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British Columbia’s Court of Appeal looks past unregistered trading in ordering payment to investment finder

Many junior resource companies depend on investment finders to help keep the lights on. Working with finders, however, requires navigating the “exempt” market, so named because it involves exemptions from certain securities laws. One company recently found itself in a catch-22: sanction a potential breach of securities law and stock exchange policy by paying a finder’s fee, or be liable for unjust enrichment and legal costs (the eventual result) by declining.

This resulting court case, Birch v. GWR Resources Inc., is of interest to issuers and their advisers for several reasons, including the rare occasion it presented for British Columbia’s highest court to consider the junior capital market. It also contains guidance for issuers and finders in respect of when a fee will be payable. Above all, it highlights that engaging investment finders can attract legal and regulatory headaches, along with needed capital. Diligence and informed advice are critical to managing risks in this area, and to avoiding noxious side effects of an exempt financing.

Read the full article on dentons.com.

British Columbia’s Court of Appeal looks past unregistered trading in ordering payment to investment finder

Requisitioned meeting breaks deadlock

A deadlocked board of directors, talk of a “public flogging”, and a court reluctant to intervene. The case of Goldstein v. McGrath is a colourful recent example of a requisitioned public company shareholders’ meeting, with the twist that the requisitioning shareholders were represented by or aligned with three of the company’s six directors.

The decision provides three helpful reminders for boards, shareholders and their advisors: the right of shareholders to requisition (i.e. demand) a meeting can be a powerful tool, especially in the context of junior public companies; courts are generally reluctant to exercise their authority to call shareholders’ meetings; and a court will need strong evidence that an incumbent chair may engage in impropriety before appointing an independent chair for a shareholders’ meeting.

Read the full article on dentons.com.

Requisitioned meeting breaks deadlock

Ontario court clarifies dissent procedure in arrangement transaction

A recent Ontario decision shines a light on the ability of shareholders to dissent in respect of a corporate transaction. This right, also known as an appraisal remedy, allows shareholders opposed to a business deal to opt out and be paid the “fair value” of their shares. It is available in certain corporate transactions, including court-approved arrangements (colloquially, “plans of arrangement”) under Ontario law.[1] Having a small number of dissenting shares is often a condition to completing such a transaction.

The decision relates to a plan of arrangement pursuant to which a publicly listed Ontario company was restructured. It is focused in part on the distinction between being a registered shareholder and a beneficial owner of shares. Registered holders are those whose names appear on the company’s register (i.e. list) of shareholders, while beneficial owners hold shares through an intermediary, such as a broker. Corporate statutes provide that only registered holders are entitled to dissent rights.

The facts and arguments of the case are described below. Three takeaways are:

  1. Absent clear language to the contrary, a beneficial owner of shares who wishes to dissent by re-registering the shares in its own name may do so after (or, of course, before) the record date in respect of voting on the transaction.
  2. At least for Ontario companies, it may be possible to limit dissent rights, if the company wishes to do so, by requiring that only registered holders as of the record date may dissent.
  3. Dissent rights in an arrangement under Ontario’s Business Corporations Act (the “OBCA”) are not provided for by section 185 (the dissent provisions) but rather by the interim court order, which is made per section 182 (the arrangement provisions).

Facts and Argument

The company, Partners Value Investments Inc., called a special meeting of shareholders to consider an arrangement pursuant to which it would be restructured as a limited partnership. Shareholders would receive partnership units in exchange for their shares. The company followed the normal procedure of obtaining an interim order in respect of the transaction, which included the provision that registered shareholders could dissent by notifying the company in writing two days prior to the meeting. This two day pre-meeting requirement is typical.

The information circular that was sent to shareholders in respect of the transaction explained, among other things, the two methods by which a beneficial owner could dissent: by having the shares re-registered in its name and delivering a notice of dissent itself (“method 1”), or by instructing its intermediary, as registered holder, to dissent in respect of its shares (“method 2”). This is also typical, and reflective of the OBCA dissent provisions.

The applicant, a beneficial owner of shares, sought to dissent via method 1. It therefore had the shares it owned re-registered in its name, and delivered the notice of dissent within the time period described in the interim order and circular. The company rejected the purported dissent on the grounds that the shareholder was not a registered holder as of the record date, even though it was a registered holder when it delivered its notice of dissent in accordance with the requirement to do so two days in advance of the meeting.

