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Court of Appeal Lifts Stay in Cross Border Class Action

In Kaynes v. BP [1] (referred to herein as “Kaynes”) the Court of Appeal for Ontario (“ONCA”) recently lifted a stay of a class proceeding in which the Plaintiff is seeking damages for alleged misrepresentations made to shareholders by BP. The alleged misrepresentations centred on the 2010 Deep Horizons Oil spill.

Class actions were commenced in both Canada and the U.S. which led the Court to grant the order to stay proceedings at first instance, finding Ontario to be forum non conveniens. The ONCA was forced to revisit the stay due to developments in the U.S. proceedings.

Background

The proposed representative Plaintiff in the Canadian proceeding, Mr. Kaynes, purchased his BP securities on the New York Stock Exchange (“NYSE”). The Plaintiff alleged that BP misrepresented its operational and safety programs in its public disclosure prior to the Deep Horizons oil spill. Mr. Kaynes contends that the explosion and spill constituted “corrective disclosure” revealing the deficiencies in the earlier disclosure. He further maintains that BP misrepresented its clean-up efforts following the spill.

Canadian Action Stayed

BP brought a motion to stay the action on the grounds of forum non conveniens, which was granted on appeal.[2] The Court of Appeal concluded that while Ontario has jurisdiction to hear claims relating to securities purchased on the NYSE (and other foreign exchanges), BP had shown Ontario to be an inconvenient forum. The basis for this conclusion was the existence of the U.S. class action and the fact that the US Securities and Exchange Act of 1934 (the “US Act”) asserted exclusive jurisdiction over claims such as those brought by the Plaintiff. The US action and the assertion of exclusive jurisdiction pursuant to the US Act, was enough to convince the Court to stay the action on the grounds of forum non conveniens, despite jurisdiction not otherwise being an issue.

US Proceedings

In the US District Court, BP accepted the Plaintiff’s position that the action was based on Ontario law, and as such, the US Act did not provide for jurisdiction. The US District Court dismissed the class proceeding on two grounds:

  1. The pre-explosion claim was based on the Ontario Securities Act[3] (the “OSA”), and in the Court’s opinion, this claim was statute barred; and
  2. The Court made an order in December 2010 which appointed lead plaintiffs to represent the class; however, these lead plaintiffs had not brought a pre-explosion claim based upon the OSA. As the Canadian plaintiffs were part of the same class as the lead plaintiffs, they would be required to bring a separate class action for the pre-explosion misrepresentations under the OSA.

The ONCA Decision

Following the decision in the US the Plaintiff moved to have the stay of the class proceeding in Ontario lifted. The ONCA considered whether the dismissal of the pre-explosion claim in the US constituted facts arising after its initial decision which justified lifting the stay.

Ultimately, the Court referenced the dismissal of the US claim coupled with BP’s acceptance of Ontario law as being sufficient grounds to lift the stay:

“In our view, these developments taken as a whole, are sufficient to justify lifting the stay. It was certainly not brought to our attention or in our contemplation that the moving party’s claim would be dismissed by the US District Court… It is also significant that BP now accepts that the moving party’s claim is governed by Ontario law and therefore does not assert that it falls within the exclusive jurisdiction of the US courts.”[4]

The Court noted that if the stay was not lifted, the Plaintiff in Ontario faced a “purely procedural barrier” and would be prevented from having his claim heard on the merits. Accordingly, the Court lifted the stay, and in doing so declined to comment upon whether the Plaintiff’s claim may be time-barred, as found by the US District Court.

Commentary

The Court of Appeal’s decision demonstrates the inter-related nature of cross-border class proceedings. In appropriate instances, Courts in both Canada and the U.S. will look to the substantive and procedural law in each jurisdiction in considering the conduct in class proceedings. In Canada, the existence of a foreign class action may be sufficient to stay Canadian claims, unless a Plaintiff will be prevented from pursuing its substantive rights.

[1] Kaynes v. BP P.L.C. 2016 ONCA 601
[2] Kaynes v. BP P.L.C. 2014 CarswellOnt 10971
[3] R.S.O 1990, c. S.5.
[4] Supra Note 1, at para’s16 and 17

Court of Appeal Lifts Stay in Cross Border Class Action

Test for Leave to bring Secondary Market Securities Class Action is not a “Low Bar”

The recent decision in Bradley v. Eastern Platinum Ltd.[1] saw the Superior Court of Justice reaffirm the position that the test for statutory leave to bring a secondary market securities class action “is not a low bar.”[2] Justice Rady, citing the decisions of the Supreme Court of Canada in CIBC v. Green[3], and Theratechnologies[4], refused to grant leave as the claim brought by the plaintiff had no reasonable chance of success at trial. A plaintiff must put forth “both a plausible analysis of the applicable legislative provisions, and credible evidence in support of the claim”[5]; this proved to be an impossibility for the plaintiff, given the evidence led by the defendant.

Where the facts are contentious, as was the case here, the amount and quality of material submitted by the parties will be determinative of whether the motion will fail or succeed. It seems that such situations provide a real opportunity for a defendant to stop a class action before it begins, given that the burden on the plaintiff is substantial.

Facts:

The proposed class action was brought by Mr. Bradley, a pastry chef from British Columbia and the holder of 2000 shares in Eastern Platinum Ltd. (“Eastplats”). Eastplats, a Vancouver based platinum mining company, at the time operated only one mine: Crocodile River Mine (“CRM”). The mine was located in South Africa and the shares of Eastplats were listed on the Toronto Stock Exchange (“TSX”), the Johannesburg Stock Exchange and the London Stock Exchange’s AIM exchange.

In April 2011, Eastplats issued a news release indicating that production for Q1 of that year had been lower than forecasted. The reasons given for the poor Q1 performance were:

“The traditional slow start in January combined with the introduction of revised support methods [emphasis added] resulted in a significant decrease in production for the quarter.”

At the close of the next trading day following the release of this information, Eastplats’ stock price fell sharply on the TSX from $1.30 to $1.10. The plaintiff sought leave to commence an action under the secondary market provisions in Part XXIII.1 of the Ontario Securities Act (“OSA”).[6] Mr. Bradley alleged that Eastplats failed to disclose: (i) a complete or partial shutdown of operations due to a labour dispute, and (ii) the installation of cement grout packs to shore up CRM’s ceiling. The plaintiff claimed that together, these two issues caused the decrease in production and that both were material changes that should have been disclosed. As such, Eastplats’ share price was artificially inflated, thereby causing damage to shareholders who invested during the class period.

As noted, the facts were contentious, and much was made of the particular support structures used to shore up CRM. The plaintiff contended that Eastplats installed cement grout packs ahead of a planned schedule, which caused the redistribution of manpower and a significant decrease in productivity. The defendants however, claimed that while a new support structure was installed, it was not a cement grout pack system and had no significant impact on productivity.

The Motion:

The test to obtain leave under Part XXIII.1 of the OSA is twofold: the plaintiff must show that the action is brought in good faith and that the action has a reasonable prospect of success. The plaintiff contended he met these requirements by leading sufficient evidence to meet what he described as “the low reasonable possibility of success at trial standard”[7] and that the application was brought in good faith.

Justice Rady began her analysis by noting that the purpose of the leave provisions under the OSA is to weed out wholly unmeritorious claims or those brought by coercive design. Such claims are brought in the hope that a defendant will be bullied into a quick settlement, rather than engage in protracted and expensive litigation.

