Plaintiffs in class action claims for misrepresentation in the secondary market recently scored a victory when the Ontario Superior Court of Justice determined[1] that not only does it have jurisdiction over these claims brought by Canadians who purchased shares of a company registered in Canada on a foreign stock exchange, but that Canadian securities and tort law should apply to such claims.
Background
In August 2015 Mr. Paniccia commenced a class action against MDC Partners Inc and its officers (together, "MDC") in Ontario for both a statutory misrepresentation claim under Part XXIII.1 of Ontario's Securities Act[2] and negligent misrepresentation. While initially the claim was brought on behalf of all global purchasers on the TSX and NASDAQ, he later amended the proposed class to include only Canadian purchasers on the TSX and NASDAQ.
MDC is a Canadian company with its registered office in Toronto, Ontario, but with its head office and investor relations group in New York. It is engaged worldwide in marking, communications and providing public relations services. At the material time, it was listed on both the TSX and NASDAQ. The vast majority of trading of the shares occurred on NASDAQ. An unknown number of shareholders (likely over 100) holding between 0.8% to 2.6% of MDC's shares reside in Canada. Mr. Paniccia himself purchased 245 shares of MDC on NASDAQ in April 2015.
In July 2015, a substantial MDC shareholder commenced a proposed class against MDC in the United States District Court for Southern District of New York on behalf of MDC share purchasers on NASDAQ. This action was dismissed with prejudice, before certification, in September 2016.
At the same time, the US Securities and Exchange Commission brought enforcement action against MDC, and in 2017 MDC paid $7 million in civil penalties.
Jurisdiction Challenge
MDC challenged the class definition, seeking to restrict the Ontario class to only the Canadians who purchased on the TSX, and excluding those who, like Mr. Paniccia, purchased shares on NASDAQ. While MDC conceded that the Ontario court had jurisdiction simpliciter over the claims of all Canadian purchasers, it argued that the Ontario court is forum non conveniens for Canadians who purchased on NASDAQ.
Following a detailed discussion of the forum non conveniens analysis and highlighting principles of comity, the Court found that Ontario was the appropriate forum for Canadians who purchased shares on NASDAQ, finding that there was no other jurisdiction connected with the matter in which justice could be done at substantially less inconvenience and expense.
In particular, the Court found that in not challenging whether Ontario was the appropriate venue for adjudicating the claims of Canadians who purchased shares on the TSX, MDC had conceded that issues of fact related to all of these claimants could appropriately be tried in Ontario.
Similarly, since the claims were being advanced pursuant to Ontario securities legislation and the common law, the Ontario Court is the more appropriate court to decide the issues of law.
Although comity would normally dictate that a U.S. court is more appropriate to determine claims where the overwhelming majority of trading in shares occurred on NASDAQ, there are two reasons which weakened this argument. The first is that Canadian securities law already asserts extra-territorial application to secondary market trading, which acknowledges that comity may be intruded upon in these circumstances. Second, as the proposed class is only Canadian purchasers, there are no comity concerns regarding the risk of non-Canadian purchasers seeking to avoid U.S. legislation by coming to Canada to take advantage of the long reach of the Securities Act. Therefore, although comity would typically favour U.S. courts, this did not weigh heavily in the forum non conveniens analysis in this case.
Finally, factors relating to access to and the administration of justice are neutral as to which court is the more appropriate court to decide the issues of fact and law and to provide a remedy.
The onus was on MDC to establish that compared to Ontario, there was another jurisdiction in which justice could be done between the putative class members and the defendants at substantially less inconvenience and expense. It failed to do so.
Choice of Law Argument
Although choice of law was not explicitly before the Court, MDC argued as part of its forum non conveniens argument that an Ontario court should not adjudicate the claims of Canadian NASDAQ purchasers because these claims must be governed exclusively by American law.
The question for the Court in addressing this argument was what the appropriate choice of law rule was for Canadian purchasers on a foreign stock exchange where the Ontario court has jurisdiction simpliciter to adjudicate a Part XXIII.1 claim and a common law tort claim.
The Court confirmed that Part XXIII.1 has extra-territorial application, and that the Securities Act gives the Ontario Court "long-arm jurisdiction" under Part XXIII.1 as long as Ontario has a real and substantial connection to the defendant. This requirement is satisfied when a company trades securities in Ontario's secondary market, regardless of whether it also trades elsewhere, such that the Securities Act applies to trades in Ontario as well as to trades elsewhere, at least for Canadian purchasers. Therefore, the Ontario Court is required to apply Ontario law to an appropriate extra-territorial claim.
Furthermore, relevant case law supports that for the statutory tort of misrepresentation under the Securities Act, as well as for the common law tort of fraudulent or negligent misrepresentation, the misrepresentation occurs in the place where the negligent misrepresentation was received and relied upon. Under choice of law principles, these circumstances dictate that Canadian law applies to Canadian purchasers of shares bringing claims for both statutory and common law misrepresentation.
The Court therefore concluded that the choice of law in this case is Ontario law.
Implications
There are significant differences between American and Canadian securities law, and according to expert evidence led by MDC, in a number of aspects American law is more favourable to defendants than Canadian law. While this evidence did not have any impact on the Court's reasoning or the outcome due to the fact that the proposed class was only Canadian purchasers, and case law dictates that Canadian law would apply to these purchasers anyway, the evidence highlights the implication of this decision for companies who trade shares in the Canadian market.
For example, U.S. law imposes a higher obligation on the plaintiff to prove an intent to defraud with respect to secondary market trading, has stricter pleadings burdens, requires the plaintiff to prove loss causation with a very high rate of statistical confidence, and restricts the private cause of action against persons to only the maker of the statement, excluding aiders and abetters, even if they are directors or officers. The U.S. system also does not have the same obligation of ongoing disclosure of material facts, rather, the company may wait until a duty to disclose arises.
[1] Paniccia v. MDC Partners Inc. et al, 2017 ONSC 7298
[2] R.S.O. 1990, c. S.5
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