Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Litigation & Dispute Resolution, November 2011
On October 21, 2011, the Supreme Court of British Columbia (the Court) released a decision in Round v. MacDonald, Dettwiler and Associates Ltd., dismissing the application of an intended plaintiff seeking leave of the Court to commence an action based on a secondary market liability claim. This was the first case in British Columbia to examine the test for leave pursuant to the statutory cause of action found in Part 16.1 of the British Columbia Securities Act, R.S.B.C. 1996, c. 418 (the Act).
The intended plaintiff, Ms. Round, received her common shares of MacDonald, Dettwiler and Associates Ltd. (MDA) from the company's treasury under an Employee Share Purchase Plan. She argued that the intended defendant, MDA, misrepresented material facts and failed to make timely disclosure of material changes that affected the price of her shares in the stock market.
The Court dismissed the application holding that there was no prospect that the intended action, as framed, could succeed at trial. The Court expressed two main reasons for reaching its decision. First, the material facts capable of giving rise to the cause of action were concluded before the legislation came into effect on July 4, 2008. Nothing in the legislation suggested that the Legislature intended the causes of action it created to apply retroactively or retrospectively. Secondly, the Court determined that as Ms. Round's interest in the shares of MDA came directly from the company's treasury, the secondary market liability provisions of the legislation did not apply to her circumstances.
Despite having reached a decision based on these two conclusions alone, the Court discussed the test for leave to commence an action and considered some of the arguments presented in the extensive submissions of the parties.
The Cause of Action
On July 4, 2008, new statutory causes of action came into force in British Columbia dealing with misrepresentations of material facts and failures to disclose material changes by public companies, and others, which affect the price at which their shares trade on an exchange. The causes of action were created for persons who acquire or dispose of shares during the period of time between the breach and its correction. Reliance on the misrepresentation or failure to disclose does not need to be proven to maintain an action. The causes of action formed part of the liability provisions of the Act pertaining to the secondary market, which is the market in a company's shares once they are trading publicly.
While the reforms appeared aimed at deterring companies from misrepresenting material facts, they created a risk that plaintiffs might begin abusive or unmeritorious lawsuits whenever there were material changes in the price of a company's shares. Accordingly, a plaintiff seeking to bring a secondary market liability claim must seek leave of the court before an action can be started, demonstrating that the claim is brought in good faith and that there is a reasonable possibility that the claim will be resolved at trial in favour of the plaintiff.
Background and Position of the Parties
Ms. Round had worked for MDA from 2002 to 2008, during which time she received an entitlement to common shares of MDA under an Employee Share Purchase Plan. On leaving her employment with MDA in 2008, she filed an election to withdraw shares from her account. In bringing her claim under Part 16.1, Ms. Round contended that MDA, and its named officers and directors, misrepresented material facts about a proposed sale of one of its primary assets, the ISB Division, and that MDA failed to make timely disclosure of material changes that related to the prospects of the sale receiving approval from the Minister under a review process conducted according to the rules of the Investment Canada Act, R.S.C. 1985, c. 28. Ms. Round alleged that MDA misrepresented the facts of certain documents, including the 2007 Annual Report, and deliberately delayed disclosing its knowledge of the Minister's conditional refusal. She argued that MDA was engaged in a continuous single misrepresentation and failure to disclose over an extended period of time starting in October 2007 and concluding in May 2008. Importantly, the evidence was that no shares were allotted to Ms. Round's employee account during three periods—in January, April and May 2008.
The intended defendants argued that Ms. Round had no prospect of succeeding at trial, as the time periods in which no shares were allotted to her account were the only ones in which there was a potential claim that facts were not disclosed or were misrepresented. Ms. Round neither acquired nor disposed of shares during those periods, and therefore her claim could not succeed. Furthermore, MDA argued that a distribution of shares from a company's treasury to an employee is exempt from the secondary market liability provisions if the distribution is voluntary.