The Court then noted that, while not required to do so, the defendants filed voluminous evidence to refute the plaintiff’s claims. Following the decisions in Green [8]and Theratechnologies[9] the Court stated that a “robust, meaningful examination and critical evaluation of the evidence,”[10] was required in assessing whether leave should be granted, and that the test is “not a low bar as the applicant [had] asserted.”[11]

Upon examination, Justice Rady found that the body of contradictory evidence simply overwhelmed the plaintiff’s position. In light of this, the Court could not find the plaintiff’s claim to have a plausible prospect for success at trial and so dismissed the application.

Commentary:

The Superior Court noted that applications brought under these provisions are now commonly brought with voluminous amounts of evidence, produced by either or both the plaintiff and defendant. A defendant may be well advised to meet an application with compelling evidence, especially in instances where the facts are disputed. Such preparation will now see a defendant in a real position of succeeding in ending a class action early. Similarly, the interpretation of Green and Theratechnologies, has resulted in the leave provisions under the OSA becoming a real burden for a plaintiff to discharge. A plaintiff should truly examine the foundations of their claim before moving under these provisions; real scrutiny at an early stage may save much time and money. In some ways, these leave applications seem to be approaching the summary judgment test, which is an interesting but perhaps not unwelcome development.

[1] 2016 ONSC 1903
[2] Ibid per Justice Rady at para 51
[3] 2015 CarswellOnt 18336
[4] Theratechnologies inc. v. 121851 Canada inc., 2015 CarswellQue 2765
[5] Ibid at para 39.
[6] R.S.O. 1990, c. S.5.
[7] Supra note 1, at para 5
[8] Supra note 3
[9] Supra note 4
[10] Supra note 1 at para 51
[11] Ibid
Test for Leave to bring Secondary Market Securities Class Action is not a “Low Bar”

Court Clarifies the Scope of Underwriter Liability in Securities Class Actions

In LBP Holdings Ltd. v. Allied Nevada Gold Corp.,[1] the Ontario Superior Court of Justice considered a motion to add the underwriters of a bought deal secondary public offering as defendants to a proposed securities class action lawsuit. In allowing the motion with respect to only two of the plaintiff’s five proposed causes of action (both of which were not contested by the underwriters), the court clarified the nature and extent of underwriter liability, particularly in the context of primary and secondary market misrepresentation claims under the Ontario Securities Act (the “OSA”).[2]

The Facts

In May 2013, Allied Nevada Gold Corp. (“Allied Nevada”), a publically traded company, completed a US$150 million bought deal secondary public offering (the “Offering”) for which Dundee Securities and Cormack Securities (the “Underwriters”) acted as principals.[3]

The plaintiff, LBP Holdings Ltd. (“LBP”), purchased shares of Allied Nevada. After the price of Allied Nevada’s shares collapsed in the wake of alleged corrective disclosures, it launched a proposed class action for damages in July 2014.[4] In the action, LBP alleges that Allied Nevada made material misrepresentations regarding its operations and finances which were incorporated by reference in the prospectus filed for the Offering.[5]

In March 2015, Allied Nevada filed for protection under U.S. bankruptcy law and, two months later, LBP served its motion to add the Underwriters as defendants to the action.[6] In particular, LBP sought leave to amend its pleadings to assert five causes of action against the Underwriters, of which the following three were contested:[7]

  • a primary market statutory claim under Part XXIII of the OSA;
  • a secondary market statutory claim under Part XXIII.1 of the OSA; and
  • a claim for unjust enrichment seeking disgorgement of underwriting fees paid to the Underwriters.

The Test to Amend Pleadings and Add Additional Defendants

Under Rule 26.01 of Ontario’s Rules of Civil Procedure,[8] a court will grant leave to amend a pleading to add a new defendant unless the proposed defendant can show:[9]

  • that non-compensable prejudice would result from the amendment, or
  • that the claim being advanced is untenable at law.

The court determined that the Underwriters would not suffer non-compensable prejudice if LBP’s amendments were permitted. With respect to whether LBP’s claims were untenable at law, the court confirmed that it must be “plain and obvious” that the proposed claim discloses no reasonable cause of action. Conversely, if a claim, read generously, has a reasonable prospect of success, it will be allowed.[10]

As set out further below, the court ultimately refused to grant leave to amend with respect to the three contested causes of action.

LBP’s Prospectus Misrepresentation Claim is Time-Barred

Under s. 130(1)(b) of the OSA, any underwriter required to certify a prospectus may be sued for damages by a purchaser of securities where the prospectus, together with any amendment to the prospectus, contains a misrepresentation.[11] On the motion, LBP sought leave to advance this cause of action in respect of the prospectus filed for the Offering and certified by the Underwriters. The Underwriters established, however, that LBP’s claim was time-barred and, as a result, did not disclose a tenable cause of action.

Subsection 138(b) of the OSA provides that an aggrieved shareholder must bring an action under Part XXIII within the earlier of (1) 180 days after she first had knowledge of the facts giving rise to the cause of action, and (2) three years after the date of the transaction that gave rise to the cause of action. In refusing to grant leave to amend, the court held that LBP’s proposed primary market claim was time-barred because LBP must have known about Allied Nevada’s alleged corrective disclosures when it filed its notice of action, which occurred more than 180 days before the motion to amend was brought.[12]

LBP’s Secondary Market Claim is Untenable

The court held that LBP’s proposed claim against the Underwriters under Part XXIII.1 of the OSA, which deals with civil liability for secondary market disclosure, was “not viable in principle” and, therefore, not tenable.[13]

In assessing whether a reasonable cause of action existed, the court first noted that a person can only be sued under Part XXIII.1 if they fall within the list of potential defendants prescribed under s.138.3(1).[14] Of these prescribed defendants, the court agreed that the only recognized category an underwriter could possibly fall under was that of an “expert”, defined at s.138(1)(e) as follows:

A person or company whose profession gives authority to a statement made in a professional capacity by the person or company, including, without limitation, an accountant, actuary, appraiser, auditor, engineer, financial analyst, geologist or lawyer, but not including a designated credit rating organization.

The court unequivocally held that underwriters are not “experts” within the meaning of s.138(1), affirming that underwriters “… are not intended to be caught by the secondary market liability provisions of Part XXIII.1.”[15] The court offered several supporting reasons, first noting that “underwriter” and “expert” are given separate and different definitions throughout the OSA.[16] Further, the s.138(1)(e) definition of an “expert” contemplates professional membership which, the court held, did not apply given that underwriters are not part of a self-regulating or self-licensing profession.[17] Finally, reading the OSA as a whole, the court noted that the legislature expressly, and for sound policy reasons, exposed underwriters to primary market liability under Part XXIII but deliberately choose not to expose them to secondary market liability under Part XXIII.1.[18]

Even if the Underwriters were considered to be “experts” for the purpose of Part XXIII.1, the court held that LBP’s claim was untenable because, pursuant to s.138.3(1)(e), in order to establish liability, a plaintiff must show that the expert, among other things, repeated the responsible issuer’s misrepresentation in a report, statement, or opinion.[19] The court found that merely certifying the Offering prospectus did not result in a republication or restatement of Allied Nevada’s alleged misrepresentations with the result that LBP’s proposed claim was untenable.[20]

LBP’s Unjust Enrichment Claim is Untenable

To establish the viability of its claim in unjust enrichment for disgorgement of underwriting fees, LBP was required to show that the Underwriters were enriched, that LBP suffered a corresponding deprivation, and that there was no juristic reason for the Underwriters’ enrichment.[21] The court held that LBP’s proposed claim in unjust enrichment could not succeed for two reasons. First, in light of the fact that the Underwriters’ underwriting fees were paid pursuant to an unchallenged contract, LBP had no reasonable prospect of showing that there was no juristic reason for the enrichment.[22] Second, even if the fees received by the Underwriters were unjustly paid and received, absent a derivative action, Allied Nevada (who paid the underwriting fees) was the only party with standing to assert a claim.[23]

Comment

In refusing to cast underwriters as “experts” for the purpose of secondary market misrepresentation claims under Part XXIII.1 of the OSA, the court’s decision was consistent with its earlier ruling in Dugal v. Manulife Financial Corporation[24] in which it was held that s. 130 of the OSA offers a “complete code” for underwriter liability.[25] In the result, the court’s decision provides welcome clarity with respect to the potential sources of underwriter liability under the OSA.

