A recent decision by the Ontario Superior Court of Justice in Silver v. IMAX Corporation amended a previously certified global class to carve out approximately 85% of its members who were overlapping class members in a parallel U.S. action, which had conditionally settled. This decision, a first in Canadian securities class actions, is a significant development in multi-jurisdictional parallel class proceedings and indicates not only the court’s willingness to recognize foreign class settlements but also its willingness to significantly amend the class on the basis that an Ontario proceeding no longer remains the preferable procedure for that portion of the class.
This decision provides welcome comfort to public companies that, where appropriate, Ontario courts will recognize foreign settlements as binding on overlapping class members but will also likely have a significant impact on settlement dynamics. Although the decision arguably alleviates the pressure to reach a global coordinated settlement it may ultimately trigger a “race to settle” with different pressures.
The IMAX case with a “certify now, worry later” approach to global classes deferred consideration of complex jurisdictional issues, including the reasonable expectations of overlapping class members, to a much later stage in the proceeding. This recent decision reducing the class in the Ontario proceedings by 85% sharply illustrates some of the legal and practical complexities of overlapping multi-jurisdictional class proceedings, including fairness, efficient use of resources and comity for both companies and investors in class actions. It remains to be seen whether this decision will ultimately temper enthusiasm for global classes in Canada.
Background
In 2006, parallel class proceedings were commenced in Canada and
the United States against IMAX Corporation, a publicly traded
Canadian company with its shares listed on both the TSX and NASDAQ,
alleging material misrepresentations in its financial disclosure.
In the United States, eight proposed class actions were commenced
claiming relief under Rule 10b-5 of the Securities Exchange Act
of 1934 and were ultimately consolidated into a single
proceeding (the “U.S. Proceeding”). In Canada,
the class action commenced in Ontario asserted both common law
claims and statutory claims under the secondary market liability
regime in Part XXIII.1 of the Ontario Securities Act (the
“Ontario Proceeding”).
Notably, the Ontario Proceeding was certified as a global class and
included all persons who acquired IMAX shares on the TSX and the
NASDAQ. Originally the plaintiff in the U.S. Proceeding also sought
to certify a global class but was obliged to narrow the class
definition to include only persons who acquired IMAX shares on the
NASDAQ a result of the U.S. Supreme Court’s decision in
Morrison v. National Australian Bank Ltd., which
effectively mandates exclusion of purchasers of shares on any
foreign exchanges from the U.S. class action regime. As result,
there was a significant overlap between the Ontario and U.S.
classes.
Although the Ontario Proceeding progressed more rapidly, the parties in the U.S. Proceeding settled first and entered into a settlement agreement in January 2012, for a total amount of US$12 million, inclusive of costs. Of interest to the Ontario court was the fact that despite the distribution of 87,000 notices of the proposed settlement, only one investor objected to the settlement and only seven opted out of the class settlement. The settlement was approved by the court in the U.S. conditional on the Ontario court amending the Ontario class definition to exclude the members of the U.S. class, being all NASDAQ purchasers. Shortly thereafter, IMAX, together with the other defendants in the Ontario Proceeding, brought a motion for an order amending the Ontario class definition to exclude those persons who would be bound by the settlement of the U.S. Proceeding.
The Decision
The Ontario court considered four primary issues in deciding whether to grant the defendants’ motion to amend the class definition, including: a) whether it had authority to amend the class to exclude the overlapping class members; b) whether to recognize the U.S. settlement; c) whether the motion was, in effect, for the approval of a settlement under the Class Proceedings Act (CPA); and d) whether the Ontario Proceeding remained the “preferable procedure” for the overlapping class members given the finalization of the U.S. settlement.
a) The Court has Authority to Amend the Class Under the CPA
The Ontario court confirmed its authority under section 10(1) of the CPA to amend the class definition where, as a result of developments in the U.S. Proceeding, such proceeding no longer remained the “preferable procedure” for the determination of the claims of the overlapping class members who have not opted out of the U.S. settlement. Contrary to arguments raised by the plaintiff, the Ontario court concluded that the existence of the U.S. settlement was “clearly relevant to the question of whether the Ontario Action remains the preferable procedure” for resolving the claims of the overlapping class members.
