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May 2012 — The Ontario Court of
Appeal just rendered a significant decision in the field of
Canadian securities class actions. In Abdula v. Canadian Solar Inc.
2012 ONCA 211, the Court of Appeal ruled that the statutory cause
of action for secondary market misrepresentations can be raised
against foreign-listed issuers that maintain a "real and
substantial connection" to the province of Ontario.
BACKGROUND
A group of shareholders filed a class action against Canadian
Solar Inc., whose shares are listed solely on NASDAQ. The claim is
centred on misrepresentations contained in documents that were
released or presented by the issuer in Ontario, as well as made in
the course of investor conference calls.
Canadian Solar Inc. is a Canadian-incorporated company, whose
principal place of business is located in China. The company is not
required to meet the filing and disclosure requirements of a
"reporting issuer" under the Ontario Securities
Act1. In these circumstances, the disclosure documents
at issue were filed exclusively with the United States Securities
and Exchange Commission rather than with any Canadian securities
regulator.
ISSUE
The issue before the Ontario Court of Appeal was whether
Canadian Solar Inc. can constitute a "responsible issuer"
as defined by the Securities Act, and therefore be subject to a
statutory cause of action by purchasers in the secondary market. To
that effect, section 138.1 of the Securities Act defines a
"responsible issuer" as: (a) a reporting issuer, or (b)
any other issuer with a real and substantial connection to Ontario,
any securities of which are publicly traded.
COURT OF APPEAL DECISION
The defendants argued that, since the issuer is only listed on a
U.S. stock exchange, only U.S. securities law should be applied.
They argued that the definition of a "responsible issuer"
should be restricted to "any other issuer with a real and
substantial connection to Ontario, any securities of which are
publicly traded in Canada."
The Court of Appeal rejected this argument and concluded there
was sufficient reason to conclude that Canadian Solar Inc. meets
the Securities Act definition of a "responsible
issuer".
The Court of Appeal relied on the fact that Canadian Solar Inc.
held its annual meetings in the province of Ontario, has raised
money from investors in Ontario by way of private placements, and
has filed documents with the Ontario Securities Commission in the
past.
With regards to the expressed concerns pertaining to the
extraterritorial reach of the disclosed cause of action, the Court
of Appeal held that "the general principles with respect to
extra-territorial regulation do not require that the definition of
'responsible issuer' be interpreted as confined to issuers
any of whose securities are publicly traded in Canada". It
added that "the subject matter of Part XXIII.I is a remedy to
investors for misrepresentation in certain issuers' secondary
market disclosure. In this case, at least some of that disclosure
emanated from Ontario. That, together with the relationship of
Canadian Solar to Ontario, constitutes a sufficient connection
between Ontario and Canadian Solar to potentially subject Canadian
Solar to a statutory cause of action...".
IMPACT OF THE DECISION
The ruling in Abdula v. Canadian Solar Inc. promises to provide
a solid argument for shareholders looking to institute a securities
class action in Ontario, even in cases of non-reporting issuers,
whose shares are not publicly traded on a Canadian exchange. In
comparison, the U.S. Supreme Court decided the issue by drawing
rather opposite trends as to the extraterritoriality concern in its
ruling in Morrison v. National Australia Bank Ltd. Indeed, the
majority provided clear guidance by ensuring, through
well-established criteria – which the Abdula ruling is
lacking – that extraterritorial application must be
limited to cases of true substantial connection, rather than
"whenever some domestic activity is involved".
Footnote
1 R.S.O. 1990, c. S.5 [Securities Act].
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