[1] 2016 ONSC 1629 (SCJ) [Allied Nevada].

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

[3] Allied Nevada, supra at para 3.

[4] Ibid, at para 3.

[5] Ibid, at paras 4-6.

[6] Ibid.

[7] Ibid, at para 24.

[8] RRO 1990, Reg. 194.

[9] Allied Nevada, supra at para 7.

[10] Ibid, at para 23.

[11] Ibid, at para 27.

[12] Ibid, at para 30.

[13] Ibid, at paras 38-39.

[14] Ibid, at para 41.

[15] Ibid, at para 47.

[16] Ibid, at para 48.

[17] Ibid, at paras 50-52.

[18] Ibid, at paras 55-56.

[19] Ibid, at paras 44-45.

[20] Ibid.

[21] Ibid, at para 66.

[22] Ibid, at paras 64-70.

[23] Ibid.

[24] 2011 ONSC 1764 (SCJ).

[25] Allied Nevada, supra at para 62.

Court Clarifies the Scope of Underwriter Liability in Securities Class Actions

Court Dismisses Secondary Market Securities Class Action Based on Extensive Evidence

In Coffin v. Atlantic Power Corp.[1], the Ontario Superior Court of Justice considered two motions: (1) for leave under section 138.8 of the Ontario Securities Act (the “OSA”)[2] to commence an action for secondary market misrepresentation and (2) for certification to proceed as a class action under subsection 5(1) of the Class Proceedings Act, 1992 (the “CPA”).[3]

Based on his review of the extensive evidence filed by the Defendants, Justice Belobaba dismissed both motions and found that there was, in fact, no actionable misrepresentation.[4] In doing so, Justice Belobaba confirmed the close analytical relationship between requests for leave under the OSA and motions for class action certification under the CPA.

The Facts

During a November 2012 earnings call, the CEO of Atlantic Power Corporation (“Atlantic”), referring to a previously issued company press release, announced that Atlantic was “confident” that it could maintain its dividend at current levels (the “Statements”).[5] Four months later, after slashing its dividend by 65%, the price of Atlantic’s shares and debentures dropped significantly.[6]

The plaintiffs, each of whom had purchased Atlantic’s shares just weeks before the 65% dividend cut, commenced proceedings in Ontario alleging that Atlantic, its CEO, and CFO (together, the “Defendants”) were liable, pursuant to subsections 138.3(1) and 138.3(2) of the OSA, for having made negligent and misleading secondary market disclosures. In particular, the plaintiffs alleged that the Statements and various other disclosures made by Atlantic (which, significantly, contained language warning that future dividends were not guaranteed)[7] amounted to a misrepresentation of Atlantic’s ability to maintain its dividend.[8]

The Motion for Leave under the OSA

To obtain leave to proceed under section 138.8 of the OSA, the Court must be satisfied that the plaintiff’s action is brought in good faith and has a reasonable possibility of succeeding at trial.[9]

In assessing whether there was a reasonable possibility of succeeding at trial, the Court applied the Supreme Court’s framework in Theratechnologies,[10] highlighting that the leave threshold is intended to provide a robust screening mechanism for proposed securities class actions.[11] The Court applied the test for leave endorsed by the Court of Appeal in Green v. Canadian Imperial Bank of Commerce[12] which, according to Justice Belobaba, was consistent with the principles articulated in Theratechnologies: [13]

…whether, having considered all the evidenced adduced by the parties and having regard to the limitations of the motions process, the plaintiffs’ case is so weak or has been so successfully rebutted by the defendant, that it has no reasonable possibility of success.

In applying this test, the Court noted that the Defendants, having filed 10 bankers boxes of documents (including fact affidavits, expert reports, cross-examination transcripts, and other supportive material), had “made a conscientious decision to do battle from the outset.”[14] The Court highlighted that the alleged misrepresentations and the plaintiffs’ expert report will generally “… persuade the court that there is at least a reasonable possibility that the plaintiff will succeed at trial.”[15] However, after reviewing the extensive materials filed by the Defendants, Justice Belobaba concluded that there was no evidence to establish that any of the Defendants had believed that Atlantic would be unable to sustain its dividend level.[16] Rather, the parties agreed that Atlantic had sufficient cash flow to maintain its dividend level and did not dispute that dividend payments were “business judgment calls” rather than “formulaic calculations.”[17] In the result, Justice Belobaba rejected the plaintiffs’ submission that the Defendants should have known that the dividend level was not sustainable and held that there was no misrepresentation upon which the plaintiffs might reasonably succeed at trial.[18] As such, leave under section 138.8 of the OSA was denied.

The Motion to Certify

After dismissing the plaintiffs’ motion for leave to proceed with statutory claims under the OSA, the Court confirmed that the plaintiffs could still seek certification of their remaining common law and statutory shareholder and debenture-holder claims.[19] However, in order for these claims to be certified as a class action, the Court must be satisfied, pursuant to clause 5(1)(d) of the CPA, that a class action is the preferable procedure for the resolution of the common issues raised by the plaintiffs.

Before proceeding with its analysis, the Court observed that no securities class action had ever been certified once leave under the OSA had been denied, as the statutory causes of action are “tailor-made” for class proceedings.[20] Having been denied leave under the OSA, the plaintiffs were required to show that each shareholder and debenture-holder that purchased Atlantic’s securities on the secondary market individually relied on the alleged negligent misrepresentation.[21] The plaintiffs failed to do so.

Following the Court of Appeal in Musicians’ Pension Fund of Canada (Trustees of) v. Kinross Gold Corp.,[22] Justice Belobaba noted that the denial of leave under the OSA is a relevant factor in the clause 5(1)(d) preferability analysis.[23] Justice Belobaba concluded that the common law claims asserted by the plaintiffs rested on the same evidentiary foundation as the OSA claims, which had already been dismissed as part of the plaintiffs’ motion for leave.[24] In concluding that a class action was not the preferable procedure for the plaintiffs’ shareholder misrepresentation claims, Justice Belobaba noted that “encumbering the parties and the courts with a complex class action that is destined to fail promotes neither judicial economy nor access to justice.”[25]

For the debenture-holder claims, Justice Belobaba noted that neither of the current plaintiffs, who were shareholders only, were proper representative plaintiffs of the proposed class.[26] Should the debenture-holders and their lawyers wish to proceed with a class action, the Court reserved its right to hear their certification motion.[27]

Comment

Justice Belobaba’s decision underscores that, using the framework established by the Supreme Court in Theratechnologies, securities class actions will often be won or lost at the certification/leave stage. The Defendants’ strategy—to marshal extensive volumes of evidence early on in support their position that the plaintiffs could not succeed at trial—proved successful in this case.

