2013 was marked by contrasting approaches as motions judges grappled with complex preliminary matters that arose in securities class actions. Issues of jurisdiction and competing forums were at the fore and cases involving proposed global classes of plaintiffs, duplicative cross-border actions and parallel regulatory proceedings were all noteworthy trends in 2013. The outcomes in these decisions suggest that more appellate guidance is necessary to settle the governing legal principles and provide certainty for public issuers and other defendants facing potential exposure to securities class actions in Canada.
Ten new securities class actions were filed in Canada in 2013; eight of these were filed in Ontario. According to trends data compiled by NERA Economic Consulting, this matches the number of actions filed in 2012 and brings the total number of pending actions in Canada to 54. These existing securities class actions represent more than C$19-billion in total claims.
It is also noteworthy that five of the nine Canadian-domiciled companies that were the subject of a new U.S. securities class action in 2013 are also the subject of a parallel action commenced in Canada; a proportion which NERA has noted is consistent with recent filings trends since 2006.
Additionally, the Court of Appeal for Ontario recently released its much anticipated decision in the trilogy of cases considering the application of the statutory limitation period on the commencement of secondary market claims which was heard in May 2013. The Court of Appeal overturned its own 2012 decision on the subject in Sharma v. Timminco Limited. The decision demonstrates that even appellate determinations do not always provide certainty.
KAYNES AND FACEBOOK DECISIONS: CONTRASTING APPROACHES TO JURISDICTION
Two decisions released in 2013 suggest that Ontario and Quebec may be taking divergent approaches to jurisdiction over foreign issuers.
In 2013, in Kaynes v. BP, the Ontario Superior Court of Justice determined for the first time that the statutory cause of action created by Part XXIII.1 is a "statutory tort" that, if committed in Ontario, will create a presumption that Ontario courts have jurisdiction over the dispute. The common shares of the defendant issuer in Kaynes trade exclusively over the London and Frankfurt Stock Exchanges. However, depository receipts trade over the New York Stock Exchange (NYSE) and, for a brief period of time ending in August 2008, a small number of depository receipts also traded over the Toronto Stock Exchange. The defendant ceased to be a reporting issuer in Canada in January 2009.
The motions judge concluded that the fact that practically all of the securities at issue, including the depository receipts (ADRs) purchased by the proposed representative plaintiff, were acquired over a foreign exchange was insufficient to rebut the presumption of jurisdiction. In other words, Ontario courts may assume jurisdiction over the claims of Canadian-resident investors even when they purchase securities of a foreign issuer over a foreign exchange. The motions judge reasoned that the statutory tort is committed where the investment decision is made. The motions judge was not influenced by the fact that the representative plaintiff and other members of the proposed class had purchased ADRs on the NYSE and were entitled to participate in parallel proceedings in the U.S. Notably, the decision in Kaynes contrasts starkly with the approach being taken by U.S. courts following the Supreme Court of the United States' decision in Morrison v. National Australia Bank Ltd.which is to decline jurisdiction over claims arising from transactions that occurred on exchanges outside of the U.S. See our October 2013 Blakes Bulletin: Will Recent Decision "Open the Floodgates" to Securities Class Actions Against Foreign Issuers?for more information.
Although the Kaynes decision is under appeal, its reasoning suggests that Ontario courts may be taking an expansive attitude to jurisdiction in securities class actions. If upheld, Kaynes could have significant implications for public companies that are not reporting issuers in Ontario (or other Canadian provinces) because it increases the likelihood that they may nonetheless be subject to Canadian secondary market liability regimes. A decision not to be a public issuer in Ontario (or to cease being a public issuer in Ontario) may do little if anything to protect against liability under Part XXIII.1. It also increases the likelihood that issuers will face duplicative proceedings in different jurisdictions over the same secondary market transactions.
In September 2013, the Québec Superior Court declined jurisdiction over a class action brought on behalf of a proposed class of Quebec investors against a public issuer and other defendants in connection with an initial public offering. In Mouaikel c. Facebook, the court rejected the plaintiffs' argument that damages were suffered in Quebec on the basis that no harmful activity or event occurred in the province. The mere fact that the investors may have suffered losses that were recorded in Quebec was not sufficient to establish that the damages were suffered in the province.
