1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

Procedural Fairness Owed to Defendants May Redefine how Plaintiffs Proceed under the OSA

Introduction

The Court of Appeal in Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v. SNC-Lavalin Group Inc.[1] recently determined whether, once leave to assert a claim under part XXIII.1 of the Ontario Securities Act (the “OSA”)[2] has been granted, plaintiffs may later move to amend their claim under Rule 26.01 of the Rules of Civil Procedure without also obtaining leave under the OSA. The Court’s response was twofold: if the amendment is substantive and essentially involves a new misrepresentation, then the requirement of subsection 138.8(1) of the OSA must be satisfied, but if the amendments are not substantive, then only the requirements of Rule 26.01 apply.

Discussion

The plaintiffs commenced an action against SNC-Lavalin Group Inc. (“SNC”) in 2012 after public allegations against the company resulted in a corrective decline in the price of SNC’s shares. The plaintiffs obtained an order certifying the proceeding as a class action and sought leave (without opposition by SNC) to commence an action under Part XXIII.1 of the OSA, which governs actions for damages related to misrepresentation and imposes a limitation period to commence an action.[3] The plaintiffs’ original claim included the following allegations:

  • that SNC misrepresented certain agreements that resulted in a USD$56 million profit for SNC; and
  • that SNC misrepresented certain conduct of two former employees related to SNC’s presence in Bangladesh.

Over the course of the next two years, as ongoing criminal and regulatory investigations resulted in further allegations against SNC, the plaintiffs made multiple amendments to their Statement of Claim. SNC opposed the last round of these amendments on the basis that they required fresh leave under subsection 138.1(1) of the OSA, which ought to be refused because the amendments were statute barred by operation of the limitation period set out in subsection 138.14(1).

In January 2015, the Ontario Superior Court dismissed the plaintiffs’ motion to amend on the basis that to decide otherwise would result in procedural unfairness to the defendants. In his decision, Justice Perell observed that “[o]btaining leave cannot be used as a procedural bait-and-switch tactic or as a procedural bait-and-pile-on tactic,”[4] spurring legal commentators to query about the future impact of this decision on class actions.

The appeal was allowed in part. The Court of Appeal held that certain of the proposed amendments related to misrepresentations that had not been previously pleaded and as such, had become statute barred. The non-substantive amendments were allowed to proceed.

Comment

While it is too early to predict the effect of this decision on other actions brought under the OSA, the Court’s careful weighing of the purpose and objectives of Part XXIII.1 indicates that courts will be vigilant in ensuring that claims that are out of time are not “piggy-backed” onto existing allegations. This is consistent with the general principle enshrined in Rule 26 that amendments not tenable at law are prohibited.

[1] 2015 ONCA 718, 2015 CarswellOnt [“Drywall Acoustic”].

[2] RSO 1990 c S 5.

[3] Ibid – see s. 138.3(1), which sets out that there is a right of action for damages for a person or company who acquires or disposes of an issuer’s security between a document’s release and public  correction of a misrepresentation in the document, regardless of whether the person or company relied on the misrepresentation; see s. 138.8(1), which requires leave of the Court to commence an action under s. 138.3; and see s. 138.14(1), which establishes a three-year limitation period to commence the action, beginning on the date the document containing the misrepresentation was initially released.

[4] Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v SNC-Lavalin Group Inc., 2015 ONSC 256, 2015 Carswell Ont 195 at para 7.

Procedural Fairness Owed to Defendants May Redefine how Plaintiffs Proceed under the OSA

Theratechnologies inc. v. 12185 Canada inc: Supreme Court of Canada raises the bar for obtaining leave to bring secondary market securities class actions

In Theratechnologies inc. v. 12185 Canada inc.[1], the Supreme Court of Canada has ruled that requirements that plaintiffs demonstrate that their claims have been brought in good faith and have a reasonable chance of succeeding are no mere “speed bump” on the way to obtaining judicial authorization to bring an action against reporting issuers, directors and officers, or experts for damages resulting from the purchase or sale of securities in the secondary market.