[1] 2015 ONSC 3686 [Coffin].

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

[3] SO 1992, c 6.

[4] Coffin, supra at paras 153-154.

[5] Ibid, at paras 2 and 11.

[6] Ibid, at para 2.

[7] Ibid, at paras 27-28.

[8] Ibid, at para 10.

[9] Ibid, at para 16. As noted by Justice Belobaba at paragraph 17 of the decision, whether or not the action was brought in good faith was not at issue on the plaintiff’s motion.

[10] Theratechnologies inc. v. 12185 Canada inc., 2015 SCC 18.

[11] Coffin, supra at paras 18-19.

[12] 2014 ONCA 90.

[13] Coffin, supra at para 20.

[14] Ibid, at paras 23-24.

[15] Ibid, at para 22.

[16] Ibid, at para 77.

[17] Ibid, at para 30.

[18] Ibid, at paras 111-122.

[19] Ibid, at paras 129-130.

[20] Ibid, at para 131.

[21] Ibid, at para 132.

[22] 2014 ONCA 901.

[23] Coffin, supra at para 140.

[24] Ibid, at para 145.

[25] Ibid.

[26] Ibid, at para 147.

[27] Ibid, at paras 150-151.

Court Dismisses Secondary Market Securities Class Action Based on Extensive Evidence

Swisscanto v. Blackberry: What constitutes a “public correction” for the purpose of secondary market misrepresentation class actions?

In Swisscanto v. Blackberry1(“Swisscanto”), the Ontario Superior Court of Justice considered, for the first time, what constitutes a “public correction” of an alleged misrepresentation in a secondary market securities class action. The decision clarifies that the public correction requirement’s primary purpose is to serve as a “time-post” for the assessment of damages – it is not meant to be a significant hurdle to obtaining leave to bring an action for damages.2

Plaintiffs can demonstrate the evidence of a public correction under subsection 138.3(1) of the Ontario Securities Act (and in the securities legislation of all other Canadian jurisdictions3), in the following manner:4

  1. The public correction must be pleaded with sufficient precision to provide notice to the defendant;
  2. There must be some linkage or connection between the pleaded public correction and alleged misrepresentation, although the public correction need not be a “mirror image” of the alleged misrepresentation;
  3. The public correction must be reasonably capable of revealing the existence of the alleged misrepresentation to the market; and
  4. The public correction may take any number of forms and need not emanate from the issuer.

In the wake of Swisscanto, the fact that an issuer reports a change in accounting policy may, if supported by the surrounding circumstances, be enough for a Court to conclude that the previous policy was admitted to be an error. Accordingly, issuers are at increased risk that statements and disclosures not intended to be corrections of previous disclosures may, in fact, form part of an action for damages for misrepresentation. That said, the Court also confirmed that the significance of any corrective statement may be relevant at trial should a defendant raise a subsection 138.5(3) defence; under this provision, damages may be reduced if the change in the market price of securities was not a result of the alleged misrepresentation.5

The Facts

In early 2013, BlackBerry Limited (“BlackBerry”) introduced a new line of smartphones featuring the BlackBerry 10 operating system (the “BB10 Phones”).6

On launch, BlackBerry measured revenue from the sale of the BB10 Phones using the “sell-in” accounting method.7 Under this method, BlackBerry booked revenue when BB10 Phones were sold to distributors, rather than when the devices were ultimately purchased by consumers (an approach known as “sell-through” accounting).8 Under GAAP, sell-in accounting is only appropriate where a business can make reasonable estimates of pricing adjustments that may be required to achieve consumer sales.9

Consumer sales of the BB10 Phones were very disappointing; so much so that, on August 31, 2013, BlackBerry announced that it was writing off, by way of an inventory charge, approximately $1 billion of unsold BB10 Phones.10 In the same news release, BlackBerry indicated that it was switching to sell-through accounting and that revenue from such sales would “not be recognized until those devices are sold through to end customers” (the “Statement”).11

The market price of BlackBerry shares dropped 15% in response to the August 31st news release.12 Thereafter, a BlackBerry shareholder, Swisscanto Fondsleitung AG (the “Plaintiff”), launched a class action lawsuit in Ontario seeking, among other things, damages pursuant to the statutory right of action created by subsection 138.3(1) of the Ontario Securities Act. Subsection 138.3(1) provides that where a responsible issuer (or a person with authority acting on the issuer’s behalf) releases a document that contains a misrepresentation, anyone who acquires or disposes of the issuer’s security after the misrepresentation, but before the misrepresentation was publically corrected, has a right of damages against, among others, the responsible issuer and its directors and officers.

Issues

The Court’s decision was made in the context of the Plaintiff’s motion for leave. The Court must be satisfied that (1) the action is brought in good faith, and (2) the plaintiff has a reasonable chance of succeeding at trial.13

In its reasons, the Court focussed on whether the Plaintiff could satisfy the requirements of subsection 138.3(1). In that regard, the Court identified two basic issues: (1) whether there was a misrepresentation (i.e. whether BlackBerry’s use of sell-through accounting was GAAP-compliant), and (2) if there was a misrepresentation, whether the Statement amounted to a public correction.14

Decision

Ultimately, the Court granted leave and allowed the Plaintiff to proceed to the next step of the litigation – certification of the class action.15

On the first issue, the Court held that the Plaintiff had a reasonable chance of establishing that BlackBerry, by issuing financial statements on the basis of sell-in accounting, had made a misrepresentation.16 On this issue, the Court preferred the opinion of the Plaintiff’s expert, who highlighted that the newness of the BB10 Phones coupled with recent negative experiences with other BlackBerry products meant that unexpected future concessions might be required to sell the BB10 Phones through to consumers.17

On the second issue, whether the Statement amounted to a public correction, BlackBerry submitted that the Statement was not a correction of anything. Instead, new facts unrelated to the financial quarters at issue had caused BlackBerry to switch to sell-through accounting. BlackBerry further argued that it was disclosing the change without commenting on disclosures regarding previously recognized revenue.18

In deciding that the Statement did, in fact, amount to a public correction, the Court took a purposive approach to interpreting the phrase “publically corrected” (which is not statutorily defined and had been given very little judicial consideration).19 The Court noted that Part XXIII.1 of the Securities Act (which contains section 138.8) targets the wrong of misrepresentation while balancing against the possibility of strike suits against issuers.20 Within this regime, the public correction requirement serves to set a temporal end for the assessment of damages, which period opens upon the initial public misrepresentation.21 In the end, the Court concluded that the Statement, when read in context, could “fairly and reasonably be said to be a public correction of the sell-in method of revenue recognition that was used in the previous two quarters.”22

Conclusion

The Swisscanto decision confirms that the “public correction” requirement in securities legislation serves as a temporal marker for the assessment of damages, rather than a substantive hurdle to obtaining leave to bring a secondary market securities class action on the basis of an alleged misrepresentation. Accordingly, at the outset of any proceeding, the legal resources of a defendant reporting issuer may be better spent challenging, on other bases, whether the plaintiff has a reasonable chance of succeeding at trial, rather than disputing the existence or timing of any public correction.

