How will the courts interpret the test for leave in relation to the new secondary market liability provisions of the B.C. Securities Act?
On October 21, 2011, the Supreme Court of British Columbia released its decision in Round v MacDonald, Dettwiler and Associates Ltd.1 The Round decision is the first in British Columbia to examine the secondary market liability leave provision.
The Applicant in Round argued that, in order to meet the threshold required for leave, all she needed to do was demonstrate that her proposed action was not an abuse of process, not purely speculative, and that some evidentiary basis of wrongdoing existed. The Applicant also argued that the fact that she obtained her shares from treasury and not on the secondary market was not fatal to her application. Mr. Justice Harris of the Supreme Court disagreed, dismissing the case of the would-be plaintiff and refusing to grant leave to bring an action.
Secondary Market Liability Provisions
The new secondary market liability provisions of the British Columbia Securities Act came into force on July 4, 2008. These causes of action relate to misrepresentations of material facts and the failures of public companies and others to disclose material changes which affect the price at which shares are traded on the market.
The causes of action were created in favour of people who acquire or dispose of shares during the period between the breach and its correction. The new causes of action remove the requirement for the affected individual to prove reliance on the misrepresentation or failure to disclose in order to maintain an action.
The legislation imports a leave requirement into the new causes of action in order to prevent frivolous suits and so-called "strike suits" from being pursued.
The test at the leave stage requires a would-be plaintiff to prove that:
- the action is brought in good faith; and
- there is a reasonable possibility that the claim will be successful at trial.
The second part of this test is what was at issue in the Round case.
The Petitioner, Lesley Round, was an employee of the Defendant, MacDonald, Dettwiler and Associates ("MDA"), from 2002 to 2008. During her employment, she received an entitlement to common shares of MDA through her employee share purchase plan. Under the plan, employees made contributions via automatic payroll deductions. Funds accumulated in each employee's plan account and, periodically, the plan administrator would purchase shares from MDA's treasury and hold them until the employee elected to withdraw. In December 2008, upon leaving her employment, Ms. Round elected to withdraw shares from her plan account. There was no evidence that Ms. Round had ever disposed of her shares.
Round complained that MDA and its named officers and directors failed to disclose that MDA began negotiating the sale of one of its divisions in October 2007, and that the proposed sale was subject to approval of the Minister responsible for administering the Investment Canada Act ("ICA"). MDA had made disclosure to the effect that it expected the sale to close in the second quarter of 2008, but did not indicate that the agreement was subject to ministerial approval. MDA issued a news release on May 9, 2008 indicating that the Minister had refused to approve the agreement, and further documents were filed on SEDAR on May 12, 2008; however no Material Change Report was filed on SEDAR. The fact that the proposed agreement did not receive ministerial approval came as a surprise to both MDA and the company it was negotiating with, Alliant Techsystems Inc. ("ATK").
Two central issues were considered by the court in determining whether Round's petition met the threshold for a reasonable possibility of success at trial:
- Do the secondary market liability provisions apply to the Petitioner's intended action, given that the events in question occurred before the new provisions came into force?
- Does the Petitioner have the right to bring an action if she did not acquire her shares on the secondary market?
With respect to the first issue – concerning retroactivity of the legislation – the court determined that to apply the civil liability provisions of the Act to the facts here (all of which pre-dated the creation of the causes of action) would give the statute a retroactive or retrospective application unintended by the legislature. Ms. Round was therefore unable to fit herself under the statutory causes of action and could not properly be a plaintiff.
With respect to the second issue, the question in this case was whether the secondary market liability provisions confer a cause of action on a person who acquired shares from treasury but did not acquire or dispose of them on the secondary market. Round argued that the fact that she obtained the shares from treasury and not the secondary market was of no consequence. The court disagreed and emphasized that the provisions of the Act, specifically sections 140.3 and 140.8, clearly stipulate that an action can only be brought by someone who personally has a cause of action and therefore properly be a plaintiff. The legislation is clear and the provisions requiring acquisition or disposition on the secondary market are an essential element of the cause of action which are intended to influence conduct that affects the secondary market. The court characterized this requirement as a "necessary part of achieving the purpose of the legislation."
In rejecting both of the Petitioner's arguments above, the court had sufficient grounds to dismiss the application. However, the court went on to comment on other aspects of the leave test, as follows:
- The leave application necessarily involves a review, weighing and balancing of the material facts upon which each side intends to rely, and requires the parties to submit that evidence in affidavit form. The court must then assess the merits of the proposed action on the evidence available.
- The determination of whether the applicant's evidence meets the "reasonable possibility" threshold is different than the test involved in certification of class actions, or the test for summary judgment.
- The leave test is intended to do more than simply screen out potential actions that are frivolous, vexatious or scandalous, and the test requires an applicant to do more than merely identify a triable issue. An action might have some merit, and not be frivolous, scandalous or vexatious, and yet it may not rise to the level of demonstrating that the proposed plaintiff has a "reasonable possibility of success."
- It is clear that the analysis at the leave stage requires a "reasoned and significant assessment of the existing evidentiary record," and that this analysis necessarily occurs before any discovery has taken place. However, the leave application is intended to be, and should remain, an initial hurdle and not a substitute for trial.
The court also commented on the inquiry into the merits of the intended action:
- The court cited with approval the Ontario Securities Commission decision in Re AiT Advanced Information Technologies Corp2 for the proposition that a material change occurs only when there is a sufficient commitment by both parties and a substantial likelihood that the transaction will be completed. The Petitioner's allegation that MDA wrongly failed to disclose its negotiations with ATK was not supported by the case law, as the transaction was surrounded by considerable uncertainty.
- Round took issue with certain "statements of optimism about future events" published by MDA. The court indicated there was no evidence that MDA, its directors, or officers, did not honestly believe the statements were untrue. The jurisprudence indicates that such statements are not considered material, nor are they misrepresentations of fact.
The Bottom Line
The Round judgment gives us a first glimpse at how the courts are going to interpret the new secondary market liability provisions of the B.C. Securities Act. The court was careful to warn that the decision in Round should not be considered a "definitive" decision on the leave test, indicating that such a decision must await a case with, presumably, more appropriate facts.
Despite the court's comments on the limited utility of the case, the Round decision fleshes out and clarifies various aspects of the leave test, including providing a confirmation that the requirement in the legislation that shares be purchased or disposed of on the secondary market means just that. The commentary provided in Round is likely to be influential in future decisions of the court on these issues and provides public issuers and potential plaintiffs with some guidance in the interim.
1 BCSC 2011 1416. Note: this decision is currently under appeal.
2 (2008) 40BLR (4th) 242 (OSC).
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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