b) The U.S. Settlement Ought to be Recognized in the Ontario Proceeding
In determining whether to recognize the U.S. settlement, the court applied the factors set out by the Ontario Court of Appeal in Currie v. McDonald’s Restaurants of Canada Ltd. (Currie), namely, whether:
- the U.S. court had a “real and substantial connection” to the claims of the overlapping class members;
- whether the overlapping class members were accorded procedural fairness, including adequate notice; and
- whether the interests of the overlapping class members were adequately represented.
The court concluded that the U.S. settlement should be recognized as binding on the overlapping class members in the Ontario Proceeding as the U.S. court properly had jurisdiction, there was order and fairness in the treatment of the claims of the overlapping class members and in their representation in the U.S. Proceeding. With respect to the factor of procedural fairness and notice, the court noted that U.S. court considered the same factors in its determination of the fairness of the U.S. settlement as considered by Ontario courts in determining whether to approve the settlement of a class proceeding.
c) Review and Approval of the U.S. Settlement is Not Required
Despite the arguments advanced by the plaintiffs, the court declined to review the adequacy or fairness of the U.S. settlement as part of its consideration of whether to recognize the U.S. settlement. Rather the court determined that, based on the Currie decision, the focus of its review was on the process that was followed in the U.S. Proceeding and whether that process adequately protected the interests of absent class members. However, the court considered the adequacy of the U.S. settlement in its determination of whether the Ontario Proceeding remained the preferable procedure for a global class.
d) The Ontario Proceeding is No Longer the “Preferable Procedure” for the Overlapping Class Members
The question of whether the Ontario Proceeding remains the “preferable procedure”, involves a consideration of whether it is preferable “to other ‘reasonably available means of resolving the class members’ claims” and having regard to the objectives of class proceedings, including: judicial economy, access to justice and behaviour modification.
The court compared the advantages and disadvantages associated with continuing the claim of the overlapping class members in its determination of whether it was the preferable procedure to amend the global class. Importantly, and in contrast to its recognition of the U.S. settlement, the court did consider the adequacy of the U.S. settlement in this portion of its analysis, including expert evidence of both parties (the plaintiffs experts concluded the U.S. settlement provided a recovery of either 11% or 13% of the maximum value of the damages for NASDAQ purchasers). The court found that the evidence did not establish that the U.S. settlement was improvident compared to the resolution of other class actions in this jurisdiction.
Notably, the court indicated two specific factors which, although not determinative, weighed in favour of granting an order removing overlapping class members: (i) the U.S. court had a strong jurisdictional connection to the overlapping class members and “it would be consistent with the reasonable expectations of the overlapping class members, who acquired their shares on the NASDAQ, and in circumstances where IMAX was subject to both U.S. and Ontario securities laws, that their rights could be determined by the U.S. court in the context of applicable U.S. law.” and (ii) the robust procedure followed by the U.S. court, including the fairness consideration of the U.S. settlement.
The court determined that in these circumstances remaining in the global class would be of no clear advantage to the overlapping class members and that participation in the U.S. settlement would satisfy the objective of access to justice. Similarly, the court rejected an argument that there would be a negative effect on TSX purchasers by removing the NASDAQ purchasers from the global class due to the inherent risks associated with litigation, and since the TSX purchasers were made the same offer (proportionally) as the NASDAQ purchasers. In concluding that access to justice was not impeded, the court stated:
It is not the function of this court to seek to jealously guard its own jurisdiction over a class proceeding that has been certified here. Such an approach is inconsistent with the principles of comity. It is also not the function of the court to favour or to protect the interests of class counsel within this jurisdiction...
Ultimately, the court found that it was the preferable procedure to remove the claims of the overlapping class members from the Ontario Proceeding and granted the order amending the class definition to exclude NASDAQ purchasers.
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.