_________________________________________

1 2015 ONSC 6434 [Swisscanto].
2 Ibid, at para 58.
3 AB (Securities Act, s 211.03(1)), BC (Securities Act, s 140.3(1)), MB (The Securities Act, ss 176(1)-(2)), NB (Securities Act, s 161.2(1)), NL (Securities Act, s 138.3(1)), NU (Securities Act, s 124(1)), NT (Securities Act, s 124(1)), PE (Securities Act, s 124(1)), QC (Securities Act, ss 225.8, 225.12), SK (The Securities Act, 1998, s 136.11(1)), YT (Securities Act, s 124(1)).
4 Swisscanto, supra note 1 at para 65.
5 Ibid, at para 72.
6 Ibid, at para 5.
7 Ibid, at para 13.
8 Ibid, at para 10.
9 Ibid, at para 12.
10 Ibid, at para 16.
11 Ibid, at para 17.
12Ibid, at para 19.
13 The Supreme Court recently clarified the test for obtaining leave in Theratechnologies inc. v 12185 Canada inc. Read more about this leading decision here.
14 Swisscanto, supra note 1 at para 23.
15 Ibid, at para 30.
16 Ibid, at paras 47-49.
17 Ibid, at paras 38 and 45.
18 Ibid, at para 53.
19 Ibid, at para 60.
20 Ibid, at para 57.
21 Ibid, at para 57.
22 Ibid, at para 73.

Swisscanto v. Blackberry: What constitutes a “public correction” for the purpose of secondary market misrepresentation class actions?

Supreme Court of Canada considers Limitation Period for Secondary Market Securities Class Actions

Overview

On December 4, 2015, the Supreme Court of Canada released its highly anticipated decision1 in a trilogy of shareholder class actions under the secondary market liability provisions of the Ontario Securities Act2 (the “OSA”). At issue was whether section 28 of the Class Proceedings Act, 19923 (the “CPA”) operates to suspend the limitation period applicable to a claim under section 138.3 of the OSA at the time when a plaintiff files a statement of claim or motion for leave under section 138.8 of the OSA, or whether the limitation period is suspended only once leave has in fact been granted.

A majority of the Supreme Court restored the Court of Appeal for Ontario’s previous decision in Sharma v. Timminco4 (“Timminco”) that a plaintiff must obtain leave from the court to proceed with the statutory claim within the three-year limitation period under section 138.14 of the OSA and that it was not sufficient to simply issue a statement of claim alleging that the defendants were liable under the OSA. The Court also considered the application of nunc pro tunc orders to retroactively permit otherwise time-barred actions to proceed. In doing so, the Court rejected a bright-line test for the application of limitation periods in secondary market class actions in favour of leaving motion judges with a residual discretion to permit otherwise time-barred claims to proceed.

Procedural Background

In IMAX Corp. et al. v. Silver and Cohen (“IMAX”), the Superior Court of Justice had already granted leave before the decision in Timminco was released. However, after the release of Timminco, the defendants applied for summary judgment to dismiss the proceeding as time-barred. Justice van Rensburg dismissed the motion and granted leave nunc pro tunc as the expiry of the limitation period occurred while the case was under reserve by the court.

In Celestica Inc. et al. v. Trustees of the Millwright Regional Council of Ontario Pension Trust Fund et al. (“Celestica”), the Ontario litigation was held in abeyance as a parallel proceeding made its way through the courts in the United States. The plaintiffs filed a notice of motion to seek leave after Timminco was released. The Superior Court of Justice applied the doctrine of special circumstances and refused to strike the claim as statute-barred. Justice Perell determined that leave could be granted nunc pro tunc if the plaintiffs satisfied the test for leave.

In Canadian Imperial Bank of Commerce et al. v. Green and Bell (“CIBC”), the Superior Court of Justice would have granted the application for certification under the CPA and leave to proceed under the OSA. However, on the penultimate day of the motion, the Court of Appeal released its decision in Timminco. Consequently, Justice Strathy dismissed the leave application and the statutory action as time-barred by the three-year limitation period.

On appeal, a five-member panel of the Court of Appeal determined that its previous decision in Timminco was incorrect and had unintended consequences as 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. In addition, the Court of Appeal held that it undercut the ability of investors to initiate class actions in compliance with the limitation period. The Court of Appeal therefore overruled Timminco and held that a plaintiff had three years from the date a misrepresentation was made to commence a secondary market misrepresentation claim (as opposed to three years to both commence a claim and obtain leave to pursue it).

Notably, after the Court of Appeal’s decision in CIBC, the OSA was amended to provide that the three-year limitation period is suspended on the date a notice of motion for leave to commence the action is filed with the court.5 A similar provision is found in the securities acts of Alberta, Manitoba, and New Brunswick.6 However, the Supreme Court’s decision is applicable in those provinces that have not yet amended their securities legislation in the same manner as Ontario.

CIBC

The Supreme Court delivered a complex and split decision based on competing interpretations of the interaction between Part XXIII.1 of the OSA and section 28 of the CPA. A majority, comprised of McLachlin C.J., and Rothstein, Cromwell, and Côté JJ., held that section 28 of the CPA does not operate to suspend the limitation period for secondary market liability claims under section 138.3 of the OSA, as it then stood, until leave to proceed with such claims is granted by the court.7

The same majority also held that an order granting leave to proceed with an action can be made nunc pro tunc, where leave is sought before the expiry of a limitation period:

The courts have identified the following non-exhaustive factors in determining whether to exercise their inherent jurisdiction to grant such an order: (1) the opposing party will not be prejudiced by the order; (2) the order would have been granted had it been sought at the appropriate time, such that the timing of the order is merely an irregularity; (3) the irregularity is not intentional; (4) the order will effectively achieve the relief sought or cure the irregularity; (5) the delay has been caused by an act of the court; and (6) the order would facilitate access to justice.8

The dissenting view, adopted by Moldaver, Karakatsanis, and Gascon JJ., would have affirmed the Court of Appeal’s decision in CIBC overruling Timminco and that section 28 of the CPA will suspend the limitation period once the plaintiff commences a class action and pleads the statutory claim for misrepresentation based on section 138.3 of the OSA and the facts supporting the claim.9 In that context, the dissenting justices decided that none of the class actions were statute-barred.

However, while Côté J., writing on behalf of McLachlin C.J. and Rothstein J., declined to grant leave nunc pro tunc, in a separate decision, Cromwell J. would have exercised his discretion to grant an order nunc pro tunc for leave to proceed with the action based on the following analysis.

First, the plaintiffs had been diligent in advancing their action. There was no doubt that the plaintiffs intended to seek leave and that significant time and effort was invested in the development of their case.10

Second, neither the plaintiffs, nor the defendants considered the prospect that the cause of action under section 138.3 of OSA would be statute-barred if the certification and leave motion did not occur and leave was not granted before expiry of the three-year limitation period. It was only until the Court of Appeal’s decision in Timminco that the parties faced the prospect that the plaintiffs’ claim was irremediably statute-barred.11

Third, extending the limitation period in this particular case would not undermine the purpose of limitation periods. To the contrary, according to Cromwell J., “[h]olding that the plaintiffs’ claim is irremediably statute-barred is to defeat that claim by allowing the defendants to take advantage of an after-the-fact ‘gotcha’— a technical defence, the application of which in this case does not further either the purpose of the limitation defence or reinforce public confidence in the administration of justice.”12

Fourth, the court has an obligation to protect unrepresented putative class action members. Indeed, until Timminco, it was reasonable for these class members to assume that their action was sheltered.13

Finally, the plaintiffs’ statutory claim had a reasonable chance of success and should therefore be resolved on its merits rather than as a result of the expiry of a limitation period.14

In the result, the statutory claim in CIBC was permitted to proceed.