Justice Abella, writing for a unanimous Supreme Court, allowed the defendant reporting issuer’s appeal and concluded that the plaintiff investor was not authorized to proceed with an action for damages suffered as a result of the defendant’s alleged failure to disclose material changes.

The decision directs courts in all Canadian provinces to more rigorously apply securities law requirements that oblige plaintiffs to obtain judicial authorization before proceeding with secondary market securities class actions. Plaintiffs, in the wake of Theratechnologies, must adduce sufficient evidence to demonstrate a reasonable chance of success, lest their claim be denied at the outset.

The Facts

In 2010, Theratechnologies Inc. (“Thera”), a pharmaceutical research and development company based in Montreal and listed on the Toronto Stock Exchange, was awaiting FDA approval for an HIV drug then under development.

The FDA posed various questions about the proposed drug to an expert advisory committee. These questions were posted to a public FDA website and Thera elected not to make any related disclosure to investors. Subsequently, third party stock quotation companies issued press releases stating that use of Thera’s drug could cause unwanted side effects. The market reacted negatively to these reports and the plaintiff, 121851 Canada Inc. (“121851”), sold its shares and suffered a loss.

121851 took the position that the FDA’s questions represented a material change requiring disclosure pursuant to section 73 of Quebec’s Securities Act[2]. As is the case in every province, 121851 needed judicial authorization before bringing an action against Thera. The relevant test under section 225.4 of Quebec’s Securities Act is two-fold and is mirrored in the securities legislation of all other provinces: a court must be satisfied that any given secondary market claim (1) is brought in good faith, and (2) has a reasonable possibility of being resolved in favour of the plaintiff.

Both the motion judge, at first instance, and Quebec Court of Appeal held that there was sufficient evidence to conclude that the plaintiff’s claim had a reasonable chance of success. The Supreme Court, however, disagreed.

The Supreme Court’s Approach and Decision

The issue before the Supreme Court was whether 121851’s claim had a “reasonable possibility” of succeeding within the meaning of section 225.4 of Quebec’s Securities Act. In a unanimous decision, the Supreme Court allowed Thera’s appeal and held that an action should not be authorized.

The Supreme Court clarified that, in order to establish that it has a realistic chance of success, a claimant must offer “some credible evidence in support of its claim”[3]. A full analysis of the evidence is not required. Instead, a plaintiff must adduce “sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant’s favour.”[4]

Applying these principles, the Supreme Court focussed on whether Thera failed to disclose a “material change” within the meaning of section 5.3 of Quebec’s Securities Act[5]. The court held that there was no evidence suggesting that Thera, by electing not to disclose the FDA’s questions, had failed to make any required disclosure. Specifically, the information Thera elected not to disclose did not contain any new information about the drug or its side effects; in fact, there was no evidence to suggest that the FDA’s questions departed in any way from its routine drug approval procedure[6]. Because the evidence did not credibly suggest that there was a material change requiring disclosure under Quebec’s securities laws, the Supreme Court held that there was no reasonable possibility of success and, accordingly, 121851’s action was not authorized.

Outcome and Impact

The securities legislation in all Canadian provinces contain threshold requirements analogous to section 225.4 of Quebec’s Securities Act: a claimant must establish that their action is brought in good faith and has a reasonable chance of succeeding[7]. Accordingly, Theratechnologies will have a far-reaching impact and, given the Supreme Court’s decision, will likely result in courts approaching provincial “reasonable chance for success” requirements with increased analytical rigour. The message to plaintiff’s counsel is clear: evidence showing the fundamental merits of a claim must be adduced before a court will authorize an action for damages in secondary market securities disputes.