The company’s rationale was that section 185 of the OBCA, the dissent provision, provides that only shareholders entitled to vote on a matter are able to dissent, and only registered shareholders as of the record date are entitled to vote on the arrangement. Beneficial owners don’t vote directly, but rather instruct their intermediary (e.g. their broker) as to how to vote on their behalf.

Findings (and One Quirky Fact)

The court rejected the argument on a few grounds, of which this summary focuses on one: section 185 provides the right to dissent in respect of certain corporate procedures, excluding arrangements. The shareholder’s right to dissent stems rather from the interim order, which was made pursuant to section 182, the arrangement provision of the OBCA. The order referred to section 185, but in relation to the procedure for dissenting, rather than as to who is entitled to dissent. This is typical wording for an interim order of this nature.

There is at least one unusual fact that was favourable to the shareholder. The record date preceded the announcement of the arrangement and the filing and mailing of the circular, per the timeline below. This is not typical, and the result was that it was impossible for a beneficial owner to have shares re-registered in their own name (or to do anything else) after learning of the arrangement but before the record date. As such, if only registered shareholders as of the record date could dissent, it would have made no sense for the circular to have described (as it did) method 1 as a viable dissent option.

Analysis and Commentary

The decision implies that the company could mandate that only registered holders as of a record date are able to dissent, “by including appropriate language” in the order and the plan of arrangement.[2]  This appears to open to door for companies to take a more restrictive approach to granting dissent rights than is current practice. The decision does not explicitly or implicitly sanction limiting the right of beneficial shareholders to dissent via method 2 (having an intermediary dissent on their behalf). It does, however, raise the issue of whether other aspects of the timing conventions around dissenting in an arrangement transaction could be subject to change.

Court decisions in respect of dissent procedures are rare, but dissent rights are frequently granted in arrangements and in certain other transactions. The guidance provided in this decision is therefore valuable to companies, shareholders and their advisors.

Timeline

March 17, 2016 – notice of meeting and record date (two subsequent amendments, March 28 and April 20 to clean up technical stuff)
April 15, 2016 – record date
April 25, 2016 – news release announcing arrangement; arrangement agreement filed
May 3, 2016 – meeting materials filed on SEDAR
May 19, 2016 – shares beneficially owned by applicant re-registered in its own name
May 24, 2016 – notice of dissent delivered, per the requirement of two days in advance of the meeting
May 26, 2016 – meeting held

[1] The plan of arrangement, formally speaking, is a document appended to the main agreement between the transaction parties, laying out the procedure pursuant to which the transaction will be effected.

[2] The quotation is from paragraph 27. It was not noted, but it goes without saying, that this provision should be reflected in the circular.

Ontario court clarifies dissent procedure in arrangement transaction

Court reconsiders the role of “public corrections” in securities class actions

Introduction

In Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v SNC-Lavalin Group Inc.[1] the Ontario Superior Court of Justice examined, in the context of competing motions for summary judgment, what constitutes public correction of an alleged misrepresentation in a secondary market securities class action. The decision in Drywall Acoustic builds on Justice Belobaba’s analysis in Swisscanto v Blackberry[2] and recognizes that the “public correction” requirement serves as more than a mere “time-post” for the measurement of damages. Significantly, the Court confirmed that a public correction is a “constituent element in the determination of liability” and, in complex cases where the existence of a public correction is in dispute, such issues may not be appropriate for determination by way of a motion for summary judgment.[3]

The Facts

The plaintiff shareholders commenced a class action against the defendant reporting issuer, SNC-Lavalin, as well as several of its officers and directors, alleging that SNC-Lavalin’s core documents contained misrepresentations that, once discovered, caused SNC-Lavalin’s share price to plummet, resulting in over $1 billion in shareholder losses.[4]  Specifically, the plaintiffs alleged that SNC-Lavalin’s core documents falsely stated that (i) SNC-Lavalin was a “socially responsible company”, (ii) SNC-Lavalin had controls, policies, and practices in place designed to ensure compliance with anti-bribery laws, (iii) SNC-Lavalin’s internal controls over financial reporting and disclosure controls and procedures were properly designed and operating effectively, and (iv) SNC-Lavalin’s business was being conducted in compliance with a code of ethics.[5] The plaintiffs alleged that these misrepresentations were publically corrected through a series of press releases, articles and reports (collectively, the “Disclosures“) which revealed, among other things, that SNC-Lavalin had paid bribes to foreign government officials.[6]

