In a landmark decision, the Ontario Court of Appeal has provided guidance to market participants and has confirmed that plaintiffs seeking to commence actions under the Ontario Securities Act for misrepresentations by public companies in their secondary market disclosures, must obtain judicial leave within three years of the misrepresentation ("Statutory Misrepresentation Claim").
In the proposed $520 million class action Sharma v. Timminco Limited, the proposed representative plaintiff issued a Statement of Claim in May 2009 but had not obtained leave to proceed with the Statutory Misrepresentation Claim within the three-year limitation period set out in the Securities Act. The Court of Appeal held, contrary to the decision below, that the three-year limitation period was not suspended when the Statement of Claim was issued in May 2009, but instead would continue to run until judicial leave is obtained to proceed with the Statutory Misrepresentation Claim. As a result of this decision, if a representative plaintiff, in a proposed class action, fails to obtain leave to proceed within three years of the claimed misrepresentation, the Statutory Misrepresentation Claim claim contained in Part XXIII.1 of the Securities Act will be time barred.
The overriding message from the Court of Appeal 's decision is consistent with some of the public policy objectives of the Securities Act. The commencement of a securities class action for misrepresentations in secondary market disclosures can have a very detrimental impact on a public company and its long-term shareholders. Part XXIII.1 was drafted to include protections to prevent meritless actions and inordinate delays in the prosecution of these actions. Accordingly, the Court of Appeal has now made it clear that proposed representative plaintiffs must pursue a Statutory Misrepresentation Claim for alleged misrepresentation promptly and seek leave to proceed with these cases with "dispatch".
Leave Must be Obtained Within 3 Years
Part XXIII.1 of the Securities Act was enacted to provide shareholders the ability to seek damages from public companies and their directors and officers, among others, for misrepresentations in public disclosures that improperly inflate the price of the company's shares. Due to a concern that certain companies could be targeted by unmeritorious suits, including certain claims referred to in the U.S. as "strike suits", the drafters of the legislation included a requirement that plaintiffs must obtain leave from the court to commence such actions.
In its report on the draft legislation that became Part XXIII.1, the Canadian Securities Administrators (CSA) stated that the purpose of the leave requirement is as follows:
to screen out, as early as possible in the litigation process, unmeritorious actions. . . This screening mechanism is designed not only to minimize the prospects of an adverse court award in the absence of a meritorious claim but, more importantly, to try to ensure that unmeritorious litigation, and the time and expense it imposes on defendants, is avoided or brought to an end early in the litigation process.
This leave requirement is set out in section 138.8 of the Securities Act, which requires a proposed plaintiff to establish that the action (1) is being brought in good faith and (2) has a reasonable possibility of success, before the action is commenced.
The Securities Act also imposes an absolute time limit for commencing actions for misrepresentations in the secondary market. Section 138.14 requires that actions be commenced no later than three years of the date on which the alleged misrepresentation was made.
As no such actions can be commenced without leave, the Securities Act clearly requires proposed plaintiffs to obtain leave within three years of the alleged misrepresentation so that the action can be commenced before the expiry of the limitation period.
Background of the Action
The representative plaintiff issued a Statement of Claim in May 2009 which purported to assert common law mispresentation claims and mentioned an intention to seek leave to commence a Statutory Misrepresentation Claim. The representative plaintiff alleged that Timminco and certain of its directors and officers, during the period from March 17, 2008 to November 11, 2008, made certain misrepresentations in public documents and statements in respect of Timminco's process for manufacturing solar grade silicon. The solar grade silicon produced by Timminco was purchased by solar industry customers who used the material in the production of solar cells, the main component in solar panels used to generate electricity. In the first half of 2008 Timminco's share price rose significantly, but in the latter half of the year Timminco's share price, like that of most companies in the global solar industry, began to decline.
The Decision of the Motions Judge
The first alleged misrepresentations in the Timminco proceeding were alleged to have been made by the company on March 17, 2008. By March 2011, the representative plaintiff was facing the expiry of the three-year limitation period for Statutory Misrepresentation Claims relating to these alleged misrepresentations, but had not yet obtained leave from the court to commence the proceeding or, for that matter, served motion material or scheduled its motion to obtain leave.
