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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 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”