The defendants brought a surgical summary judgment motion on the issue of whether the alleged misrepresentations had, in fact, been publicly corrected.[7] The defendants argued that: (i) none of the Disclosures were corrective of the alleged misrepresentations because they did not “logically connect with the statement in the core document and, therefore, the statement [said] nothing about the truth or falsity of the statement in the core document”[8]; and (ii) a public correction must have a “significant impact on the valuation of the securities being traded in the secondary market” and that evidence of such impact was not present in this case, based on statistical evidence analyzing the Disclosures’ impact on SNC-Lavalin’s share price.[9]

The plaintiffs brought their own motion for summary judgment to determine whether misrepresentations and public corrections had, in fact, been made and filed their own statistical evidence regarding the impact of the Disclosures on the SNC-Lavalin’s share price.[10] Within the context of these competing motions for summary judgment, the defendants brought a motion for directions to determine whether, and in what manner, the summary judgment motions should proceed.

Issues

The Court considered two issues:

  1. What role does public correction play in secondary market securities class actions?
  2. Could the issues relating to public correction, on the facts of this case, be determined summarily?

Decision

As set out further below, the Court permanently stayed the plaintiffs’ and defendants’ summary judgment motions; in doing so, the Court distinguished Swisscanto, which was decided within the context of a low-threshold leave application, and held that a public correction is an integral element of liability in secondary market misrepresentation class actions.

The role of “public correction”

The Court affirmed that a public correction is “a constituent element and a necessary pre-requisite for a cause of action under s. 138.3 of the Ontario Securities Act” and agreed with earlier case law which held that public correction of a core document can come from any number of sources including the issuer, market analysts, short-sellers, newspaper articles, and credit rating agencies.[11]

The Court generally agreed with Justice Belobaba’s analysis in Swisscanto: a public correction need not mirror the alleged misrepresentation and is not intended to act as a significant hurdle to obtaining leave to bring an action for damages.[12] That said, the public correction element can, in certain cases, play a significant role in the proceeding and is more than a mere “time-post” for the assessment of damages:[13]

… in a particular case, the public correction component of the statutory cause of action can play much more than a relatively modest role in the statutory scheme. In addition to being a constituent element in the determination of liability, the public correction of the misrepresentation plays a fundamental ingredient in quantifying that liability; that is, public correction plays a fundamental role in the calculation of damages.

The Court rejected the plaintiffs’ submission that a public correction only serves to define the class period and class membership; instead, as a constituent element of the statutory cause of action acting as both a surrogate for causation and as a significant tool in the calculation of damages, public correction has the potential of becoming a dispositive issue in any given dispute “much like a limitation period defence can be a free-standing dispositive issue.”[14]

Summary judgment

In light of the sophisticated and highly theoretical statistical models tendered by the parties, the Court concluded that the issues raised by the parties’ summary judgment motions could not be fairly determined without a trial:[15]

…both the statistical analysis and even more so the semantic analysis of what counts for a public correction raise numerous genuine issues and… are far too complicated and nuanced to be fairly and justly determined summarily.

The Court noted that, in the case before it, determining whether the Disclosures qualified as public corrections was more than a “mechanical exercise”.[16] Given the sophisticated and complex models tendered by the parties, combined with the “early stage of the development of the law about the statutory cause of action”, the Court was not willing to determine the genuine issues raised by the parties’ summary judgment motions without the benefit of a full trial record.[17]

Comment

Drywall Acoustic makes a significant contribution to the developing case law regarding the identification, role, and significance of a public correction in secondary market securities class actions. As a constituent element of the statutory cause of action, the public correction element has the potential of becoming a free-standing dispositive issue, not unlike a limitation period defence, and, in complex cases, may not be determinable by way of summary judgment.

[1] 2016 ONSC 5784 [Drywall Acoustic].

[2] 2015 ONSC 6434 [Swisscanto] (case comment available here).

[3] Drywall Acoustic, supra note 1 at para 148.

[4] Ibid at paras 1 and 2.

[5] Ibid at para 70.

[6] Ibid at paras 73-83.

[7] Ibid at para 6.

[8] Ibid at paras 28 and 29.

