No Common Law Duty of Care Owed by Underwriters to Investors in a Bought Deal: LBP Holdings Ltd. v. Hycroft Mining Corporation, 2017 ONSC 6342
On October 24, 2017, Justice Perell of the Ontario Superior Court of Justice dismissed a motion to certify claims for negligent misrepresentation and negligence against two underwriters primarily on the basis that a class action was not the preferred procedure.1 The Court also held that the plaintiff's common law negligence simpliciter claim did not disclose a cause of action. The foreseeability and proximity stages of the Anns v Merton2 test arguably were not satisfied, and policy factors negated the existence of any duty of care.
Background
Hycroft, formerly Allied Nevada Gold Corp., was a mining company dual-listed on the New York and Toronto stock exchanges. In 2013, Cormark Securities and Dundee Securities (the Underwriters) agreed to a bought deal of Hycroft's secondary public offering. Under s. 59(1) of the Ontario Securities Act (the Act), an underwriter is required to certify that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief.3
Hycroft incorporated by reference its most recent Annual Report, Interim Report and MD&As as part of the prospectus. These documents included representations about Hycroft's gold production and its ability to finance its gold mine. Following the completion of the bought deal, Hycroft shares were resold to purchasers, including LBP Holdings, which asserted that it purchased the shares in reliance upon these representations and the Underwriters' certification of the prospectus. Following the offering, Hycroft released information about operational problems, which led to a two-day decline of approximately 37% in share value.
LBP Holdings alleged that Hycroft violated disclosure obligations because it failed to include these operational problems that had begun several months before the public offering in its prospectus. LBP Holdings also alleged that the Underwriters breached duties of care owed to class members to conduct reasonable due diligence and ensure that the prospectus was free of any misrepresentation.
Certification Motion
LBP Holdings moved to certify a proposed class action for misrepresentation under s. 130 of the Act and equivalent Securities Acts in other provinces against Hycroft and two of its executives (the Hycroft Defendants), and for negligence and negligent misrepresentation under the common law against the Underwriters.
The certification motion against the Hycroft Defendants was allowed, but the motion against the Underwriters was dismissed on the basis that LBP Holdings 1) had not met the cause of action criterion with respect to its negligence claim, and 2) in any event, had not satisfied the preferable procedure criterion.
No Cause of Action for Negligence: A "Disguised Version" of the Misrepresentation Claim
The Court held that it was plain and obvious that the pleading of negligence had been "dressed up" to hide its real identify as a negligent misrepresentation claim to avoid the necessity of proving reliance. It arose from the same circumstances as the negligent misrepresentation claim, and the alleged duties to properly price the shares and to perform due diligence to ensure comprehensive disclosure of material facts in the prospectus were "inexorably intertwined" with the negligent misrepresentation claim. Accordingly, the negligence claim was subsumed by the negligent misrepresentation claim. Nevertheless, the Court still went on to analyze LBP Holding's negligence claim as a free-standing claim as part of its reasons for decision.
The negligence claim as pleaded did not fall under any of the five previously recognized categories of claims for which a duty of care had been found with respect to pure economic losses. Thus, the Court applied the following Anns4 analysis to determine whether a new category was warranted and reached the following conclusions:
- Was the harm that occurred a
reasonably foreseeable consequence of the Underwriters'
acts?
No. In the circumstances of a bought deal, an underwriter would not anticipate that purchasers would be relying on it to act as a gatekeeper to prevent the harm of buying Hycroft's shares at an inflated price "beyond and distinct" from its duties of care under s. 130 of the Act and its common law duties with respect to misrepresentations in the prospectus.5 - Was there sufficient proximity
between the Underwriters and prospective investors?
No. Underwriters are not hired to provide an opinion or to develop an investment transaction or scheme. They are hired "essentially to be distributers of another's goods often as sales agents, or as in the immediate case, by assuming the risks of a bought deal."6 Unlike issuers and auditors, underwriters make a "weak representation" that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief. They do not make strong representations of the nature made by "the promoters, auditors, lawyers and experts involved in the creation of the investment."7 As such, there was insufficient proximity. - Are there any overriding policy
considerations to negate any prima facie duty of
care?
Yes. Extending an underwriter's liability for pure economic loss beyond its current liability under statutory and common law misrepresentation claims would:
- deter useful economic activity where the parties are best left to allocate risks through the autonomy of contract, insurance, and due diligence;
- encourage a multiplicity of inappropriate lawsuits;
- arguably disturb the balance between statutory and common law actions envisioned by the legislator; and
- introduce the courts to a significant regulatory function when existing causes of action and the marketplace already provide remedies.8
For these reasons, at least within the bought deal context, the Underwriters did not owe LBP Holdings a duty of care in negligence simpliciter.
Too Many Individual Issues
The Court further held that, in any event, the constituent elements of the torts involved – particularly reliance, causation and damages – were matters that raised highly individual issues. Applying Musician's Pension Fund of Canada v Kinross Gold Corp9, the inevitably of trying these individual issues substantially diminished the productivity, manageability and benefits of a class proceeding. Further, pursuing the potential individual actions (with an average claim of USD $300,000) against the Underwriters with other putative class members joined as co-plaintiffs was an economically viable alternative.
As a result, the Court held that none of the factors of the preferability analysis enumerated by the Supreme Court of Canada in AIC Limited v Fisher10 – i.e. judicial economy, behaviour modification and access to justice – was present to justify a class proceeding.
The author would like to thank Peter Choi, Student-At-Law, for his contribution to this article.
Footnotes
1. LBP Holdings Ltd v Hycroft Mining Corporation, 2017 ONSC 6342 [LBP Holdings].
2. Anns v Merton, [1978] AC 728 (HL).
3. Securities Act, RSO 1990, c S5.
4. Anns, supra note 2.
5. LBP Holdings, supra note 1 at para 136.
6. Ibid at para 142.
7. Ibid at para 142.
8. Ibid at para 135.
9. 2014 ONCA 901.
10. 2013 SCC 69.
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