Canada: Foreign Listed Issuer Subject To Canadian Securities Law Class Action

The Ontario Court of Appeal recently issued its decision in Abdula v. Canadian Solar Inc. The decision continues a trend in which Canadian courts and tribunals have been willing to enforce securities laws beyond provincial and territorial boundaries. The Court confirmed that the statutory cause of action for misrepresentation set out in the Securities Act (Ontario) applied to Canadian Solar, a company whose shares trade on NASDAQ and not on any Canadian stock exchange and whose principal place of business is in the People's Republic of China. This decision, in addition to recent jurisprudence from the Supreme Court of Canada (the SCC), is of consequence to foreign companies with a significant or limited connection to any Canadian jurisdiction.

Background

Canadian Solar is the subject of a proposed representative class action in Ontario. The claim arises out of alleged misrepresentations contained in its public filings and made during investor conference calls. Canadian Solar's filings in relation to this matter were with the U.S. Securities Exchange Commission and not with the Ontario Securities Commission.

The relevant cause of action is provided for in section 138.3 of the Securities Act (Ontario), which confers a right of action in damages in the event of a misrepresentation by a "responsible issuer". The term "responsible issuer" is defined in that legislation as a reporting issuer or "any other issuer with a real and substantial connection to Ontario, any securities of which were publicly traded." This decision is relevant to all Canadian jurisdictions, as comparable legislation has been enacted in all Canadian provinces and territories.

Issue

The issue on appeal was whether the definition of "responsible issuer" should be limited to issuers whose securities are publicly traded in Canada, as Canadian Solar was not a reporting issuer in Ontario. The Court held that there was no such implied limit. After a detailed review of the legislation and its context, the Court decided that the legislation could apply to an issuer whose securities were not publicly traded in Canada.

While the issue of whether Canadian Solar possessed a real and substantial connection to Ontario was not under appeal, the Court did go on to make reference to the motion judge's analysis on that issue, thus providing possible guidance that may be instructive to determining when a real and substantial connection exists for the purposes of the statute.

Factors militating against finding a real and substantial connection in Canadian's Solar's case were that:

  • Canadian Solar's principal place of business is in the People's Republic of China;
  • its shares trade on NASDAQ, and no Canadian stock exchange; and
  • Canadian Solar's filings in relation to this matter were with the U.S. Securities Exchange Commission and not with the Ontario Securities Commission.

These facts notwithstanding, Canadian Solar was said to have a real and substantial connection to Ontario. Factors which appeared to be relevant to the analysis were that:

  • the plaintiff is an Ontario investor;
  • Canadian Solar is a federal corporation governed by the Canadian Business Corporations Act;
  • Canadian Solar carries on business in Ontario and has a registered office in Toronto and a principal executive office in Kitchener; and
  • some of the disclosure in question emanated from Ontario.

At this stage, the determination of whether a company possesses a "real and substantial connection" for the purposes of the legislation remains unpredictable. What appears more certain is that there is no one factor that will insulate companies from Canadian securities law. It is feasible that the current state of the law may result in Ontario and other Canadian jurisdictions becoming the forum of choice for shareholders attempting to seek remedies even where the connection to Canada is tenuous.

Outside the area of securities enforcement, recent authority from the SCC released after Canadian Solar has also provided further guidance about factors that establish a connection to Canadian courts. Relevant to this issue, the SCC set out certain presumptive connecting factors. If one of those connecting factors is present, the court will assume jurisdiction over all aspects of the case unless the defendant rebuts the presumption of connection. For further information on this SCC authority, please see our April 2012 Blakes Bulletin: Supreme Court Clarifies Law of Assumed Jurisdiction Over Foreign Defendants. The SCC jurisprudence is yet another example of the increasing tendency of Canadian courts and tribunals to take jurisdiction over matters with foreign aspects.

Implications

Canadian Solar, as well as the above-referenced SCC authority, is significant to the extent that the decisions emphasize the need for issuers to be aware of the potential application of extra-territorial securities laws. Decisions determining a "real and substantial connection" are often so fact-specific as to be unpredictable. However, the increasing inclination of Canadian courts to assume jurisdiction underscores the importance of companies remaining vigilant in assessing whether their activities require them to comply with Canadian securities laws.

Foreign companies must be increasingly conscious of their exposure to potential legal proceedings in Canada regardless of whether they perceive their level of corporate activity in Canada to be minimal.

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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