Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Class Actions/Securities Regulation, February 2011
On February 14, 2011, the Ontario Superior Court of Justice released a highly anticipated decision in respect of civil liability for secondary market disclosure under Part XXIII.1 of the Ontario Securities Act (the OSA).
In Silver v. IMAX Corp., Justice Corbett denied leave to appeal two decisions of Justice van Rensburg that had been released concurrently on December 14, 2009. In those earlier decisions, Justice van Rensburg had granted leave to the plaintiffs to commence an action under s. 138.3 of the OSA and certified the proceeding as a class proceeding against IMAX Corp. and certain of its directors and officers.
The plaintiffs are pursuing a claim for secondary market misrepresentation contained in Part XXIII.1 under s. 138.3 of the OSA, which provides a relatively new statutory cause of action to shareholders of reporting issuers. These provisions permit a shareholder to sue a reporting issuer and certain others (including its directors and officers) when there has been a misrepresentation in its secondary market disclosure. Liability follows proof of the misrepresentation, without the need to prove reliance, subject to certain statutory defences.
One of the decisions of Justice van Rensburg was the first decision in Canada dealing with s. 138.8(1) or analogous sections found in other provincial securities acts that create liability on corporations, directors, and officers for disclosure made in the secondary market. In order to obtain leave to commence an action under s. 138.3, plaintiffs must first obtain leave of the court under s. 138.8, upon satisfying the court of two elements: the action is being brought in good faith and there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.
For greater detail on these decisions of Justice van Rensburg, please see our December 2009 Blakes Bulletin on Class Actions/Securities Regulation.
IMAX is a public issuer on both the TSE and NASDAQ stock exchanges. In August 2006, IMAX announced that it was responding to an informal inquiry from the U.S. Securities and Exchange Commission about revenue recognition in its 2005 financial results. The following day, IMAX's share price fell 40%. Shortly after, IMAX acknowledged that its 2005 statements had not conformed with generally accepted accounting principles (GAAP) and it issued restated financial statements for 2005.
The plaintiffs had purchased shares after IMAX's initial statements and sold them at a loss after the sharp fall in share price. The plaintiffs claim damages of C$200-million for negligent and "reckless" misrepresentation, negligence, and civil conspiracy, as well as punitive damages of C$10-million. In their statement of claim, the plaintiffs also claim damages for secondary market misrepresentation under s. 138.3 of the OSA.
THE DECISION OF JUSTICE CORBETT
IMAX had brought a motion seeking leave to appeal the decisions of Justice van Rensburg, which required IMAX to establish, among other things, that there is either a conflicting decision on the matter or there is good reason to doubt the correctness of Justice van Rensburg's decisions. Justice Corbett entirely dismissed the motion and denied the defendants leave to appeal to the Divisional Court. Accordingly, the prior decisions of Justice van Rensburg are maintained with some additional elucidation, as follows. In December 2009, Justice van Rensburg had held that the "good faith" element of the leave test is met where plaintiffs establish that they are bringing the action in the "honest belief that they have an arguable claim." Justice Corbett found ample evidence that the plaintiffs wished to recover their losses and to deter other public issuers from behaving as IMAX did. The court found that a more rigorous scrutiny to satisfy the "gatekeeper" function of the court could work serious injustice against potential plaintiffs.
In December 2009, Justice van Rensburg had also held that, in respect of the "reasonable possibility of success" element of the leave test, once this "relatively low" threshold is established, the onus shifts to the defendants to establish their affirmative defences on, what Justice Corbett characterized as, a standard sufficient to grant summary judgment dismissing a claim. Corbett J. saw no reason to doubt the correctness of Justice van Rensburg's decision, whatever the precise formulation of the onus, standard of proof, and test to be applied in respect of affirmative defences.
Justice Corbett also denied leave to appeal the dismissal of the defendants' Rule 21 motion to strike the common law claims of misrepresentation. The defendants had argued that there is no duty of care owed by reporting issuers to the "investing public" in respect of statements made in continuous disclosure documents and, secondly, that the plaintiffs failed to plead actual reliance by each class member, which is necessary to establish causation between the statements and the plaintiffs' alleged losses. Unlike common law claims of misrepresentation, liability under s. 138.3 of the OSA is without regard to whether plaintiffs relied upon the misrepresentation.
Justice Corbett acknowledged that the relationship between common law and statutory claims of misrepresentation merits appellate consideration and held that "the decision of van Rensburg J. does no more than permit the plaintiffs to proceed to trial. The Court of Appeal will be able to give full consideration to these issues if and when the case is appealed after a trial judgment."
Justice Corbett briefly dismissed other aspects of the motion for leave to appeal, including leave to appeal the decision of Justice van Rensburg in respect of certifying the proceeding as a class proceeding. Justice Corbett noted that addressing in detail the score of issues and sub-issues raised on the motion could have led to reasons as lengthy as the 670 paragraphs of Justice van Rensburg's decisions.
Justice Corbett's decision denying leave to appeal represents a nod of approval to Justice van Rensburg's construing of the requirement for leave to commence an action under s. 138.3 of the OSA. As Justice Corbett noted, "van Rensburg J.'s decision is the first word on the test for leave under s. 138.8(1) of the OSA. Doubtless it is not the last."
Other securities class actions are pending before courts in Canada and have been awaiting the release of Justice Corbett's decision. Blakes is currently acting as defence counsel in some of those class actions engaging both the common law and secondary market liability provisions in a number of jurisdictions across Canada.
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