On February 16, 2012, the Ontario Court of Appeal released its decision in Sharma v. Timminco,1 affirming the statutory requirement to seek leave to commence a secondary market securities class action within three years from the date of the alleged misrepresentation, failing which, the claim will be dismissed.
The Court of Appeal's decision was the right one, for a number of reasons. Importantly, it restores the careful balance struck by the legislature in creating a secondary market civil liability regime. Part XXIII.1 of the Ontario Securities Act created a new cause of action to sue companies and their directors, among other things, for misrepresentations. The legislature conferred a number of benefits to plaintiffs in that regime, most notably, that they would not be required to prove "reliance": the fact of the misrepresentation was sufficient.
But at the same time, the legislature was acutely aware that, left unchecked, this new secondary market civil liability could be used not to cure wrongs, but rather to create them, most notably through a strike suit. A strike suit is one that is not advanced to correct a wrong or to advance legal rights, but rather, to effectively shake down a company by virtue of the size and magnitude of the claim.
Two checks were created to avoid that evil. First, a plaintiff seeking to advance the civil liability for secondary market misrepresentation must seek leave of the Court before asserting the cause of action. This gives the court a gatekeeper role to weed out inappropriate cases. Second, a plaintiff must assert the cause of action within three years of the alleged misrepresentation, regardless of when the facts emerged showing the statement to be untrue. It is an absolute, hard stop limitation period.
What the Court's decision in Timminco does is put those two requirements together in the manner the legislature expressly intended. The plaintiff must seek and obtain leave to commence the action before the three years have expired. Any later and the plaintiff is out of time. This was the right decision based on the wording of the statute, its purpose, and even on policy grounds.
In Timminco, the plaintiff commenced a class action against Timminco and its directors alleging, among other things, secondary market misrepresentation under the Part XXIII.1 of the Securities Act. The statement of claim alleged that the defendants issued or authorized public statements containing material misrepresentations affecting the price of Timminco's shares. The misrepresentations were alleged to have commenced on March 17, 2008, and continued until November 11, 2008.
Under the Securities Act, actions for secondary market misrepresentation may not be commenced without leave of the court (s. 138.8) and must be commenced within three years of the date of the alleged misrepresentation (s. 138.14). Significantly, the statement of claim in Timminco expressly pleaded nothing more than an intention to seek leave to assert its secondary market claim.
In February of 2011, the plaintiff had not yet sought leave, and as a result, was facing down the impending three-year limitation period. The plaintiff moved for an order declaring that the limitation period was suspended pursuant to the provisions of the Class Proceedings Act (CPA). Under s. 28 of the CPA, any limitation period applicable to a cause of action is suspended in favour of a class member on the date the class proceeding is commenced.
The issue for the courts was whether the plaintiff's secondary market cause of action had been "asserted" for the purposes of the CPA, suspending the limitation period, when the plaintiff had not been granted leave to commence such an action under the Securities Act.
At first instance, the motion judge granted the order requested by the plaintiff and declared that the limitation period in s. 138.14 of the Securities Act was suspended pursuant to s. 28 of the CPA. In so doing, the motion judge held that the plaintiff was not required to seek leave under Part XXIII.1 of the Securities Act to toll the limitation period, but rather, that it only had to "mention" the action in its statement of claim. The defendants appealed.
The Court of Appeal Decision
The Court of Appeal rejected the lower court's interpretation and confirmed that claims for secondary market misrepresentation are governed by the leave requirement and three-year limitation period outlined in the Securities Act regardless of s. 28 of the CPA.
The Court of Appeal focused on the ordinary meaning of the word "assert" as it is used in s. 28 of the CPA. That section provides that "any limitation period applicable to cause of action asserted in a class proceeding is suspended...on the commencement of the class proceeding." The Court found that the word "assert" means more than a mere mention, but rather, means to "invoke or enforce" a legal right.2
In order to commence an action for secondary market misrepresentation, the Court of Appeal noted that the legislature provided a clear leave requirement in the Securities Act before the legal right to assert such a claim could be enforced or invoked.3
Applying a grammatical and ordinary interpretation of s. 28 of the CPA to s. 138.3 of the Securities Act, the Court ruled that the limitation period could not be suspended by the CPA absent leave being granted under the Securities Act.
In so doing, the Court acknowledged that the lower court ruling provided class members with an unintended benefit that was not available to individual plaintiffs. The Court found it cannot have been the purpose of s. 28 of the CPA to put the class in a better position than if a class member had commenced an individual action.4
Secondly, the Court noted that the provisions in Part XXIII.1 of the Securities Act are intended to ensure that secondary market claims proceed expeditiously and with dispatch. To suspend the limitation period with no guarantee that the action or leave motion would proceed expeditiously would have been inconsistent with the scheme set up to govern secondary market claims.5
Finally, the Court clarified that its finding did not make s. 28 of the CPA entirely inoperable as it concerns secondary market claims. Rather, it simply means that leave must be obtained before the secondary market action can commence within the meaning of the CPA. Only then can s. 28 apply to suspend the limitation period in the Securities Act.6
The reasoning of the Court of Appeal was not particularly revolutionary: it applied well-accepted principles of statutory interpretation to give effect to the clearly stated legislative intent. There are no other appellate decisions that conflict with this, making it unlikely this case will attract the attention of the Supreme Court of Canada should the plaintiffs seek leave to appeal.
But while the case is not revolutionary in methodology, it is nonetheless important direction from Ontario's highest court regarding how secondary market class actions are to be conducted: leave must be obtained relatively quickly and in all events prior to the expiry of three years from the date of the alleged misrepresentation.
The case also has a number of ancillary benefits.
First, it sounds the death knell for a potentially mischievous development in this practice area, whereby plaintiffs had been seeking to couple the leave application with the application for certification.7 Because the merits of the lawsuit are somewhat at issue in a leave application, plaintiffs who coupled that application with certification could in the right case add colour to the certification motion with evidence on the merits they viewed as being helpful, which would not normally be considered by a judge on certification. Given the speed with which leave applications must now be brought, it is difficult to see how that coupling could occur again in the future.
Second, the decision will likely affect, if not effectively reverse, an earlier decision of the motions judge in Timminco which required defendants to deliver a statement of defence prior to certification, even before leave had been granted to commence the claim.8 That can no longer be the law. While it is still conceivable that a judge could require a defence prior to certification, it cannot be required prior to leave being granted.
Third, the decision will likely avoid mischief caused by delay and otherwise, through preliminary motions from the plaintiff in circumstances where it had not yet been established that the court would grant leave to commence the proceeding. In Timminco, the plaintiffs spent months battling with other class counsel on a carriage motion, then additional months in a motion to compel the production of insurance policies, and still more time on a motion to clean up their claim with particulars. All of this was done before the Court had even granted leave to commence the proceeding, and it is difficult to see how that could ever happen again.
It should be noted that while this decision gives important guidance for secondary market claims commenced under Part XXIII.1 of the Ontario Securities Act, it has no application to purely common law claims of misrepresentation. Of course, in those common law claims all of the usual rules apply, including the requirement for the plaintiff to show reliance
1. 2012 ONCA 107 [Timminco].
2. Ibid., at para. 17.
3. Ibid., at para. 18.
4. Ibid., at para. 25.
5. Ibid., at para. 26.
6. Ibid., at para. 27.
7. See Imax v. Silver,  O.J. No. 5573 (Sup. Ct.).
8. See Bennett Jones Class Action Update from July 21, 2011, " Recent Decision Requires Defendants to Plead in Class Action Prior to Certification".
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