IMAX

In the IMAX case, a majority of the Supreme Court was of the view that the statutory action was time-barred. However, Côté J., writing on behalf of McLachlin C.J. and Rothstein J., would grant leave nunc pro tunc in favour of the plaintiffs who were parties to the original claim because the parties agreed to suspend the limitation period while the leave application was under reserve. They would not grant leave in favour of the plaintiffs who were not plaintiffs at the time when argument on the leave application concluded. In their view, granting relief to the plaintiffs against those defendants in this context would undermine the strict limitation period set out in section 138.14 of the OSA.15

Yet, Cromwell J., in a separate decision, was of a different view and exercised his discretion to grant an order nunc pro tunc in favour of all plaintiffs on the basis that the law in Ontario is currently unsettled with respect to whether parties can be added to an existing cause of action after the limitation period has expired in cases where the limitation period is contained “under another Act” (that is, not in the Limitations Act, 2002).16 Cromwell J. indicated that recent commentary takes the view that discretionary jurisdiction may apply to other limitation periods contained in different legislation, such as the OSA in this case (citing Dentons’ lawyers, Christina Porretta and Rahim Punjani’s “The Clock Strikes: A Review of the Limitations Act, 2002, A Decade Later” (2015), 44 Adv. Q. 346 at 375 for this proposition).

In the result, the statutory claim in IMAX was permitted to proceed.

Celestica

In the Celestica case, a majority of the Supreme Court, consisting of McLachlin C.J. and Rothstein, Cromwell, and Côté JJ., held that the statutory action was time-barred and would deny the nunc pro tunc order on the basis that no motion for leave was filed before the expiry of the limitation period.17

Thus, of the cases decided by the Supreme Court, only the Celestica case was held to be time-barred and prohibited from proceeding.

Comment

The Supreme Court determined by a narrow margin that section 28 of the CPA does not operate to suspend the three-year limitation period that applies to the statutory cause of action under section 138.3 of the OSA when an intention to seek leave is pleaded in a class action for common law misrepresentation. Therefore, under the OSA, as it then was, a representative plaintiff had three years to both commence a claim and obtain leave of the court to pursue it.

While the Supreme Court restored the Court of Appeal’s initial strict interpretation in Timminco, it also produced a mix of views on the court’s inherent jurisdiction to grant orders nunc pro tunc and ameliorate the harsh consequences of statutory limitation periods in class action proceedings. This is perhaps the most significant implication of the majority of the Supreme Court’s decision and lower courts will be faced with the challenge of refining the boundaries of the court’s power to effectively back-date an order or judgment.

On a final note, while the trilogy of decisions dealt largely with limitation periods, the Supreme Court also confirmed its previous articulation of the test for leave to proceed with secondary market securities class actions in Theratechnologies Inc. v. 121851 Canada Inc.18 The Supreme Court further affirmed the Court of Appeal’s decision in CIBC that although a class action would not be the preferable procedure to resolve a reliance-based claim in common law negligent misrepresentation, certain issues related to the intent and conduct of the defendant should be certified as common issues in order to advance the litigation.
___________________________________________________________________
1 Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60 [CIBC].
2 Securities Act, RSO 1990, c s.5.
3 Class Proceedings Act, 1992, SO 1992, c 6.
4 Sharma v. Timminco, 2012 ONCA 107, leave to appeal to SCC refused, [2012] SCCA no. 157.
5 See OSA, supra note 2, s 138.14(2).
6 Securities Act, RSA 2000, c S-4, s 211.095(2); The Securities Act, CCSM, c S50, s 197(2); and Securities Act, SNB 2004, c S-5.5, s 161.9.
7 CIBC, supra note 1 at para. 53.
8 Ibid at paras. 90 and 130.
9 Ibid at para. 162.
10 Ibid at para. 136.
11 Ibid at paras. 137-139.
12 Ibid at para. 141.
13 Ibid at paras. 142-143.
14 Ibid at para. 144.
15 Ibid at para. 106.
16 Ibid at paras. 151-152.
17 Ibid at para. 111.
18 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18.

Supreme Court of Canada considers Limitation Period for Secondary Market Securities Class Actions

Theratechnologies1 leave threshold proves too robust for plaintiff shareholder in Securities Class Action

In Mask v. Silvercorp Metals Inc.2 released on October 22, 2015, the Ontario Superior Court of Justice considered a motion for leave to commence an action for secondary market misrepresentation under section 138.8 of the Ontario Securities Act,3 and a motion to certify the action as a class proceeding under section 5(1) of the Class Proceedings Act, 1992.4

Deficient pleadings, uncontroverted expert evidence and a strict application of the Court of Appeal’s analysis in Musicians’ Pension Fund of Canada (Trustees of) v. Kinross Gold Corp.5 led Justice Belobaba to dismiss both motions.

The Facts

Over a two week span in 2011, anonymous internet postings questioned Silvercorp Metal Inc’s (“SVM”) financial accounting and alleged that the company had overstated certain mineral resources and reserves. As a result, SVM’s share price dropped about 30 percent. SVM responded by issuing a press release and a Schedule 4 that reconciled production to revenue from 2006 to the middle of 2011 (the “Schedule 4”). SVM also retained AMC Mining Consultants to prepare a new technical report, which was produced in June 2012 (the “AMC Report”).

In May 2013, the plaintiff, a former SVM shareholder, alleged that a comparison of the AMC Report and the Schedule 4 demonstrated that SVM had overstated its mineral production and grade levels in its 2010 and 2011 public reports.

The plaintiff advanced three claims: (1) a statutory and common law claim for misrepresentation; (2) a statutory claim for failure to make a timely disclosure; and (3) a common law claim in negligence alleging that SVM co-authored and published public reports that it knew, or should have known, had not been prepared in accordance with industry standards or properly audited.

The Leave Motion

The Court found that the plaintiff’s pleadings did not identify which words or figures, in particular documents or on particular dates, were alleged to be misrepresentations pursuant to section 138.3(1) of the OSA. The plaintiff is required to link the misrepresentations to a public correction, however, the plaintiff failed to indicate what public correction was made or when it occurred. Nevertheless, the Court determined that since “publicly corrected” is not defined in the OSA, anonymous internet postings can constitute public corrections under section 138.3 of the OSA.

The leave requirements under section 138.8 of the OSA require that the court be satisfied that an action was brought in good faith and that “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff”.6 In the wake of Theratechnologies, plaintiffs must adduce sufficient evidence to demonstrate a reasonable chance of success, lest their claim be denied at the outset. Here, the plaintiff alleged that there were obvious misrepresentations in SVM’s Schedule 4 due to material differences between the numbers in the AMC Report and the Schedule 4. An AMC geologist involved in the preparation of the AMC Report swore an affidavit on behalf of SVM explaining that different reporting parameters had been applied to the two reports and, therefore, there were no actual discrepancies between the reports. While the plaintiff produced an expert report of its own, the plaintiff’s expert failed to rebut or even address the conclusions of SVM’s expert. The Court favoured AMC’s detailed and uncontroverted evidence.

The plaintiff also alleged that SVM failed to make timely disclosure of a material change as required under section 138.3(4) of the OSA. The plaintiff did not, however, plead any material facts as to any specific production data received by SVM showing a material change within the OSA definition.

The Certification

The Court applied the Court of Appeal’s analysis in Kinross and concluded that a class action is not the preferable procedure where leave under section 138.8 of the OSA has been denied because the statutory misrepresentation claim has no reasonable possibility of success and where the common law misrepresentation claim is “destined to fail” because it rests on the same evidentiary foundation.7

The Court also found that the plaintiff’s negligence claim was in substance a pleading of negligent misrepresentation and could not therefore be certified where the claim for misrepresentation had been denied.

