The proposed class action
The representative plaintiff sought to certify a class proceeding on behalf of primary market shareholders against two classes of defendants. Firstly, the plaintiff alleged misrepresentation under section 130 of the Ontario Securities Act as against the issuer Hycroft Mining and its directors. Secondly, the plaintiff sought certification against the underwriters, who had been added as parties following the bankruptcy of Hycroft Mining. However, by virtue of the fact that a claim under section 130 was found to be statute-barred, the action proceeded only on the basis of alleged negligence and negligent misrepresentation at common law.
The nature of the claim against the underwriters was founded on their statutory obligation to deliver a certificate in a prescribed form that certified that the prospectus was full, true and constituted plain disclosure to the best of their knowledge. The plaintiff alleged that, as a result of their ability to conduct due diligence in order to issue such a certificate, the underwriters knew or ought to have known that the prospectus failed to include material facts with regards to the production of a key mine.
While the statutory action was certified, on consent, as against Hycroft Mining and its directors, the underwriters resisted the motion to certify the common law claims on the basis that the claims did not disclose a reasonable cause of action and that a class proceeding was not the preferable procedure.
Justice Perell found that the negligent misrepresentation claim against the underwriters disclosed a reasonable cause of action. A common law negligent misrepresentation claim can be certified notwithstanding that there will be individual trials to address reliance and damages. However, it was ultimately held that a class proceeding was not the preferable procedure for its adjudication. Accordingly, the motion to certify the action against the underwriters was dismissed.
Preferable procedure
Relying on the principles articulated by the Supreme Court of Canada in AIC Limited v Fischer, the Court noted that in order to satisfy the preferable procedure criterion, the prospective plaintiff must demonstrate that the proposed class action would:
- Be a fair, efficient and manageable method of advancing the claim;
- Be preferable to any other reasonably available means of resolving the class members' claims; and
- Facilitate the three principal goals of class proceedings, namely judicial economic, behaviour modification and access to justice.
In applying these principles, Justice Perell found that the circumstances of the case did not render the claim best suited to adjudication via a class proceeding.
While each case will turn on its own facts, it was held that since no statutory cause of action could be advanced against the underwriters (unlike the statutory claims against the issuer and directors), there were no synergies in having the claims heard together. In other words, the alleged misrepresentation made by the underwriters differed fundamentally from those made by the issuer and directors. The former would require individual issues trials with respect to causation, reliance, and damages, while the latter rested largely on the finding of a misrepresentation in the prospectus, and the purchase of a security offered thereunder during the period of distribution.
Justice Perell (at para 85):
In the case at bar, coat tailing the tort claims against the Underwriters with the statutory misrepresentation claim against the Hycroft Defendants is problematic in terms of manageability and given the difference between the claims against the co-defendants, there is only modest advancement in judicial economy and much less than would be the case if a statutory claim against the Underwriters had been combined with the common law claims against them. Indeed, given that the misrepresentations, duty of care, and standard of care issues are not the same for the co-defendants, combining the statutory and common law claims may complicate the prosecution and defence of the various causes of action.
Lastly it was noted that, given the monetary size of the average class member claim against the underwriters, such claims were viable as individual actions.
Conclusion
Apart from providing guidance as to the appropriate limits of potential underwriter liability to shareholders of an issuer, the case serves as a useful reminder that claims against disparate defendants may result in divergent results when it comes to class certification. In particular, parallel claims against co-defendants that give rise to different legal tests, and in turn that require different facts to establish liability, may not satisfy the preferable procedure criterion. To the extent that defendants are faced with a certification motion, and are differently situated in respect of the causes of action asserted and the corresponding factual underpinnings, thought should be given to challenging certification on the basis that a class proceeding is not the preferable procedure for resolving such claims.
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