The Supreme Court provides general guidance only, however, as to what evidence will establish that a given claim has a reasonable chance of succeeding. Although the authorization stage for secondary market liability actions “should not be treated as a ‘mini-trial’”[8], plaintiff’s counsel should view Theratechnologies as a call for increased evidentiary diligence. According to the court, “a case with a reasonable possibility of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.”[9] Only time, and subsequent consideration and application by lower courts, will determine exactly how provincial authorization threshold requirements have been impacted by Theratechnologies.

[1] 2015 SCC 18.
[2] CQLR, c V-1.1.
[3] Theratechnologies, supra note 1 at para 39.
[4] Ibid.
[5] A material change is defined as “a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or a decision to implement such a change made by the directors or by senior management of the issuer who believe that confirmation of the decision by the directors is probable.”
[6] Theratechnologies, supra note 1 at paras 48 and 51.
[7] British Columbia (Securities Act, RSBC 1996 c 418, s 140.8(2)); Alberta (Securities Act, RSA 2000 c S-4, s 211.08(2)); Saskatchewan (Securities Act, 1988, SS 1988-89 c S-42.2, s 136.4(1)); Manitoba(Securities Act, CCSM c S-50, s 191(2)); Ontario (Securities Act, RSO 1990 c S-5, s 138.8(1)); New Brunswick (Securities Act, SNB 2004 c S-5.5, s 161.41(1)); Nova Scotia (Securities Act, RSNS 1989 c 418, s 146H(1)); PEI (Securities Act, RSPEI 1988 c S-3, s 129(2)); Newfoundland and Labrador (Securities Act, RSNL 1990 c S-13, s 138.8(2)).
[8] Theratechnologies, supra note 1 at para 39.
[9] Ibid.

Theratechnologies inc. v. 12185 Canada inc: Supreme Court of Canada raises the bar for obtaining leave to bring secondary market securities class actions

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

Overview

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

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

Background

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

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

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

Discussion

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

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

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

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

Comment

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

Recent Update

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

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

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

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

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

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

UPDATE: Zungui Class Action Settlements against Remaining Defendants Approved by Court

**This blog post was co-authored by Dentons’ Michael Schafler and Michael Beeforth.

On August 27, 2013, Justice Perell released his decision (2013 ONSC 5490) approving three settlements valued at $10.85 million, bringing the class action against Zungui Haixi Corp. (“Zungui”) and others to a close. Under the approved settlements, Zungui will pay $8.1 million, auditors Ernst & Young (“E&Y”) will pay $2 million and the company’s underwriting syndicate (CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities LP and Mackie Research Capital Corporation) will pay $750,000. In an earlier May 2013 decision, Perell J. had certified the class action for settlement purposes in respect of the Zungui and E&Y settlements.

As summarized here, the proposed class action brought by Zungui’s investors stemmed from an August 22, 2011 announcement that E&Y had suspended its audit of Zungui’s 2011 financial statements. The company’s shares immediately dropped by 77% and were subsequently cease-traded. The proposed class was comprised of various groups of investors (each represented by separate counsel), including purchasers in the initial December 2009 IPO, investors who received shares in exchange for securities of a Zungui subsidiary prior to the IPO, and secondary market purchasers.

The proposed plan of distribution under the settlements allocated various levels of compensation to the investor groups depending on, amongst other factors, when investors acquired or sold their shares. The plan did not, however, contemplate any compensation to class members who acquired shares on or following the August 22, 2011 E&Y disclosure (though the settlements included a release of these class members’ claims). One investor who had purchased his shares on August 22, 2011 objected to the fairness of the plan of distribution on the basis that the August 22, 2011 disclosure “[did] not clearly foreshadow the events that followed” and that “there was no way of knowing that the worst possible outcome would come to pass, with investors unable to trade their shares ever again”.