Comment

This case reaffirms the Supreme Court of Canada’s ratio in Theratechnologies. Where a plaintiff’s case is so weak or has been so successfully rebutted by the defendant that it has no reasonable possibility of success, the leave threshold is intended to provide “a robust deterrent mechanism” to ensure that cases without merit are prevented from proceeding.8

____________________________________

1 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 [Theratechnologies].
2 Mask v. Silvercorp Metals Inc., 2015 ONSC 5348.
3 R.S.O. 1990, c. S.5 [OSA].
4 S.O., 1992, c. 6 [CPA].
5 Musicians’ Pension Fund of Canada (Trustees of) v. Kinross Gold Corp., 2014 ONCA 901 [Kinross].
6 OSA, supra at s 138.8.
7 Kinross, supra at para 138.
8 Theratechnologoes, supra at para 38.

Theratechnologies1 leave threshold proves too robust for plaintiff shareholder in Securities Class Action

Procedural Fairness Owed to Defendants May Redefine how Plaintiffs Proceed under the OSA

Introduction

The Court of Appeal in Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v. SNC-Lavalin Group Inc.[1] recently determined whether, once leave to assert a claim under part XXIII.1 of the Ontario Securities Act (the “OSA”)[2] has been granted, plaintiffs may later move to amend their claim under Rule 26.01 of the Rules of Civil Procedure without also obtaining leave under the OSA. The Court’s response was twofold: if the amendment is substantive and essentially involves a new misrepresentation, then the requirement of subsection 138.8(1) of the OSA must be satisfied, but if the amendments are not substantive, then only the requirements of Rule 26.01 apply.

Discussion

The plaintiffs commenced an action against SNC-Lavalin Group Inc. (“SNC”) in 2012 after public allegations against the company resulted in a corrective decline in the price of SNC’s shares. The plaintiffs obtained an order certifying the proceeding as a class action and sought leave (without opposition by SNC) to commence an action under Part XXIII.1 of the OSA, which governs actions for damages related to misrepresentation and imposes a limitation period to commence an action.[3] The plaintiffs’ original claim included the following allegations:

  • that SNC misrepresented certain agreements that resulted in a USD$56 million profit for SNC; and
  • that SNC misrepresented certain conduct of two former employees related to SNC’s presence in Bangladesh.

Over the course of the next two years, as ongoing criminal and regulatory investigations resulted in further allegations against SNC, the plaintiffs made multiple amendments to their Statement of Claim. SNC opposed the last round of these amendments on the basis that they required fresh leave under subsection 138.1(1) of the OSA, which ought to be refused because the amendments were statute barred by operation of the limitation period set out in subsection 138.14(1).

In January 2015, the Ontario Superior Court dismissed the plaintiffs’ motion to amend on the basis that to decide otherwise would result in procedural unfairness to the defendants. In his decision, Justice Perell observed that “[o]btaining leave cannot be used as a procedural bait-and-switch tactic or as a procedural bait-and-pile-on tactic,”[4] spurring legal commentators to query about the future impact of this decision on class actions.

The appeal was allowed in part. The Court of Appeal held that certain of the proposed amendments related to misrepresentations that had not been previously pleaded and as such, had become statute barred. The non-substantive amendments were allowed to proceed.

Comment

While it is too early to predict the effect of this decision on other actions brought under the OSA, the Court’s careful weighing of the purpose and objectives of Part XXIII.1 indicates that courts will be vigilant in ensuring that claims that are out of time are not “piggy-backed” onto existing allegations. This is consistent with the general principle enshrined in Rule 26 that amendments not tenable at law are prohibited.

[1] 2015 ONCA 718, 2015 CarswellOnt [“Drywall Acoustic”].

[2] RSO 1990 c S 5.

[3] Ibid – see s. 138.3(1), which sets out that there is a right of action for damages for a person or company who acquires or disposes of an issuer’s security between a document’s release and public  correction of a misrepresentation in the document, regardless of whether the person or company relied on the misrepresentation; see s. 138.8(1), which requires leave of the Court to commence an action under s. 138.3; and see s. 138.14(1), which establishes a three-year limitation period to commence the action, beginning on the date the document containing the misrepresentation was initially released.

[4] Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v SNC-Lavalin Group Inc., 2015 ONSC 256, 2015 Carswell Ont 195 at para 7.

Procedural Fairness Owed to Defendants May Redefine how Plaintiffs Proceed under the OSA

Ontario Proposes Whistleblower Regime

On October 28, 2015, the Ontario Securities Commission (OSC) published proposed OSC Policy 15-601 – Whistleblower Program (Policy). The proposed Policy provides for the adoption of a whistleblower program by the OSC with the aim to encourage individuals to report information on securities- or derivatives-related misconduct. The whistleblower program is designed to further the OSC’s mandate to protect investors from unfair, improper, or fraudulent practices, and to foster fair and efficient capital markets. If implemented, the whistleblower program would be the first of its kind for securities regulators in Canada.

In developing the proposed Policy, the OSC reviewed written comments received regarding OSC Staff Consultation Paper 15-401: Proposed Framework for an OSC Whistleblower Program, which was released on February 3, 2015 (as discussed in our previous client alert). In addition, the OSC considered the dialogue about the whistleblower program that took place at its June 2015 public roundtable. As a result, the proposed Policy sets out a structured program that includes how information may be submitted to the OSC, whistleblower protections, eligibility and monetary amounts for whistleblower awards.

Who is eligible to be a whistleblower?

Under the proposed Policy, a whistleblower is an individual who voluntarily provides original information relating to a violation of Ontario securities law that has occurred, is ongoing or is about to occur. The proposed Policy expands the list of individuals who are eligible to be whistleblowers. The list of eligible individuals now includes directors and officers, chief compliance officers, in-house legal counsel and culpable whistleblowers provided that there is a reasonable basis to believe that:

a. the subject is engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors;

b. the subject is engaging in conduct that will impede an investigation of the misconduct; or

c. in circumstances where the whistleblower provided the information to the relevant entity’s audit committee, chief legal officer, chief compliance officer or the individual’s supervisor, at least 120 days have elapsed since the whistleblower provided the information.

What type of information would entitle a whistleblower to be eligible for an award?

To be eligible for a whistleblower award, the OSC expects that information will relate to a serious violation of Ontario securities law and will be:

a. original information;

b. information that has been voluntarily submitted;

c. of high quality and contain sufficient timely, specific and credible facts; and

d. of meaningful assistance in investigating the matter

How will whistleblower awards function?

For a whistleblower to receive a monetary award, the OSC requires an individual to report information and misconduct that results in administrative proceedings or a settlement under section 127 of the Ontario Securities Act or section 60 of the Commodity Futures Act. Upon final resolution of a matter, the OSC would offer an eligible whistleblower a monetary award between 5-15 percent of the total monetary sanctions imposed in a hearing or settlement where total sanctions or voluntary payments exceed CA$1 million. If the total sanctions imposed or voluntary payment is equal to or greater than CA$10 million, the award would be capped at a maximum amount of CA$1.5 million. However, if the monetary sanctions imposed or voluntary payment is equal to or greater than CA$10 million, and the OSC in fact collects an amount equal to or greater than CA$10 million in respect of the proceeding, the whistleblower may be awarded up to a maximum of CA$5 million.