[9] Ibid at para 31.

[10] Ibid at para 8.

[11] Ibid at paras 143 and 145.

[12] Ibid at para 148.

[13] Ibid.

[14] Ibid at para 154.

[15] Ibid at paras 157,160, and 163.

[16] Ibid at para 159.

[17] Ibid at para 166.

Court reconsiders the role of “public corrections” in securities class actions

Court of Appeal Clarifies Scope of Shareholder Misrepresentation Claims in Takeover Bids

Overview

In Rooney v. ArcelorMittal S.A.[1], the Court of Appeal for Ontario considered whether a plaintiff in an action pursuant to s. 131(1) of the Securities Act (the “Act”) is required to choose whether to sue the offeror, or to instead sue the directors/officers and signatories of the offeror, where misrepresentations are alleged to have been made in a hostile take-over bid circular.

The Court also considered whether security holders who sold their shares in the secondary market should be permitted to elect to bring an action under s. 131(1) of the Act rather than pursuant to the secondary market liability provisions in Part XXIII.1 of the Act, based on alleged misrepresentations in the takeover bid circular.

Background

In September 2010, the defendant, Baffinland Iron Mines Corporation (“Baffinland”), was the subject of a hostile take-over bid led by the defendant Jowdat Waheed (“Waheed”), who was originally hired to provide strategic advice to Baffinland’s board of directors. ArcelorMittal S.A. (another defendant) first made an unsuccessful friendly bid for Baffinland alone, but later made a hostile joint take-over bid with Waheed.

As required under the Act, both Waheed and Baffinland’s board of directors prepared circulars that were sent to Baffinland’s security holders. The plaintiffs brought a class action alleging that the circulars failed to disclose material information. and that the information included in the circulars was itself materially misleading and replete with misrepresentations. The action was based upon s. 131(1) of the Act and was brought against the persons and companies who signed and filed the circulars.

Section 131 of the Act provides that:

(1) Where a take-over bid circular sent to the security holders of an offeree issuer as required by the regulations related to Part XX, or any notice of change or variation in respect of the circular, contains a misrepresentation, a security holder may, without regard to whether the security holder relied on the misrepresentation, elect to exercise a right of action for rescission or damages against the offeror or a right of action for damages against,

  1. every person who at the time the circular or notice, as the case may be, was signed was a director of the offeror;
  2. every person or company whose consent in respect of the circular or notice, as the case may be, has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by the person or company; and
  3. each person who signed a certificate in the circular or notice, as the case may be, other than the persons included in clause (a). [Emphasis added]

The defendants brought various motions to strike out parts of the plaintiffs’ statement of claim on the grounds, amongst others, that (i) the plaintiffs were required to make an election on whether to sue the offeror, or to sue the directors/officers and signatories of the offeror under s. 131(1) of the Act and (ii) the plaintiffs who acquired their shares in Baffinland in the secondary market could not pursue their claims under s. 131(1) of the Act.

The motions judge agreed on both points, stating that while Act could have been more carefully worded, it appeared that such an election was required, and that it must have been intended that secondary market transactions would be included under s. 131(1).

Analysis

The Court of Appeal applied the modern approach to statutory interpretation and determined that the plaintiffs did not have to choose between suing the offeror only or suing the directors/signatories of the offeror under s. 131(1) of the Act. The Court looked to the entirety of the provisions under Part XXIII of the Act and found that the scheme of this part is inconsistent with the interpretation of the motions judge who found that such plaintiffs must choose between suing the offeror or the directors/signatories personally. The Court noted that the preceding section, s.130(1), required no such choice to be made by a potential plaintiff and could not identify reasons why a distinction would be made between potential plaintiffs under these sections. Accordingly, the Court overturned the decision of the motions judge on this issue stating:

…If the motions judge’s interpretation is correct, this scheme falls apart. What point is there in requiring the offeror’s directors and officers to sign a certificate affirming the integrity of the take-over bid circular if s. 131(1) forces a plaintiff into an election that could let those people off the hook? And what statutory purpose is served by forcing an innocent investor to choose which allegedly bad actor to sue? Why should a wrongdoer get a free pass?[2]