In considering whether the plan of distribution was fair and reasonable, Perell J. noted that if class members such as the objecting investor had appreciated that the parties had only included them in the class as a bargaining chip and would eventually exclude them from the plan of distribution while releasing their claims, those investors would likely have opted out of the class action. As it stood, Perell J. found it “inappropriate and unfair to include August 22, 2011 purchasers as Class Members and then exclude them from the Plan of Distribution”. He thus revised the plan to include August 22, 2011 purchasers but discounted their claims to reflect the increased risk of their investments.

While the precedential value of this decision is likely limited by the fact that the court’s authority to vary the plan of distribution was expressly provided for by the settlement agreements, Perell J. made it clear that he would not have approved the settlements without this authority. Perell J. also noted that s. 26 of the Class Proceedings Act, 1992 provides the court with ample discretion and scope for creativity in determining or approving a plan of distribution where a judgment has been issued. Based on these comments, class counsel would be wise to expressly advise settling class members of the court’s ability to vary distributions, especially in cases involving objecting class members or other potential fairness concerns.

UPDATE: Zungui Class Action Settlements against Remaining Defendants Approved by Court

Class Action Decision Considers Secondary Market Misrepresentation Actions

On July 25, 2013, Justice Belobaba of the Ontario Superior Court of Justice released his decision (2013 ONSC 4083) certifying a proposed class action brought by the Ironworkers Ontario Pension Fund against Manulife Financial Corp. and two of its former executives, Dominic D’Alessandro (CEO) and Peter Rubenovitch (CFO). Belobaba J. also granted the plaintiffs leave to commence an action for secondary market misrepresentation under s. 138 of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “Act”).

Background

In early 2004, Manulife added a number of new guaranteed investment products (the “Guaranteed Products”) to its array of segregated funds. Unlike most of its older products, Manulife decided that the Guaranteed Products would not be hedged or reinsured – any risk of equity market fluctuations would be borne entirely by Manulife. The Guaranteed Products were very successful, growing Manulife’s business from approximately $71 billion in early 2004 to approximately $165 billion by the end of 2008. However, almost all (if not completely all) of that business was unhedged and uninsured. When the global financial crisis hit in the fall of 2008 and the Canadian and American equity markets fell by more than 35%, Manulife was badly overexposed.

On February 12, 2009, Manulife released its 2008 annual financial statements which disclosed that corporate profits had fallen by almost $3.8 billion from the previous year ($2 billion of which was attributable to the Guaranteed Products line) and EPS had dropped from $2.78 to $0.32. The statements also noted that Manulife had increased its reserves from $576 million at year-end 2007 to $5.783 billion because of its unhedged exposure to the equity markets. Investors reacted immediately: Manulife’s share price dropped 6% on the date it released its financial statements, fell a further 37% over the following ten days and, by the end of Manulife’s Q1 2009, was trading at $8.92, a 77% decline from its $38.28 trading price six months earlier.

The plaintiffs commenced a proposed class action in July 2009 based on claims of negligence, negligent misrepresentation, unjust enrichment and the secondary market liability provision of the Act. The plaintiffs alleged that while Manulife was entitled to make a business decision not to hedge or reinsure its equity market risk, it had a legal obligation to fully and fairly disclose to investors its decision to abandon such techniques and the resulting risks. The plaintiffs further alleged, among other things, that Manulife consistently misrepresented in its core disclosure documents that it had in place “effective, rigorous, disciplined and prudent” risk management systems, policies and practices.

Discussion

In certifying the action as a class proceeding and granting leave to pursue a s. 138 claim, Belobaba J. focused on two aspects integral to asserting the statutory cause of action: the test for leave to pursue such a proceeding, and the requirement under the Class Proceedings Act, S.O. 1992, c. 6, that the pleadings disclose a cause of action.

Leave Test under Section 138.8(1) of the Act

Belobaba J. discussed at some length the uncertainties surrounding the second branch of the leave test set out at s. 138.8(1) of the Act: that is, that there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff [1]. In Ontario, class action judges have consistently treated the “reasonable possibility” threshold as a relatively low standard, holding that the plaintiff must simply show, based on a reasoned consideration of the evidence, that there is something more than a de minimis possibility of success at trial. On the other hand, courts in British Columbia have viewed the test as a higher standard which is intended to do more than screen out clearly frivolous, scandalous or vexatious actions.