The Court first considered whether the secondary liability market provisions of the Act could apply to Ms. Round's claim at all. The evidence on the record demonstrated that the events material to the cause of action had occurred, and their legal consequences were complete before the cause of action existed. By May 23, 2008, any alleged misrepresentation or failure to disclose had been corrected, and any effect on the market price of shares evaporated. The Court agreed with the position of MDA that, in light of this evidence, to apply the civil liability provisions of Part 16.1 of the Act to the facts at hand would be to give the statute a retroactive or retrospective application.'
The Court stated that "[i]t is uncontroversial that there is a common law presumption that a statute is interpreted to apply only to events in the future. Statutes are presumed to apply prospectively and not retroactively or retrospectively." The statutory scheme did not contain any transitional provisions, and there was no statement of legislative intent determining the temporal application of Part 16.1 of the Act. The Court therefore concluded that the statutory causes of action could not apply to the facts alleged to give rise to Ms. Round's claim.
Although this finding was sufficient to deny Ms. Round's application, the Court went on to consider whether Ms. Round could have fallen into the class of plaintiffs entitled to bring an action under the secondary market liability provisions. The Court considered the question of whether the provisions could confer a cause of action on a person who acquired shares from a treasury and did not acquire or dispose of them on the secondary market. It was not in dispute that Ms. Round's shares were acquired from MDA's treasury, through her participation in the Employee Share Purchase Plan. The Court found that the distribution of shares from a company's treasury to an employee is exempt from the secondary market liability provisions if the distribution is voluntary. The provision of shares to Ms. Round was indeed voluntary, and the secondary market liability provisions did not apply to confer a cause of action in respect of the shares she acquired through the plan.
As Ms. Round could not properly be a plaintiff under the secondary market liability provisions, she could not possibly satisfy the test for leave, which requires that "there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff."
The Court went on to address some of the issues raised by the parties on the matter of the test for leave. Ms. Round argued that the test for granting leave pursuant to the secondary market liability provisions should be given a liberal interpretation favouring a party seeking leave, as the provisions were intended to be remedial legislation. The Court held that this argument neglected the plain wording of the statute, requiring that the Court be satisfied that there is a reasonable possibility that the action will be resolved in favour of the plaintiff. Furthermore, the statutory scheme required that the plaintiff and each defendant serve and file with the court one or more affidavits setting forth the material facts upon which each intends to rely. The Court stated that based on these sections, the propositions emerged that the leave application involved a review of evidence and that the analysis must involve the weighing and balancing of such evidence. The Court could not simply rely on the material filed by the plaintiff. Furthermore, the test for leave involves assessing the evidence to determine whether there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. The Court emphasized that this test is based on merit, differentiating it from the tests involved in the certification of class actions or the test for summary judgment.
The Court emphasized that establishing a reasonable possibility of success at trial involves more than merely raising a triable issue. However, it does not require that a plaintiff demonstrate that it is more likely than not that he or she will succeed.
Finally, the Court assessed the merits of the action on the evidence presented and, apart from the reasons already given, concluded that Ms. Round would not have had any prospect of succeeding at trial. The Court went through the matters raised by Ms. Round and concluded that the evidence did not disclose any issues on which there was any prospect that an action based on them would be resolved in her favour. Among other matters, the Court found that Ms. Round's argument that MDA failed to disclose the negotiations for the sale of the ISB Division was not responsive to the jurisprudence of the Securities Commissions about when negotiations amount to a material change. A material change occurs only where there is sufficient commitment by both parties and a substantial likelihood that the transaction will complete. In this case, the evidence was that there was considerable uncertainty surrounding the proposed transaction.
The Round decision clarifies that the test to be applied in granting leave to start an action is one that is based on merit. Specifically, the test for leave pursuant to the secondary market liability provisions of the Act involves the weighing and testing of evidence to assess whether there is a reasonable possibility that the plaintiff will be successful at trial. In its decision, the Court also confirms the common law presumption that a statute cannot be applied retroactively or retrospectively and that a person who acquires shares voluntarily through a company's treasury cannot properly be a plaintiff under Part 16.1 of the Act. The decision makes clear that the test for leave to bring an action pursuant to secondary market liability provisions will not be given a liberal interpretation that favours the party seeking leave.
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