Canada: Theratechnologies Leave Threshold Proves Too Robust For Plaintiff Shareholder In Securities Class Action

Theratechnologies¹ Leave Threshold Proves Too Robust For Plaintiff Shareholder In Securities Class Action

In Mask v. Silvercorp Metals Inc.² released on October 22, 2015, the Ontario Superior Court of Justice considered a motion for leave to commence an action for secondary market misrepresentation under section 138.8 of the Ontario Securities Act,³ and a motion to certify the action as a class proceeding under section 5(1) of the Class Proceedings Act, 1992.⁴

Deficient pleadings, uncontroverted expert evidence and a strict application of the Court of Appeal's analysis in Musicians' Pension Fund of Canada (Trustees of) v. Kinross Gold Corp.⁵ led Justice Belobaba to dismiss both motions.

The Facts

Over a two week span in 2011, anonymous internet postings questioned Silvercorp Metal Inc's ("SVM") financial accounting and alleged that the company had overstated certain mineral resources and reserves. As a result, SVM's share price dropped about 30 percent. SVM responded by issuing a press release and a Schedule 4 that reconciled production to revenue from 2006 to the middle of 2011 (the "Schedule 4"). SVM also retained AMC Mining Consultants to prepare a new technical report, which was produced in June 2012 (the "AMC Report").

In May 2013, the plaintiff, a former SVM shareholder, alleged that a comparison of the AMC Report and the Schedule 4 demonstrated that SVM had overstated its mineral production and grade levels in its 2010 and 2011 public reports.

The plaintiff advanced three claims: (1) a statutory and common law claim for misrepresentation; (2) a statutory claim for failure to make a timely disclosure; and (3) a common law claim in negligence alleging that SVM co-authored and published public reports that it knew, or should have known, had not been prepared in accordance with industry standards or properly audited.

The Leave Motion

The Court found that the plaintiff's pleadings did not identify which words or figures, in particular documents or on particular dates, were alleged to be misrepresentations pursuant to section 138.3(1) of the OSA. The plaintiff is required to link the misrepresentations to a public correction, however, the plaintiff failed to indicate what public correction was made or when it occurred. Nevertheless, the Court determined that since "publicly corrected" is not defined in the OSA, anonymous internet postings can constitute public corrections under section 138.3 of the OSA.

The leave requirements under section 138.8 of the OSA require that the court be satisfied that an action was brought in good faith and that "there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff".⁶ In the wake of Theratechnologies, plaintiffs must adduce sufficient evidence to demonstrate a reasonable chance of success, lest their claim be denied at the outset. Here, the plaintiff alleged that there were obvious misrepresentations in SVM's Schedule 4 due to material differences between the numbers in the AMC Report and the Schedule 4. An AMC geologist involved in the preparation of the AMC Report swore an affidavit on behalf of SVM explaining that different reporting parameters had been applied to the two reports and, therefore, there were no actual discrepancies between the reports. While the plaintiff produced an expert report of its own, the plaintiff's expert failed to rebut or even address the conclusions of SVM's expert. The Court favoured AMC's detailed and uncontroverted evidence.

The plaintiff also alleged that SVM failed to make timely disclosure of a material change as required under section 138.3(4) of the OSA. The plaintiff did not, however, plead any material facts as to any specific production data received by SVM showing a material change within the OSA definition.

The Certification

The Court applied the Court of Appeal's analysis in Kinross and concluded that a class action is not the preferable procedure where leave under section 138.8 of the OSA has been denied because the statutory misrepresentation claim has no reasonable possibility of success and where the common law misrepresentation claim is "destined to fail" because it rests on the same evidentiary foundation.⁷

The Court also found that the plaintiff's negligence claim was in substance a pleading of negligent misrepresentation and could not therefore be certified where the claim for misrepresentation had been denied.

Comment

This case reaffirms the Supreme Court of Canada's ratio in Theratechnologies. Where a plaintiff's case is so weak or has been so successfully rebutted by the defendant that it has no reasonable possibility of success, the leave threshold is intended to provide "a robust deterrent mechanism" to ensure that cases without merit are prevented from proceeding.⁸

Footnotes

^{1 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 [Theratechnologies].}

^{2 Mask v. Silvercorp Metals Inc., 2015 ONSC 5348.}

^{3 R.S.O. 1990, c. S.5 [OSA].}

^{4 S.O., 1992, c. 6 [CPA].}

^{5 Musicians' Pension Fund of Canada (Trustees of) v. Kinross Gold Corp., 2014 ONCA 901 [Kinross].}

^{6 OSA, supra at s 138.8.}

^{7 Kinross, supra at para 138.}

^{8 Theratechnologoes, supra at para 38.}

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