In Facebook, none of the defendants were residents of Quebec, nor had any of the events giving rise to the allegations in the claim taken place in the province. The defendant issuer was not a reporting issuer under the Quebec Securities Act (QSA), nor had it distributed securities in Quebec. In declining jurisdiction, the court noted that the shares at issue were bought and sold either in New York or California.
The outcome contrasts sharply with the Ontario court's determination in Kaynes. It will be interesting to see how courts in the various provinces approach questions of jurisdiction over securities class actions as the law in this area develops.
FISCHER AND IMAX DECISIONS: WHEN WILL SETTLEMENTS BRING CERTAINTY?
In December 2013, the Supreme Court of Canada clarified the analysis a court must follow in determining whether a class action, as opposed to another dispute resolution process, will be considered the preferable procedure for resolving class members' claims. In its decision in AIC Limited v. Fischer, the Supreme Court determined that the settlement of Ontario Securities Commission (OSC) proceedings, which included the payment of restitution by several mutual fund managers to investors, did not insulate the fund managers from a securities class action brought on behalf of that same class of investors. See our December 2013 Blakes Bulletin: Supreme Court: Class Action is "Preferable Procedure" Notwithstanding Settlement with the OSCfor further information.
Canada has seen a significant increase over the past decade in "follow on" class actions initiated against defendants who have reached settlements with regulatory bodies. The Fischer case arose from an investigation conducted by the OSC as to whether the fund managers had taken reasonable steps to protect the funds from harm that could arise from frequent trading market timing. The OSC entered into settlement agreements with the fund managers which included payment in the amount of C$205.6-million to investors. The settlement agreements included factual admissions which were made "without prejudice" to the defendants in "any civil or other proceedings which may be brought." Following approval of the settlements by the OSC, investors initiated a class action against the fund managers advancing allegations about the same conduct that was the subject of the settlements.
The Supreme Court, in applying the test for certification, held that a class proceeding, when compared to the OSC process, was "preferable from the point of view of providing access to justice." It noted that the OSC's primary function is regulatory, as opposed to remedial or punitive. The Supreme Court also considered the results of the regulatory proceeding and concluded that the proceeding had provided little or no basis for investor participation, and it was not possible to determine how the OSC had arrived at the settlement amounts. It concluded that the plaintiffs had sufficiently demonstrated that barriers to access to justice remained after the resolution of the OSC proceedings and that the proposed class action was the preferable procedure for addressing their claims.
The Supreme Court's decision in Fischer may have significant consequences for securities class actions that involve parallel regulatory proceedings. By requiring courts to scrutinize these proceedings and other alternate procedures to determine whether they offer sufficient procedural rights to claimants, and by confirming that a regulatory settlement will not necessarily preclude the possibility of a "follow on" class action, the Supreme Court has arguably introduced greater uncertainty for defendants considering settlement with a regulator.
While the Fischer decision may be discouraging for defendants seeking to achieve finality through regulatory settlements, a more encouraging message has been delivered for defendants settling parallel claims in cross-border scenarios.
In March 2013, in Silver v. IMAX, the Ontario Superior Court partially decertified a "global" securities class action as a result of the settlement of a U.S. proceeding that would resolve some class members' claims. See our March 2013 Blakes Bulletin: U.S. Settlement Reduces Global Class in Ontario Securities Class Actionfor additional information. Parallel U.S. and Canadian proceedings were commenced in 2006 against IMAX and other defendants in which it was alleged that the defendants made misrepresentations in the company's financial reports. IMAX is a Canadian-based public issuer and its shares are dual-listed on the TSX and NASDAQ exchanges. In 2009, the court granted the Ontario action leave to proceed under Part XXIII.1, and the action was certified as a class proceeding. The court certified a global class of IMAX investors that included purchasers of securities on both the TSX and NASDAQ exchanges, reasoning that the conduct of the defendants had a real and substantial connection to Ontario; in particular, because IMAX is a reporting issuer in Ontario and its shares are listed on the TSX. Meanwhile, in 2012, the U.S. court conditionally approved a settlement agreement in the U.S. action affecting only those purchasers who acquired their securities over the NASDAQ exchange. The U.S. court's order was conditional upon an order from the Ontario court amending the class proceeding to exclude those persons entitled to participate in the U.S. settlement.