Belobaba J. pointed out that while his opinion was more consistent with the latter interpretation, the debate may have been decided in favour of the more lenient interpretation by the Supreme Court of Canada’s recent decision in R. v. Imperial Tobacco Canada, 2011 SCC 42. In that decision, the Supreme Court held that under the strike-pleadings rule – which allows a claim to be struck if it is plain and obvious, assuming the facts as pleaded to be true, that the pleading discloses no reasonable cause of action – one must only show a “reasonable prospect of success”, which amounts to the same thing as a “reasonable possibility of success” and may effectively render the test under s. 138.8 of the Act a de minimis threshold (as articulated by the Ontario courts). In any event, Belobaba J. held that he would have come to the same conclusion in favour of the plaintiffs under either interpretation of the test.

Certification under Class Proceedings Act

In certifying the action as a class proceeding, Belobaba J. addressed Manulife’s argument that the pleadings did not disclose a cause of action claim in respect of the s. 138 claim because the action was not commenced within three years of the alleged misrepresentations (as required by s. 138.14 of the Act and the Ontario Court of Appeal’s decision in Sharma v. Timminco Ltd., 2012 ONCA 107).

While Timminco is currently under review by a five-member panel of the Court of Appeal, Belobaba J. agreed with Manulife that he is bound by the current state of the law. However, he also agreed with the plaintiffs’ position that Timminco did not deal directly with the court’s jurisdiction to grant leave nunc pro tunc, and that case law subsequent to Timminco has held that the limitation period in s. 138 of the Act is subject to the special circumstances doctrine (which provides a limited jurisdiction to make orders nunc pro tunc that have the effect of reviving a statute-barred cause of action [2]). On this basis, Belobaba J. concluded that he could not say that it is plain and obvious that the limitation period defence applies and the statutory claim is certain to fail.

Conclusion

Justice Belobaba’s decision, while uncontroversial in its application of current legal principles, stands as an interesting commentary on future potential developments regarding the threshold to be applied in the test for leave under s. 138 of the Act. Indeed, in light of Imperial Tobacco, it may be inevitable that a lower standard emerges which, in Belobaba J.’s words, renders the test for leave “nothing more than a speed bump”. It remains to be seen in future case law whether his premonition proves true.

[1] Belobaba J. held that the first branch – that the action is being brought in good faith – was easily satisfied based on the plaintiffs’ argument and content of their expert reports.

[2] See, e.g., Millwright Regional Council of Ontario Pension Trust Fund v. Celestica Inc., 2012 ONSC 6083 at para. 85.

Class Action Decision Considers Secondary Market Misrepresentation Actions

UPDATE: Proposed Class Action Based on Offering Document Misrepresentations Certified for Purposes of Settlement

On May 21, 2013, Perell J. certified a proposed class action against certain defendants in Zaniewicz v. Zungui Haixi Corp. based on misrepresentations in Zungui’s IPO offering documents and other disclosure documents, including its audited and unaudited financial statements (2013 ONSC 2959). Perell J. had previously heard and granted the plaintiffs’ motion for leave to assert a secondary market liability claim under s. 138.3 of the Ontario Securities Act against certain defendants (click here for a summary of that decision).

By the time of the certification hearing, the plaintiffs had reached two settlements covering all of the defendants except for those that comprised the underwriting syndicate for Zungui’s IPO (including CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities LP and Mackie Research Capital Corporation – collectively, the “Underwriter Defendants”). As such, the motions for certification were brought for settlement purposes and did not address the claims against the Underwriter Defendants.

