Canada: New Guidance On The Test For Leave To Bring A Secondary Market Misrepresentation Action

On October 21, 2011, the Supreme Court of British Columbia released the reasons of Justice Harris in Round v. MacDonald, Dettwiler and Associates Ltd., 2011 BCSC 1416. Round is the first decision from British Columbia to apply the leave test under Part 16.1 of the province's Securities Act (BCSA), which creates a civil liability regime for secondary market disclosure.

Justice Harris concluded that the petitioner had failed to meet the requirements for leave. In so doing, he offered guidance on the proper standard to be applied to a leave application, supplementing the prior jurisprudence from Ontario.

The Leave Requirement

Under section 140.8 of the BCSA, an action cannot be commenced under Part 16.1 without leave of the court. The court may only grant leave where it is satisfied both that the action is brought in good faith and that there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

The enactment of Part 16.1 followed a trend in which comparable provisions were added to the securities legislation of other Canadian jurisdictions. For example, Part 23.1 of the Ontario Securities Act (OSA) creates a similar secondary market liability regime, including a virtually identical leave requirement under section 138.8.

The Prior Jurisprudence on Ontario's Leave Requirement

In Ainslie v. CV Technologies Inc. (2008), 93 OR (3d) 200, an early Ontario Superior Court of Justice decision that considered but did not apply section 138.8, Justice Lax provided support for the view that the leave requirement should constitute a relatively high bar for plaintiffs to overcome. Justice Lax emphasized that section 138.8 was intended to be a "gatekeeper mechanism", and that it was not enacted to benefit plaintiffs. Instead, it was designed to protect defendants from coercive litigation and to reduce their exposure to costly proceedings.

However, there are only two Ontario decisions that have actually applied section 138.8, and both granted leave. In doing so, the Ontario courts have indicated that the leave requirement will not constitute an overly onerous obstacle.

In Silver v. IMAX Corporation, 2009 CanLII 72342, Justice van Rensburg rejected the defendants' argument that the good faith test called for a "high onus" and that the reasonable possibility of success test imposed a "substantial burden". She called on courts to recognize that motions for leave are conducted at the early stages of an action, without discovery, and that there may therefore be limitations on the ability of the parties to fully address the merits. She also cautioned that an overly onerous threshold will undermine the deterrent force of Part 23.1 of the OSA and may lengthen, complicate and increase the costs of the leave procedure.

Justice van Rensburg concluded that the leave requirement is "designed to prevent an abuse of the court's process through the commencement of actions that have no real foundation, actions that are based on speculation or suspicion rather than evidence."

Subsequently, Justice Corbett dismissed a motion for leave to appeal Justice van Rensburg's decision to the Ontario Divisional Court. Though the defendants challenged Justice van Resnburg's articulation of the test for leave under section 138.8, Justice Corbett found that the test would have been met regardless of its precise formulation. Justice Corbett therefore declined to weigh in on the exact nature of the burden set by the leave requirement, stating:

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. But that is no reason to push these interesting questions up to the appellate level where there is no good reason to doubt the correctness of the decision.

In Dobbie v. Arctic Glacier Income Fund, 2011 ONSC 25, Justice Tausendfreund largely agreed with Justice van Rensburg's interpretation of section 138.8. With regard to the reasonable possibility of success requirement, Justice Tausendfreund concluded that the applicable standard is more than a mere possibility of success, but is a lower threshold than a probability.

A motion for leave to appeal Justice Tausendfreund's decision is currently pending.

The Decision

In Round, the petitioner claimed that MacDonald, Dettwiler and Associates Ltd. (MDA), and certain named officers and directors, had misrepresented material facts about a proposed sale of one of MDA's key business divisions. In particular, she claimed that the respondents had failed to make timely disclosure as to the likelihood of the sale receiving the Minister's approval under the Investment Canada Act. The petitioner was a former employee of MDA, and obtained her shares in the company from MDA's treasury as part of its Employee Share Purchase Plan.

Justice Harris dismissed the petitioner's application for leave to bring a Part 16.1 action, citing two primary bases for his conclusion that there was no prospect of her proposed action succeeding at trial. First, Justice Harris found that Part 16.1 of the BCSA does not apply retroactively, and that its provisions had not yet come into force at the time of the events in issue.

Second, because the petitioner had acquired her shares from MDA's treasury, and not on the secondary market, Justice Harris found that she had no cause of action under Part 16.1. Justice Harris also briefly reviewed the merits of the proposed action, and found no evidence of a violation of MDA's continuous disclosure obligations.

Given these decisive conclusions, there was no need for a detailed consideration of the burden imposed by the leave requirement. Nevertheless, Justice Harris provided some guidance on the proper application of section 140.8 of the BCSA.

Significantly, Justice Harris rejected the petitioner's argument that the leave requirement was only intended to weed out frivolous, scandalous and vexatious lawsuits that are certain to fail. In reviewing the language of section 140.8, Justice Harris set out the following propositions:

1. A leave application requires a review of evidence.

2. The analysis must involve a weighing and balancing of the evidence of each side, not simply the plaintiff's material.

3. The court must analyze the evidence to make an assessment on the merits and to decide whether the reasonable possibility test is satisfied.

4. The test on a leave application differs from the certification test (which does not involve a merits assessment) and the summary judgment test (which only requires a triable issue). While section 140.8 does not require a plaintiff to demonstrate that it is more likely than not that he or she will succeed at trial, it is intended to do more than just screen out clearly frivolous, scandalous or vexatious actions.

It should be noted that Round only involved an application for leave to bring an action under Part 16.1 of the BCSA. It was not brought jointly with a certification motion, as has been the practice in Ontario proceedings. Accordingly, Justice Harris did not deal with any causes of action being advanced by the plaintiff that did not require leave.


Justice Harris' comments are largely in obiter and as in IMAX and Arctic Glacier, he concluded that a reasonable possibility is something less than a probability.

Nonetheless, it is arguable that Round adopted a somewhat stricter approach to the leave requirement than IMAX or Arctic Glacier. Justice Harris soundly rejected the argument that section 140.8 is only intended to bar clearly frivolous, scandalous or vexatious actions. His emphasis on the importance of a robust merits review is also notable. However, just as Justice Corbett found that the IMAX case was well above the leave threshold, Justice Harris found that Round was well below the threshold. As a result, the jurisprudence continues to await appellate commentary or a case that is closer to the margins.

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.

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