As a result, the proposed plaintiff sought a declaration from the Superior Court that the three-year limitation period was suspended in May 2009 with respect to the Statutory Misrepresentation Claim when the Statement of Claim was issued. The Statement of Claim mentioned that the plaintiff intended to seek leave to assert the cause of action under Part XXIII.1.
The proposed plaintiff relied on Section 28 of the Class Proceedings Act, which was enacted to protect class members in potential class actions from the continued running of limitation periods after the commencement of an action by a representative plaintiff. Section 28 provides, in relevant part, that "any limitation period applicable to a cause of action asserted in a class proceeding is suspended in favour of a class member on the commencement of the class proceeding . . ."
On the motion below, the Honourable Mr. Justice Perell found that the mention of an intention to assert a Part XXIII.1 claim constituted the assertion of a cause of action under Section 28 of the Class Proceedings Act. Accordingly, Justice Perell declared that the three-year limitation period in the Securities Act was suspended when the Statement of Claim was issued in May 2009, with a stated intention to seek leave under section 138.8.
The Court of Appeal Decision
Timminco and the other proposed defendants appealed Justice Perell's decision, taking the position that the limitation period could only be suspended by section 28 of the Class Proceedings Act after leave is granted under Section 138.8 of the Securities Act and the Part XXIII.1 claim was asserted in a Statement of Claim.
The Court of Appeal disagreed with the interpretation of Justice Perell and adopted the arguments advanced by Timminco and the other proposed defendants. Simply put, the Court of Appeal found that pleading an intention to assert a Part XXIII.1 claim did not amount to the assertion of a claim so as to trigger the application of section 28 of the Class Proceedings Act. Accordingly, the applicable limitation period would only be suspended by section 28 after leave is granted under the Securities Act and a Part XXIII.1 claim is actually asserted in a Statement of Claim.
The Court of Appeal gave effect to the clear language in the Securities Act, making it clear that plaintiffs in both class proceedings and individual actions must complete the leave motion, obtain leave and issue a Statutory Misrepresentation Claim within three years of the alleged misrepresentation. The key findings of the Court of Appeal can be summarized as follows:
- The mere "mention" in the Statement of Claim of the plaintiff's intention to seek leave to bring a claim under Part XXIII.1 is not sufficient to engage section 28 of the Class Proceedings Act so as to suspend the limitation period in section 138.14 of the Securities Act;
- Section 28 of the Class Proceedings Act requires that a cause of action be "asserted" in a class proceeding in order for the limitation period applicable to the cause of action to be suspended, and a cause of action cannot be "asserted" under Part XXIII.1 of the Securities Act until leave has been granted;
- The representative plaintiff in this case has not been granted leave and therefore has not asserted a cause of action under Part XXIII.1. Rather, the Statement of Claim merely "mentions" the representative plaintiff's intention to seek leave to assert such a cause of action;
- If the mere mention of the representative plaintiff's intention to seek leave were sufficient to trigger the suspension of the limitation period, a representative plaintiff could simply do nothing towards obtaining leave or advancing the shareholders' claim and thereby suspend the limitation period indefinitely;
- An interpretation of section 28 of the Class Proceedings Act that would suspend the limitation period before leave has been granted would unfairly benefit representative plaintiffs and class members in a class proceeding as it would not be available for a plaintiff suing in an individual capacity, as section 28 does not apply in individual actions. Such an interpretation favouring class representatives over individual plaintiffs could not have been intended by the legislature;
- Requiring leave to be obtained before the suspension of the limitation period under section 28 of the Class Proceedings Act is triggered is consistent with the legislature's intention that secondary market claims proceed "with dispatch".
The drafters of the proposed legislation leading to Part XXIII.1 of the Securities Act, the CSA, sought to include adequate protections to prevent unmeritorious claims and inordinate delays in the prosecution of statutory secondary market class actions due to the impact that such actions can have on public companies and their long-term shareholders. The Court of Appeal has made it clear that proposed representative plaintiffs must seek and obtain leave under section 138.8 of the Securities Act and issue a Statutory Misrepresentation Claim within 3 years of an alleged misrepresentation in order to preserve a statutory secondary market claim.Part XXIII.1 was drafted to protect companies and shareholders from these risks, and the Court of Appeal's decision in the Timminco proceeding is consistent with that legislative intent.
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.