In certifying the class action against the settling defendants, Perell J. noted that even in situations where certification is sought for settlement purposes, all of the criteria for certification under s. 5(1) of the Class Proceedings Act, 1992, S.O. 1992, c. 6 must still be met (though compliance with the criteria is not as strictly required because of the different circumstances associated with settlements).

It remains to be seen whether the plaintiffs will continue to pursue their claim against the Underwriter Defendants. Given Perell J.’s determination that the proposed class action against the settling defendants satisfied all of the certification criteria (albeit on a less strict evaluation than would be applied in a contested certification motion), it is more likely than not that the plaintiffs would be successful if they moved to certify against the Underwriter Defendants. On the other hand, the plaintiffs have yet to obtain leave to assert a secondary market liability claim against the Underwriter Defendants and, through the proposed settlements, have already recovered half of their estimated damages ($10M as against the plaintiffs’ estimate of $20M). The plaintiffs’ intentions will likely become clearer following the settlement approval hearings on August 26, 2013.

UPDATE: Proposed Class Action Based on Offering Document Misrepresentations Certified for Purposes of Settlement

Class Proceeding against Investment Advisor, Firm and Trustee Certified at the Expense of Individualized Causes of Action

Background

Verbeek was an investment advisor and, at some relevant times, a registered representative of the defendant Dundee Securities Corporation (“Dundee”). According to the plaintiffs’ allegations, between August 1998 and June 2001, Verbeek ran an investment scheme pursuant to which his clients could access money in their retirement savings on a tax-free basis. Under the scheme, Verbeek’s clients would either create a self-directed, locked-in RRSP at Verbeek’s investment firm (such as Dundee) or open a trust account at a third party trustee (such as the defendant Canadian Western Trust Company, or “CWT”). Those RRSP funds were then used to purchase shares in certain Canadian Controlled Private Corporations, or “CCPCs”, which were purportedly qualified investments for locked-in RRSPs. Verbeek’s clients were then to receive loans using the CCPC shares as collateral. The CCPC shares were subsequently found to be worthless, and Verbeek’s clients lost some or all of their money. The plaintiffs also allege that the CCPC shares were not eligible investments for locked-in RRSPs and were immediately taxable, and that the loans were illegal.

The plaintiffs allege that Dundee and CWT are liable on the basis of breach of contract, negligent performance of a service, negligence simpliciter and breach of fiduciary duty. At the certification motion, the plaintiffs sought to certify an overall “Verbeek Class” (which would include all of Verbeek’s clients who participated in the investment scheme) and two subclasses: the “Dundee Subclass” (composed of all Verbeek Class members who participated in the investment scheme while Verbeek was registered at Dundee) and the “CWT Subclass” (composed of all Verbeek class members whose shares were held by CWT).

In analyzing the proposed class action, Justice Lauwers found that it met the criteria set out in s. 5 of Ontario’s Class Proceedings Act, 1992, S.O. 1992, c. 6, though he expressed reservations about the fact that the class and sub-class definitions were subjective and referenced the merits of the plaintiffs’ claim, and held that the common questions required some amendment. Accordingly, Justice Lauwers certified the action conditionally pending completion of the above amendments.

Discussion

While Dundee and CWT opposed certification on several bases, the most interesting arguments concerned the requirement that each plaintiff’s individual claim share a common issue.

Dundee argued that the plaintiffs’ allegations of breach of contract, negligence and breach of fiduciary duty would oblige the court to engage in the fact-specific inquiry of assessing the suitability of the individual investments proposed by Verbeek to each of his clients, rendering those causes of action incapable of being common issues. CWT likewise argued that there was no evidentiary basis for determining that the proposed class members all participated in the same investment scheme in the same way for the same purpose.