The determination of an award under the proposed whistleblower program is discretionary and requires the OSC to analyze the established criteria provided by the proposed Policy. Some factors that may increase the amount of an award to a whistleblower are:

a. the timeliness of the whistleblower’s initial report;

b. whether the whistleblower’s assistance saved time in the investigation;

c. the whistleblower’s efforts to remedy the harm caused by the violations of Ontario securities law; and

d. any unique hardship the whistleblower experienced as a result of the report.

Other factors that may decrease the amount of a whistleblower award are:

a.the whistleblower refused to provide additional information or assistance to the OSC when requested;

b.whether the whistleblower unreasonably delayed reporting the violations; and

c.the degree to which the whistleblower was culpable or involved in the violations.

Expectations

The whistleblower program is expected to increase the OSC’s effectiveness in gaining high quality information in enforcing matters such as insider trading, accounting, disclosure violations and registrant misconduct. Further, the whistleblower program is expected to encourage companies to self-report misconduct to the OSC.

To avoid investigations by the OSC and potential monetary sanctions, it is imperative that companies implement appropriate procedures and conduct scrupulous oversight to ensure compliance with Ontario securities legislation.

Comments

The OSC is inviting feedback and written comments on the proposed Policy until January 12, 2016.

The OSC’s aim is to have a whistleblower project established in the spring of 2016.

For more information about the proposed Policy, please contact Jason A. Saltzman, Michael Schafler or Matthew Fleming at Dentons.

This article was co-authored by Tom Budziakowski an articling student in Dentons’ Toronto office.

Ontario Proposes Whistleblower Regime

Theratechnologies inc. v. 12185 Canada inc: Supreme Court of Canada raises the bar for obtaining leave to bring secondary market securities class actions

In Theratechnologies inc. v. 12185 Canada inc.[1], the Supreme Court of Canada has ruled that requirements that plaintiffs demonstrate that their claims have been brought in good faith and have a reasonable chance of succeeding are no mere “speed bump” on the way to obtaining judicial authorization to bring an action against reporting issuers, directors and officers, or experts for damages resulting from the purchase or sale of securities in the secondary market.

Justice Abella, writing for a unanimous Supreme Court, allowed the defendant reporting issuer’s appeal and concluded that the plaintiff investor was not authorized to proceed with an action for damages suffered as a result of the defendant’s alleged failure to disclose material changes.

The decision directs courts in all Canadian provinces to more rigorously apply securities law requirements that oblige plaintiffs to obtain judicial authorization before proceeding with secondary market securities class actions. Plaintiffs, in the wake of Theratechnologies, must adduce sufficient evidence to demonstrate a reasonable chance of success, lest their claim be denied at the outset.

The Facts

In 2010, Theratechnologies Inc. (“Thera”), a pharmaceutical research and development company based in Montreal and listed on the Toronto Stock Exchange, was awaiting FDA approval for an HIV drug then under development.

The FDA posed various questions about the proposed drug to an expert advisory committee. These questions were posted to a public FDA website and Thera elected not to make any related disclosure to investors. Subsequently, third party stock quotation companies issued press releases stating that use of Thera’s drug could cause unwanted side effects. The market reacted negatively to these reports and the plaintiff, 121851 Canada Inc. (“121851”), sold its shares and suffered a loss.

121851 took the position that the FDA’s questions represented a material change requiring disclosure pursuant to section 73 of Quebec’s Securities Act[2]. As is the case in every province, 121851 needed judicial authorization before bringing an action against Thera. The relevant test under section 225.4 of Quebec’s Securities Act is two-fold and is mirrored in the securities legislation of all other provinces: a court must be satisfied that any given secondary market claim (1) is brought in good faith, and (2) has a reasonable possibility of being resolved in favour of the plaintiff.

Both the motion judge, at first instance, and Quebec Court of Appeal held that there was sufficient evidence to conclude that the plaintiff’s claim had a reasonable chance of success. The Supreme Court, however, disagreed.

The Supreme Court’s Approach and Decision

The issue before the Supreme Court was whether 121851’s claim had a “reasonable possibility” of succeeding within the meaning of section 225.4 of Quebec’s Securities Act. In a unanimous decision, the Supreme Court allowed Thera’s appeal and held that an action should not be authorized.

The Supreme Court clarified that, in order to establish that it has a realistic chance of success, a claimant must offer “some credible evidence in support of its claim”[3]. A full analysis of the evidence is not required. Instead, a plaintiff must adduce “sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant’s favour.”[4]

Applying these principles, the Supreme Court focussed on whether Thera failed to disclose a “material change” within the meaning of section 5.3 of Quebec’s Securities Act[5]. The court held that there was no evidence suggesting that Thera, by electing not to disclose the FDA’s questions, had failed to make any required disclosure. Specifically, the information Thera elected not to disclose did not contain any new information about the drug or its side effects; in fact, there was no evidence to suggest that the FDA’s questions departed in any way from its routine drug approval procedure[6]. Because the evidence did not credibly suggest that there was a material change requiring disclosure under Quebec’s securities laws, the Supreme Court held that there was no reasonable possibility of success and, accordingly, 121851’s action was not authorized.

Outcome and Impact

The securities legislation in all Canadian provinces contain threshold requirements analogous to section 225.4 of Quebec’s Securities Act: a claimant must establish that their action is brought in good faith and has a reasonable chance of succeeding[7]. Accordingly, Theratechnologies will have a far-reaching impact and, given the Supreme Court’s decision, will likely result in courts approaching provincial “reasonable chance for success” requirements with increased analytical rigour. The message to plaintiff’s counsel is clear: evidence showing the fundamental merits of a claim must be adduced before a court will authorize an action for damages in secondary market securities disputes.

The Supreme Court provides general guidance only, however, as to what evidence will establish that a given claim has a reasonable chance of succeeding. Although the authorization stage for secondary market liability actions “should not be treated as a ‘mini-trial’”[8], plaintiff’s counsel should view Theratechnologies as a call for increased evidentiary diligence. According to the court, “a case with a reasonable possibility of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.”[9] Only time, and subsequent consideration and application by lower courts, will determine exactly how provincial authorization threshold requirements have been impacted by Theratechnologies.

[1] 2015 SCC 18.
[2] CQLR, c V-1.1.
[3] Theratechnologies, supra note 1 at para 39.
[4] Ibid.
[5] A material change is defined as “a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or a decision to implement such a change made by the directors or by senior management of the issuer who believe that confirmation of the decision by the directors is probable.”
[6] Theratechnologies, supra note 1 at paras 48 and 51.
[7] British Columbia (Securities Act, RSBC 1996 c 418, s 140.8(2)); Alberta (Securities Act, RSA 2000 c S-4, s 211.08(2)); Saskatchewan (Securities Act, 1988, SS 1988-89 c S-42.2, s 136.4(1)); Manitoba(Securities Act, CCSM c S-50, s 191(2)); Ontario (Securities Act, RSO 1990 c S-5, s 138.8(1)); New Brunswick (Securities Act, SNB 2004 c S-5.5, s 161.41(1)); Nova Scotia (Securities Act, RSNS 1989 c 418, s 146H(1)); PEI (Securities Act, RSPEI 1988 c S-3, s 129(2)); Newfoundland and Labrador (Securities Act, RSNL 1990 c S-13, s 138.8(2)).
[8] Theratechnologies, supra note 1 at para 39.
[9] Ibid.

Theratechnologies inc. v. 12185 Canada inc: Supreme Court of Canada raises the bar for obtaining leave to bring secondary market securities class actions