Canada: After The Wave Break: D&O Liability And The Impact Of Statutory Secondary Market Actions

Last Updated: July 4 2016
Article by Scott Chimuk and Michael Grassie

Since 2012, all class action securities litigation claims that have been brought in Canada have been for statutory secondary market cases (SSM cases).1 Accordingly insurers and brokers ought to have a keen understanding of SSM cases when discussing directors and officers liability insurance limits with prospective insureds.

Essentially, SSM claims are a statutory creature and are the product of the statutory security schemes enacted in the various provinces. In Alberta, these claims are brought pursuant to section 211 of the Securities Act.2

SSM cases are brought against publicly traded companies, and/or their directors and officers, for failure to make disclosure in a timely manner or failure to make a disclosure of a material change. SSM cases differ from common law misrepresentation cases insofar as the Plaintiffs are not required to prove that they relied on a misrepresentation to their detriment; essentially, the threshold is lower. As such it is unsurprising that all of the very recent securities class action cases involve SSM claims.

SSM Damages

The amount of damages in an SSM claim is determined by the difference in the share price during the period of non-disclosure. It essentially works as follows: if a share is purchased during a period of nondisclosure, and subsequent disclosure is provided, the shareholder's damages equal the difference between the share price ten days following the disclosure and the amount which they originally paid.

Without any legislated limitation, SSM claims could lead to catastrophic damages awards. Consequently, section 211.01(h) imposes a liability limit of 5% of the total market capitalization, whereas the liability of directors and officers is limited to half of their annual compensation or $25,000.00, whichever is greater.3

However, corporate insureds must also be mindful in purchasing directors and officers liability insurance and ensure they have adequate coverage. At first glance, it appears that only minimal coverage is necessary, but generally directors and officers liability policy limits include legal fees, which is contrary to typical insurance, such as motor vehicle or homeowners. Therefore, given the complexity and length of many SSM cases, it is not unrealistic for this amount to exceed $500,000.00, in addition to the statutory limitations.

One must also be aware that liability caps are only in place for SSM claims as common law negligent misrepresentation claims do not have a statutory liability cap. That being said, the SSM claims are the "low hanging fruit" and settlements are usually slightly below the SSM limits on claims that jointly allege a breach of statute and common law. For example, in the last 20 years, the average settlement of all class action securities claims is at just 13.1% of the total compensatory damage claimed.4

A common fear of corporations is that if they carry high insurance limits, they will be more susceptible to claims, especially large scale class actions. However, with respect to SSM cases, it is generally the market capitalization of a corporation, not the insurance policy limits, that encourage claims. Further, because directors and officers liability in SSM claims is proportionate, and not joint and several, the directors and officers liability limits are unlikely to be an influencing factor in encouraging litigation.

The median settlement amount in 2015 was $15.3m (note that this is the total settlement as against all defendants not just as against directors and officers). Over the last 20 years the median settlement has been $11m. The average settlement has been $71.9m; however, that is anomaly based on two outlier Nortel Class Actions.5

Rising Threshold

Two recent Supreme Court of Canada cases, Theratechnologies Inc. v. 121851 Canada Inc and CIBC v Green, have significantly increased the threshold to bring SSM cases6. In Theratechnologies Inc. v. 121851 Canada Inc, Supreme Court held that:

  1. The statutory cause of action under the Securities Act7 is subject to a leave requirement. The leave requirement is intended to serve a "gatekeeping" function by preventing suits (1) not brought in good faith, or (2) not demonstrating a reasonable possibility of success at trial.
  2. The legislation does not preclude a Plaintiff from also bringing a claim for common law misrepresentation. In such cases, the Court must consider all of the issues and evidence as they normally would, regardless of the presence of a statutory misrepresentation claim.

In CIBC v Green, the Supreme Court adopted the analysis from Theratechnologies, in that the claim required a "reasonable possibility" of success, and that this test was more than a "speed bump". It was concluded that it must be demonstrated that there is a "reasonable or realistic chance that the Plaintiff will succeed [and the Plaintiff must] offer both a plausible analysis of the applicable legislative provision, and some credible evidence in support of the claim."8

As such, it may be more difficult to bring SSM cases in light of these recent Supreme Court of Canada authorities. There has been a dramatic drop of claims of this nature, clearly demonstrating that prospective plaintiffs have been influenced by these decisions: 11 such cases that were brought in 2014 dropped to only 4 such cases being brought in 2015.9

SSM cases are clearly the "wave of the future" when it comes to class action proceedings against directors and officers in Canada, however, the "wave" appears to have broken and significantly subsided in the face of the recent decisions from the Supreme Court.

Accordingly, we are seeing a decrease in SSM claims. Further, claims that are actually brought and given leave by the court tend to settle at an amount slightly below the liability limit - even when the pleadings themselves allege common law negligent misrepresentation and seek damages far in excess of the statutory limits.


1 Svetlana Starykh and Stefan Boettrich, Recent Trends in Securities Class Action Litigation: 2015 Full-Year Review, NERA Economic Consulting, accessed from on June 21, 2016

2 Securities Act, R.S.A. 2000, c. S-4, section 211

3 ibid.

4 See Footnote 1.

5 See Footnote 1.

6 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 and

7 In Alberta this is pursuant to section 211.08 of the Act

8 See Footnote 7.

9 See Footnote 1.

About Mackrell International - Canada - Scott Venturo LLP is a full service business law firm in Calgary, AB and a member of Mackrell International. Mackrell International - Canada is comprised of four independent law firms in Alberta, British Columbia, Ontario and Quebec. Each firm is regionally based and well-connected in our communities, an advantage shared with our clients. With close relations amongst our Canadian member firms, we are committed to working with clients who have legal needs in multiple jurisdictions within Canada.

This article is intended to be an overview and is for informational purposes only.

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