With respect to the second question, the Court found that the decision of the motions judge was correct; holders of securities, who dispensed with those securities on the secondary market, could not avail themselves of the relief under s. 131(1) of the Act. The Court stated that the legislature provided relief for such security holders under Part XXIII.1, and should be presumed to have intended to preclude relief under s. 131(1) of the Act. Any other interpretation would be contrary to the modern approach and render the legislation enacted a nullity. The Court stated that:

The legislature must be presumed to have created a coherent and consistent legislative scheme. It is highly unlikely that the legislature would enact a redundant right of action…The availability of s. 131 to these sellers would render Part XXIII.1 nugatory. If s. 131 provides an unfettered right to sue, why would a plaintiff ever choose to sue under Part XXIII.1 and thus to be subject to the leave requirement and liability caps imposed by that Part?[3]

Conclusion

As a result of the Court of Appeal’s decision, security holders seeking to make claims for misrepresentation in a take-over bid circular are not required to choose to sue the company or to sue its directors and officers. However, security holders who acquired their securities in the secondary market are limited to invoking the secondary market provisions in Part XXIII.1 of the Act.

It must be noted that this is a significant decision for security holders who acquired their interests in the secondary market, as they are ultimately limited by the caps placed on damages by the Act, whereas primary market security holders face no such issues. The decision is significant for the plaintiffs and defendants alike because under Part XXIII.1 of the Act, in the absence of fraud, there are caps on damages for misrepresentation claims.  There are no such caps under s. 131(1) of the Act.  Thus the Court’s decision is welcome news for defendants.

[1] 2016 ONCA 630

[2] Ibid, at para 53

[3] Ibid, at paras 73-74

Court of Appeal Clarifies Scope of Shareholder Misrepresentation Claims in Takeover Bids

Court of Appeal Confirms Judges May Weigh Evidence on Leave Motions in Secondary Market Securities Class Actions

Summary

In Mask v. Silvercorp Metals Inc.[1], the Court of Appeal for Ontario upheld a decision[2] refusing leave to commence an action for secondary market misrepresentation under section 138.8 of the Ontario Securities Act[3] (the “OSA”). The Court of Appeal’s decision, released on August 24, 2016, confirms that the test for leave in statutory secondary market claims must be viewed as a substantive hurdle to such claims and that judges considering a motion for leave may weigh and evaluate the evidence before them.

Background

Between March 1, 2010 and September 12, 2011, Silvercorp Metals Inc. (“SVM”) issued public reports regarding its mining operations in China. In September 2011, SVM became the target of anonymous internet postings which questioned the veracity of SVM’s financial accounting and public disclosure. The anonymous posts alleged that SVM had overstated its mineral resources and reserves in China. As a result of the posts, SVM’s share price dropped by approximately 30 percent.

In response to the anonymous posts, and in an effort to demonstrate that its initially reported revenue and production numbers were correct, SVM issued a press release (the “Press Release”) which included a reconciliation of mineral production to the revenue reported in SVM’s financial statements. SVM also retained AMC Mining Consultants to summarize its reported mineral production and to update SVM’s future production estimates (the “AMC Report”). The AMC Report was released in June 2012.

In May 2013, the plaintiff, a former SVM shareholder, commenced proceedings against SVM and its CEO and former CFO, alleging that a comparison of the AMC Report and the Press Release demonstrated that SVM had, in fact, overstated its production.

The Motion Judge’s Decision

The plaintiff advanced three types of claims in the certification motion heard by the motion judge: (1) a statutory and common law claim for misrepresentation; (2) a statutory claim for failure to make timely disclosure; and (3) a common law claim in negligence alleging that SVM co-authored and published public reports regarding its mineral reserves and production that it knew or should have known had not been properly audited or prepared in accordance with industry standards.

With regard to the first claim, the motion judge found that the plaintiff’s expert evidence, which posited that the AMC Report revealed inaccuracies in SVM’s public reports, was undermined by evidence proffered by SVM’s expert. SVM’s expert had demonstrated that the figures in the Press Release and other public reports were substantially the same as the figures in the AMC Report and the plaintiff did not file expert evidence rebutting SVM’s evidence. The motion judge found that there was no support for the plaintiff’s second claim based on any alleged failure to make timely disclosure and held that the plaintiff’s common law negligence claim was unlikely to succeed because it was essentially a pleading of negligent misrepresentation, and was therefore duplicative of the first claim.

The Appeal

The plaintiff unsuccessfully argued on appeal that the motion judge erred by misapprehending evidence and misapplying the leave test under section 138.8 of the OSA.

