminate proceedings by provincial securities regulators, the Supreme Court seemed to suggest that an overall reasonableness approach to a regulator’s discretion would alleviate such concerns.

__________________________________________________________

[1] http://canlii.ca/en/ca/scc/doc/2013/2013scc67/2013scc67.html
[2] http://www.osc.gov.on.ca/en/9009.htm
[3] http://www.canlii.org/en/ca/scc/doc/2011/2011scc61/2011scc61.html?searchUrlHash=AAAAAQALMjAxMSBzY2MgNjEAAAAAAQ

Supreme Court defers to Securities Commission on the Interpretation of Limitation Periods in Secondary Proceedings

Securities regulators propose amendments to oil & gas disclosure standards

The Canadian Securities Administrators (CSA) have published for comment proposed amendments to National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101) and Companion Policy 51-101CP Standards of Disclosure for Oil and Gas Activities (51-101CP). NI 51-101 and 51-101CP set forth the disclosure standards applicable to reporting issuers engaged in oil and gas activities. In the proposed amendments, the CSA target several aspects of the disclosure regime applicable to oil and gas reporting issuers, including the following:

  • The disclosure of resources other than reserves;
  • The disclosure of oil and gas metrics;
  • The disclosure of resources under alternative disclosure regimes; and
  • The refinement of the product type definition.

Disclosure of resources other than reserves: Currently, a reporting issuer can elect to disclose contingent resources or prospective resources in conjunction with its annual filings without triggering any additional reporting obligations. Under the proposed amendments, if a reporting issuer elects to disclose contingent or prospective resources in conjunction with its annual filings then the reporting issuer must also disclose the related future net revenue and the resource estimates must be evaluated or audited by a qualified reserves evaluator or auditor.

Disclosure of oil and gas metrics: Currently, the disclosure of only certain oil and gas metrics (e.g. netbacks, finding and development costs) triggers specific methodology or disclosure requirements under NI 51-101. The CSA are proposing a principle-based approach applicable to the disclosure of all oil and gas metrics. Under the proposed amendments, the disclosure of any oil and gas metric requires the reporting issuer to identify the standard, methodology and meaning of the metric, and to provide a cautionary statement as to the reliability of the metric. In addition, if there is no identifiable standard for the metric, then the reporting issuer must disclose the parameters used in the calculation of the metric and a cautionary statement that the metric does not have any standardized meaning.

Disclosure of resources under alternative disclosure regimes: Currently, if a reporting issuer is subject to an alternative resources disclosure regime, such as that prescribed by the United States Securities and Exchange Commission, then it must obtain exemptive relief to present resources disclosure in accordance with such alternative disclosure regime. Under the proposed amendments, a reporting issuer that is subject to an alternative disclosure regime may present such alternative disclosure provided that the alternative disclosure is accompanied by the disclosure required by NI 51-101; and the alternative disclosure satisfies certain other conditions relating to the adequacy and reliability of the alternative disclosure regime. In addition, the estimates prepared under the alternative disclosure regime must have been prepared or audited by a qualified reserves evaluator or auditor.

Refinement of the product type definition: The proposed amendments reconcile the definition of product type to the definition used in the Canadian Oil and Gas Evaluation Handbook. Under the proposed amendments, the existing distinction based on whether the product is conventional or unconventional is eliminated in favour of using the source and process for recovery of the product in question. In addition, the concept of production group is eliminated.

Other effects of the proposed amendments: Some of the other areas of oil and gas disclosure affected by the proposed amendments include the following:

  • Clarifying the concept of marketability as it relates to the reporting of oil and gas volumes;
  • Clarifying the determination of abandonment and reclamation costs and mandating the disclosure of such costs in the determination of future net revenue and in the presentation of significant factors and uncertainties in annual filings;
  • Clarifying the requirement to obtain a consent from a qualified reserves evaluator or auditor in relation to the qualified person’s report provided in connection with the reporting issuer’s annual filings; and
  • Clarifying the disclosure requirement when a reporting issuer has no reserves.

CSA Request for Comments: The CSA welcome comments on the proposed amendments and have posed five specific questions which commenters may choose to address. The comment period ends on January 17, 2014. The full text of the proposed amendments can be found here.

Securities regulators propose amendments to oil & gas disclosure standards