The defendants moved, against the opposition of Ontario class counsel, for the requisite order, which was granted. The Ontario court concluded that keeping the NASDAQ purchasers in the Ontario class would not promote access to justice or be "preferable" for the NASDAQ purchasers who would lose the benefit of the U.S. settlement if the order was not granted. The decision had the effect of removing approximately 85 per cent of the class members from the Ontario action and limiting the class to the remaining 15 per cent of investors who purchased their securities on the TSX.
As the first decision to consider the effect of the settlement of a parallel U.S. secondary market class action on a class proceeding commenced under Part XXIII.1, IMAX provides an example of how Canadian courts may approach the settlement of securities class actions in cross-border scenarios. The decision suggests that even when a global class of investors is certified in Canada, it may be possible to narrow the class at a subsequent point in time. The decision also introduces a measure of certainty for defendants who achieve partial settlements in cross-border claims involving overlapping classes. Even when a global settlement that finally resolves claims on both sides of the border cannot be achieved, it may be possible to obtain the benefits of a U.S. settlement through an order narrowing the Canadian class.
As the IMAX decision was released prior to the Supreme Court's decision in Fischer, it will be interesting to see whether the analysis in Fischer plays a role in future considerations as to whether foreign settlements affecting Canadian class members constitute preferable procedures.
THERATECHNOLOGIES AND GREEN DECISIONS: THE STANDARD FOR OBTAINING LEAVE TO PROCEED
Several courts across the country contributed to the growing body of judicial commentary regarding the standard for obtaining leave to proceed with a statutory claim for secondary market misrepresentation. A 2013 case from the Québec Court of Appeal and another from the Court of Appeal for Ontario, both of which focus primarily on other issues, demonstrate how the standard for obtaining leave was interpreted in 2013.
In July 2013, the Québec Court of Appeal considered for the first time whether a right of appeal is available from a decision granting leave to pursue a secondary market misrepresentation class action under the QSA. As in other provinces, a class action based on the statutory secondary market liability regime requires that the plaintiff obtain leave of the court under the QSA as well as certification as a class action. In Theratechnologies Inc. c. 121851 Canada Inc., the Québec Court of Appeal clearly stated that the certification process and the leave application, although procedurally linked, are distinct and that the decision granting leave under the QSA can be appealed with leave of the Court of Appeal, while no appeal is available from a certification decision in Quebec. See our July 2013 Blakes Bulletin: Statutory Secondary Market Misrepresentation Claims: Quebec Court of Appeal's First Decision for further information.
The Québec Court of Appeal also took the opportunity in Theratechnologies to consider the test for granting leave under the QSA. Following the trend developed in British Columbia, the Court of Appeal confirmed that this leave test imposes a higher threshold than the test for certification of a class action. The test for authorization articulated by the Quebec Court of Appeal requires real and sufficient evidence to demonstrate the reasonable possibility of the plaintiff's success. In February 2014, the Supreme Court of Canada granted leave to appeal the Québec Court of Appeal's decision.
Following a May 2013 hearing, the Court of Appeal for Ontario overturned its own decision in Timminco regarding the limitation period set out in Part XXIII.1 of the OSA. In Timminco, the Court of Appeal for Ontario interpreted section 138.14 of the OSA to provide that no action can be commenced under Part XXIII.1 if leave has not been obtained within three years of the date of the alleged misrepresentation. In a trilogy of appeals that were heard together – Green v. Canadian Imperial Bank of Commerce, Silver v. IMAX, and Trustees of the Millwright Regional Council of Ontario Pension Trust Fund v. Celestica Inc. – a five-judge panel of the Court of Appeal held that court's own prior determination in Timminco was wrong. The five-judge panel held that the commencement of an action in which the requisite elements of the statutory cause of action under Part XXIII.1 are set out is sufficient to stop limitations periods from running. The five-member panel relied on public policy reasons and a different interpretation of the Class Proceedings Act and the Securities Act than had been relied upon by the panel in Timminco when it reached the prior conclusion that an order granting leave must be obtained by the plaintiff under Part XXIII.1 before the statutory limitation period will be suspended.
The Court of Appeal also considered the test for granting leave under the OSA and commented that the "reasonable possibility" of success standard for granting leave under the OSA is the same standard as is applied in assessing whether the pleadings disclose a cause of action in the certification test under section 5(1)(a) of the CPA. The court recognized, however, that the evidentiary records informing the leave and certification tests will be quite different.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
