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Court Limits Plaintiff’s Ability to Access Corporate Documents in Securities Class Action

Overview

In Mask v. Silvercorp Metals Inc. [1] released on July 18, 2014, the Ontario Superior Court of Justice considered whether a plaintiff seeking leave to commence a secondary market liability action under the Securities Act [2] is permitted to obtain corporate documents from the defendant before the leave motion has been adjudicated.

After reviewing the case law applicable to Requests to Inspect Documents (the “Requests”) pursuant to Rule 30.04(2) and the broader policy concerns regarding leave motions under section 138.8 of the OSA, Justice Belobaba held that the Rule cannot be used as a fishing rod, especially before cross-examinations have been conducted in an OSA leave motion.

Background

The plaintiff, a former shareholder of the defendant mining company, seeks to bring a class action against the company and two senior executives for alleged misrepresentations regarding the mineral resources in the defendants’ mines in China and the accounting treatment of certain third-party dealings.

The motions for leave to commence a secondary market liability action under Part XXIII.1 of the OSA and for certification of the action as a class proceeding under the Class Proceedings Act, 1992 [3] are scheduled to be heard in September 2014.

The defendants filed affidavits opposing the plaintiff’s leave and certification motions. The plaintiff, in turn, served Requests under Rule 30.04(2) of the Rules of Civil Procedure, [4] asking that hundreds of documents mentioned in these affidavits be produced for inspection prior to the cross-examinations. The defendants declined to do so, arguing that the plaintiff’s Requests amounted to a fishing expedition.

Discussion

As a preliminary matter, the Court noted that, at best, it was unclear that a Request to Inspect can be used by a shareholder (who is, at most, a putative plaintiff) to augment a pending OSA leave motion. Unless and until leave is granted, the defendant is not yet a “party” to the OSA action, and a “non-party” cannot be forced to produce documents pursuant to the Rule.

Apart from this preliminary issue, the Court noted that the Requests ran afoul of legal principles with respect to specificity, relevance, proportionality, timeliness, prejudice and privilege. The Court agreed with the defendants that allowing the putative plaintiff to conduct a broad examination before the leave motion “in order to rummage through a large volume of (confidential corporate) documents to find evidence that could support the proposed OSA leave motion would seriously prejudice the defendants”.

The Court further held that it would have dismissed the plaintiff’s motion in any event on the basis of broader policy concerns about the nature of the OSA leave motion. The proper scope of cross-examination on an affidavit is always defined by the context of the proceeding itself. In this case, the underlying policy of the leave motion provides some measure of protection against the potentially coercive nature of secondary market claims by discouraging investors from pursuing unsupported actions to the detriment of the shareholders of the target company.

The Court concluded that the Request to Inspect Documents must be restricted in scope and content to a “manageable dimension” that accords both with first principles of documentary production, as well as the statutory language and underlying policy of the OSA leave provisions.

Comment

In arriving at his conclusion, Justice Belobaba referred to a series of Part XXIII.1 cases where Ontario Courts have consistently restricted the examination rights of moving parties to accord with the policy behind the OSA leave motion. This case, while novel in its application to Requests to Inspect Documents, simply reaffirms an existing trend that, in the context of OSA leave motions, a moving party is restricted from compelling oral and documentary evidence from respondents in an effort to make a case from their evidence.

Recent Update

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

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

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

[1] 2014 ONSC 4161.
[2] R.S.O. 1990, c. S.5 (“OSA”).
[3] S.O. 1992, c. 6.
[4] R.R.O. 1990, Reg. 194, as amended (the “Rules”).

Court Limits Plaintiff’s Ability to Access Corporate Documents in Securities Class Action

Supreme Court defers to Securities Commission on the Interpretation of Limitation Periods in Secondary Proceedings

On December 5, 2013, the Supreme Court of Canada released its much-anticipated decision in McLean v. British Columbia (Securities Commission) [1], providing clarity on the limitation period applicable to “secondary proceedings” in the securities enforcement context. Specifically, the principal issue before the Supreme Court was when the 6-year limitation period under the B.C. Securities Act begins to run when one provincial securities regulator wishes to enforce the order of another – as of the date of the underlying misconduct or the date of the extra-provincial order? The BCSC argued that the event giving rise to the proceeding against McLean was not her original misconduct, but rather the fact of having agreed with a securities regulator to be subject to regulatory action. Writing for the majority, Justice Moldaver upheld the BCSC’s order, finding that, on a standard of reasonableness, the interpretation advanced by the BCSC should be given deference.