Application of the Theratechnologies Leave Test

The plaintiff’s primary submission was that the motion judge erred in law by applying a higher leave standard than what is required by the Supreme Court of Canada pursuant to Theratechnologies[4] and Canadian Imperial Bank of Commerce v. Green.[5] In Theratechnologies, the Supreme Court interpreted section 138.8 of the OSA, pursuant to which the court must be satisfied that a statutory misrepresentation claim is brought in good faith and has a reasonable chance of succeeding at trial, as requiring the plaintiff to show “a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.”[6] A court’s assessment requires a “reasoned consideration of the evidence to ensure that the action has some merit.”[7] The plaintiff contended that by analyzing and weighing SVM’s expert evidence against the plaintiff’s expert evidence, the motion judge incorrectly elevated the Theratechnologies leave standard and consequently turned the motion for leave into a mini-trial.[8]

The Court of Appeal agreed with the motion judge’s approach, noting that “scrutiny of the merits of the action based on all evidence proffered by the parties” is a necessary component of the leave test.[9] The method adopted by the motion judge was consistent with the underlying purpose of the leave test, which is to serve as a “robust deterrent screening mechanism.”[10]

The Court of Appeal further disagreed with the plaintiff’s submission that the motion judge had made erroneous findings of fact. Instead, the Court held that “it was open to the motion judge to examine the factual underpinnings” and that, in doing so, the motion judge reasonably “concluded that the foundation [of the plaintiff’s claim] had been demolished by the defendant’s evidence and had not been repaired by the plaintiff’s.”[11]

The Motion Judge’s Characterization of the Claim and Consideration of Evidence

The plaintiff’s second submission was that the motion judge overlooked relevant evidence and misapprehended the nature of the its negligent misrepresentation claim by construing it as a mere comparison of SVM’s public reports, Press Release, and the AMC Report. The Court of Appeal, however, agreed with the motion judge’s assessment of the claim: the focus of the plaintiff’s negligent misrepresentation claim was indeed the alleged discrepancies between the reports.[12] Moreover, the Court held that motion judge’s reasons made express reference to the evidence that was allegedly overlooked.[13] Ultimately, the Court of Appeal confirmed the motion judge’s finding that SVM’s evidence explained any discrepancies between the company’s public disclosure and the AMC Report and that the plaintiff had not filed evidence rebutting this explanation or cross-examined SVM’s expert on it. The Court of Appeal further rejected the plaintiff’s argument that the motion judge improperly weighed evidence and conducted a mini-trial. The Court affirmed that a judge hearing a motion is required to evaluate and weigh the merits of the proposed claim and the evidence filed by the parties.

Comment

The Court of Appeal’s decision in Mask v. Silvercorp Metals Inc. affirms the test for leave in secondary market class actions. The Supreme Court in Theratechnologies was of the view that leave applications should provide a robust screening mechanism to prospective misrepresentation claims.[14] At the same time, the Supreme Court was wary of imposing evidentiary burdens that would “essentially replicate the demands of a trial.”[15] The Court of Appeal in Mask v. Silvercorp Metals Inc. attempts to reconcile these opposing interests by confirming that the leave test requires the scrutiny and weighing of evidence proffered by all parties.[16] A motion judge is not limited to examining only the plaintiff’s evidence to determine whether its claims have a reasonable prospect of succeeding at trial.

[1] 2016 ONCA 641 (Mask).

[2] Mask v. Silvercorp Metals Inc., 2015 ONSC 5348. Click here for a full summary.

[3] R.S.O. 1990, c. s.5.

[4] Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18. Click here for a full summary.

[5] 2015 SCC 60.

[6] Theratechnologies, supra at para 39 (emphasis added).

[7] Ibid, at para 38 (emphasis added).

[8] Mask, supra at para 36.

[9] Ibid, at para 41.

[10] Ibid, at para 42, citing Theratechnologies, supra at para 38.

[11] Ibid, at paras 48-49.

[12] Ibid, at para 53.

[13] Ibid, at paras 54-56.

[14] Theratechnologies, supra at para 38.

[15] Ibid, at para 39.

[16] Mask, supra at para 43.

Court of Appeal Confirms Judges May Weigh Evidence on Leave Motions in Secondary Market Securities Class Actions

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 of 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