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

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Introduction

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

The Facts

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

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

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

Issues

The Court considered two issues:

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

Decision

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

The role of “public correction”

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

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

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

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

Summary judgment

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

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

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

Comment

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

[1] 2016 ONSC 5784 [Drywall Acoustic].

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

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

[4] Ibid at paras 1 and 2.

[5] Ibid at para 70.

[6] Ibid at paras 73-83.

[7] Ibid at para 6.

[8] Ibid at paras 28 and 29.

[9] Ibid at para 31.

[10] Ibid at para 8.

[11] Ibid at paras 143 and 145.

[12] Ibid at para 148.

[13] Ibid.

[14] Ibid at para 154.

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

[16] Ibid at para 159.

[17] Ibid at para 166.