Background

In 2008, the appellant Patricia McLean entered into a settlement agreement with the Ontario Securities Commission (“OSC”) in respect of misconduct that predated 2001. The salient parts of the resulting OSC order [2] (the “OSC Order”) barred McLean from trading in securities for 5 years, and banned her from acting as an officer or director of certain entities registered under Ontario’s Securities Act for 10 years. In 2010, the BCSC issued a reciprocal order adopting the same prohibitions of the OSC Order pursuant to s. 161(6)(d) of its Securities Act. McLean appealed the reciprocal order on the basis that the relevant limitation period had expired: s. 159 of the B.C. Securities Act provides that proceedings “must not be commenced more than 6 years after the date of the events that give rise to the proceedings”.

The issue before the Supreme Court was whether, for the purposes of s. 161(6)(d) of the B.C. Securities Act, “the events” that trigger the 6-year limitation period in s. 159 was (i) the underlying misconduct that gave rise to the settlement agreement, or (ii) the settlement agreement itself. Under the former interpretation – advanced by McLean – the BCSC order would be statute-barred. If, however, the limitation period clock began to run on the date of the OSC Order (as the BCSC contended), the BCSC order would stand as the proceeding was commenced well within 6 years of the OSC Order.

Discussion

Moldaver J. first focused on the preliminary issue of the appropriate standard of review regarding the BCSC’s order. Contrary to the BC Court of Appeal’s decision, Moldaver J. held that the governing standard of review was one of reasonableness, not correctness, on the basis that the resolution of unclear language in an administrative decision maker’s “home statute” is usually best left to the decision maker. This approach is consistent with recent Supreme Court of Canada jurisprudence (see Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association [3]), which held that there is a presumption of reasonableness when it comes to a tribunal’s interpretation of its home statute(s).

With respect to the limitation period issue, although Moldaver J. concluded that “both interpretations are reasonable” and “both find some support in the text, context, and purpose of the statute”, he held that judicial deference must be given to the BCSC’s order:

[40] The bottom line here, then, is that the Commission holds the interpretative upper hand: under reasonableness review, we defer to any reasonable interpretation adopted by an administrative decision maker, even if other reasonable interpretations exist…Judicial deference in such instances is itself a principle of modern statutory interpretation.

[41] Accordingly, the appellant’s burden here is not only to show that her competing interpretation is reasonable, but also that the Commission’s interpretation is unreasonable

According to the Supreme Court, when faced with two competing reasonable interpretations of an administrative body’s “home statute”, the administrator – in this case, the BCSC – with the benefit of its expertise, is entitled to choose between those interpretations and “courts must respect that choice”.

Conclusion

The Supreme Court’s decision reinforces judicial deference when it comes to securities regulators dealing with their own governing statutes and regulations. The resolution of unclear language in a “home statute” is usually best left to administrative tribunals, as a tribunal is presumed to be in the best position to weigh the policy considerations in choosing between multiple reasonable interpretations of such ambiguous language. Although the interpretation of a limitation period was at issue, which is arguably a general question of law, the Court applied a reasonableness standard of review because of the tribunal’s construal of its home statute. This proposition will likely have far-reaching application.

Moreover, an important policy consideration that appears to motivate the decision is the need for inter-jurisdictional cooperation among securities regulators, given the challenges inherent in the decentralized model of securities regulation in Canada. While a securities commission cannot abrogate its responsibility to make its own determination as to whether an order is in the public interest, sections like s. 161(6) of the B.C. Securities Act obviate the need for inefficient parallel and duplicative proceedings – in this case, by providing a triggering “event” other than the underlying misconduct. It remains to be seen whether provinces can “piggy-back” on reciprocal orders sequentially, a question that the court did not want to specifically answer at this time. However, in addressing McLean’s concerns that the interpretation of the BCSC could effectively lead to indeterminate proceedings by provincial securities regulators, the Supreme Court seemed to suggest that an overall reasonableness approach to a regulator’s discretion would alleviate such concerns.

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[1] http://canlii.ca/en/ca/scc/doc/2013/2013scc67/2013scc67.html
[2] http://www.osc.gov.on.ca/en/9009.htm
[3] http://www.canlii.org/en/ca/scc/doc/2011/2011scc61/2011scc61.html?searchUrlHash=AAAAAQALMjAxMSBzY2MgNjEAAAAAAQ

Supreme Court defers to Securities Commission on the Interpretation of Limitation Periods in Secondary Proceedings