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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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

[3] Ibid at para 20.

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

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

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

Overview

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

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

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

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

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

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

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

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

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

Reliance in Common Law Negligent Misrepresentation Claims

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

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

Comment

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

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

 

 

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

 

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

 

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

 

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

 

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