In rejecting these arguments and holding that the causes of action disclosed common issues, Justice Lauwers rejected the “degree of hyper-commonality” demanded by Dundee and CWT, holding that it is well settled that courts must not set the bar too high on the common issues test. Justice Lauwers approved of the plaintiffs’ position that “the investment scheme was a scam and entirely inappropriate for any investor”, which he found to be a plausible assertion on the evidence. In accepting this simple characterization of commonality, however, Justice Lauwers pointed out that the plaintiffs might be limiting grounds for liability that would otherwise be available to individual class members in separate actions – for example, allegations of a breach of an IA’s duty to know his client.

Justice Lauwers’ decision highlights some of the difficulties associated with asserting individualized causes of action in the IA-client context as “common issues” in a class proceeding. Plaintiffs in such situations will need to determine whether they are willing to sacrifice certain individual causes of action in order to take advantage of the beneficial cost and efficiency aspects of class proceedings.

Class Proceeding against Investment Advisor, Firm and Trustee Certified at the Expense of Individualized Causes of Action

Court Confirms that S. 130 of the Ontario Securities Act Applies Only to Primary Market Purchasers

In the recent decision of Tucci v. Smart Technologies Inc. (2013 ONSC 802), Justice Perell confirmed that the statutory cause of action for misrepresentation in a prospectus (set out in s. 130(1) of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “OSA”)) does not apply to purchasers in the secondary market even when those purchasers buy securities during an ongoing IPO.

Background

In Tucci, the defendant Smart Technologies (“Smart”) filed a prospectus for the purposes of an IPO in respect of which the period of distribution began on July 15, 2010. In addition to Smart, both the defendants Intel Corporation and School S.a.r.L. sold Smart shares pursuant to the IPO. The IPO closed on July 20, 2010. However, prior to closing, the Smart shares began trading on the secondary market (on both the TSX and NASDAQ). The plaintiff alleges that on November 9, 2010, Smart made corrective disclosure in respect of a misrepresentation contained in its prospectus. The plaintiff subsequently commenced a proposed class action asserting a claim for damages under s. 130 of the OSA (as well as similar claims under the relevant sections of other Canadian securities legislation).

At the certification motion before Justice Perell, the defendants consented to certification of the action subject to one contested issue regarding the scope of the plaintiff’s proposed class definition. Section 130(1) of the OSA provides that where a prospectus contains a misrepresentation, “a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public” has a cause of action against, amongst others, the issuer and underwriters of the securities in question. This statutory cause of action has conventionally been understood to be available only to purchasers buying securities in the primary market, and not purchasers in the secondary market (who have their own statutory cause of action set out in s. 138.1 of the OSA for which leave is required). The plaintiff challenged this conventional understanding by seeking to certify a class which included persons who acquired Smart shares on the secondary market between July 15 and 20, 2010, arguing that during the period of distribution, purchasers in both the primary and secondary markets are similarly situated and, as a matter of public policy, it is desirable to treat similarly-situated persons equally. The plaintiff also sought to distinguish existing Ontario case law restricting the s. 130 cause of action to primary market purchasers on the basis that those cases only addressed secondary market purchasers who bought securities after the primary market distribution had been completed.

In rejecting the plaintiff’s submissions, Justice Perell held that a secondary market purchaser does not purchase securities offered by a prospectus but, rather, purchases securities offered by a secondary market vendor, likely at a different price and on different terms of sale than primary market purchasers. Justice Perell also noted that the plaintiff’s “strained interpretation” would have the anomalous result that some s. 130 claimants (the secondary market purchasers) would not have the alternative statutory right of rescission which is only available against the issuer, selling security holders and underwriters (and not secondary market vendors). In the result, the plaintiff’s proposed class definition was revised by excluding secondary market purchasers.

Commentary

This result is consistent with previous decisions, including Menegon v. Philip Services Corp. (2001 CanLII 28396 (ON SC)), in which FMC’s J.L. McDougall and Michael Schafler successfully argued that extending s. 130 to secondary market purchasers could expose issuers and their advisors to indeterminate liability, as primary market purchasers might sell their purchased securities during the period of distribution to secondary market purchasers, who may themselves resell the securities several times.

