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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

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.

Recent Update

The Plaintiff sought leave to appeal Justice Belobaba’s decision on August 6, 2014, but leave to appeal was denied (see Mask v. Silvercorp Metals Inc., 2014 ONSC 4647). The Court concluded that the plaintiff did not meet the test for leave to appeal from an interlocutory order of a motions judge. Moreover, Justice Perell found that Justice Belobaba’s decision was an exercise of discretion, and his decision was entitled to significant deference:

The truth of the matter is that Mr. Mask has been hoisted on his own procedural petard. He had the choice of proceeding to cross-examinations in accordance with the agreed schedule, but he chose instead to serve Requests to Inspect Documents with 28 separate requests, demanding thousands of pages of otherwise confidential corporate documents, and he did not file any evidence to explain the relevance of, or the necessity of, reviewing all those documents before the cross-examinations.

Mr. Mask was making a tactical maneuver to obtain an examination for discovery and advance rulings on the production of documents in a case for which leave to proceed had not been granted. It was a trip to the tackle and bait store before a fishing expedition and Justice Belobaba, for a variety of reasons, put a stop it.

[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