Court Confirms that S. 130 of the Ontario Securities Act Applies Only to Primary Market Purchasers

Court of Appeal Agrees to Reconsider Timminco

On February 6, 2013, the Court of Appeal for Ontario agreed to review its much discussed decision in Sharma v. Timminco Limited (2012 ONCA 107).

Background

Timminco concerned a proposed class action in which the plaintiff sought to assert a claim for secondary market misrepresentation pursuant to section 138.3 of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “OSA”), for which leave of the court is required under s. 138.8(1). Section 138.14 of the OSA provides that an action under s. 138.3 must be commenced within three years of the date of the alleged misrepresentation (or within six months following the issuance of a news release disclosed that leave has been obtained, whichever occurs first). The plaintiff had asserted in his Statement of Claim that he intended to seek leave as required by the OSA but, for various reasons, had not obtained leave by February 2011 (when the three-year limitation period was about to expire). The plaintiff thus sought and obtained an order declaring that the limitation period had been suspended by s. 28(1) of the Class Proceedings Act, 1992, S.O. 1992, c. 6 (the “CPA”), which provides that “any limitation period applicable to a cause of action asserted in a class proceeding is suspended in favour of a class member on the commencement of the class proceeding”. The defendants appealed to the Court of Appeal on the issue of whether pleading the intention to seek leave was sufficient to suspend the limitation period. The Court of Appeal overturned the initial decision, concluding that without leave having been obtained, no cause of action under s. 138.3 was being “asserted” so as to engage s. 28(1) of the CPA. As such, the cause of action for secondary market misrepresentation was not a legal right and could not be enforced. The Supreme Court of Canada declined to review the decision.

Since its release in February 2012, Timminco has attracted criticism from the plaintiffs’ bar which argues that the court’s approach has proven to be unworkable given the inherent delays in the court system, and the ability of corporate defendants to exacerbate those delays. In contrast, the defence bar has praised Timminco as providing certainty.

In the meantime, two further secondary market liability cases had come before the Court of Appeal on appeal: Green v. Canadian Imperial Bank of Commerce (2012 ONSC 3637), in which Justice Strathy reluctantly declined to certify a class action because it was time-barred by the three-year limitation period; and Silver v. IMAX (2012 ONSC 4881), in which Justice van Rensburg granted an order issuing retroactive leave under s. 138.8 of the OSA to allow the claim to proceed. IMAX is particularly interesting in that oral argument on the leave application had concluded before – and Justice van Rensburg’s decision was released after – the three-year limitation had expired. At the request of the plaintiffs in both cases, the Court stated that it would appoint a special five-judge panel to hear the two appeals and reconsider the issues raised by Timminco. The panel is set to convene in May 2013.

Commentary

Limitation periods are meant to provide certainty by representing an ultimate cut-off for potential legal proceedings. Recent legislative reforms were aimed at making Ontario’s limitation period laws even stricter by eliminating the “special circumstances” doctrine. IMAX represents a departure from this trend and a step back towards the “special circumstances” doctrine. On the other hand, Timminco seemed harsh. What, specifically, has motivated the Court of Appeal to reconsider the issue is not known. Typically, however, full panels of the Court of Appeal are convened to reconsider decisions that have sparked public debate, which has been the case here. It may be that the Court of Appeal wishes to clarify its prior ruling – for example, by promulgating a new test for these types of cases. It may also be that the Court overrules itself. Our own view is that the Court may well provide clarification as to the meaning of the word “asserted” found in s. 28(1) of the CPA; the Court may, for example, hold that the launching of a leave motion under s. 138.3 of the OSA should suffice to suspend the applicable limitation period, since that step is akin to “asserting” a claim within the meaning of s. 28(1) of the CPA. It may also hold that as long as the motion is heard before the limitation period expires, the limitation period will have been complied with.

Court of Appeal Agrees to Reconsider Timminco