In an action alleging secondary market misrepresentations
brought under Part XXIII.1 of Ontario's Securities
Act, defendants may be reluctant to file extensive evidence in
opposition to the leave motion. This reluctance appears to be
justified given early leave decisions such as Silver v.
IMAX,1 which suggest that there is little or
nothing to be gained by doing so. Defendants may view the chance of
defeating leave as low in light of the minimal threshold that
plaintiffs have to meet. Further, a defendant's obligation to
produce documents and other information on the cross-examination on
any affidavits filed may be so extensive as to effectively amount
to early discovery - a daunting prospect.
However, the recent decision of Strathy J. in Gould v.
Western Coal Corporation2 may give defendants new
hope that the leave requirement can fulfill its initial promise of
screening clearly unmeritorious claims.
In Western Coal, the plaintiff alleged that the
defendants (which included the issuer Western Coal, its major
shareholder, one of its lenders, and a number of its officers and
directors) had "fabricated" a financial crisis in the
company. It was alleged that the defendants conspired in an effort
to depress the company's stock price, thereby allowing certain
of the defendants to increase their shareholdings at a fraction of
the shares' actual value, diluting the interests of other
investors. This allegation was based in large part on a note in the
company's financial statements disclosing that there was
"substantial doubt" as to the company's ability to
meet its obligations as they came due, and the fact that the
company was able to arrange financing shortly after the financial
statements were released. The plaintiff alleged that the note was a
misrepresentation, and that the company had deliberately delayed
obtaining the financing until after its statements were released so
that certain of the defendants could benefit from the resulting
decrease in share value.
In responding to the plaintiff's leave motion, the
defendants filed affidavits from fact and expert witnesses in
support of their position that the note was not a
misrepresentation, and that the allegation that they had delayed
obtaining financing was baseless. The evidence included expert
evidence as to why the company was required to include the note in
the financial statements, and fact evidence relating to discussions
and recommendations of the company's auditors. Based on the
strength of the defendants' evidence, and his complete
rejection of the expert evidence filed on behalf of the plaintiff,
Strathy J. held that leave should not be granted under Part
XXIII.1, as the plaintiff's claim had "no reasonable
possibility of success at trial".
Notably, although Strathy J. endorsed the leave decision of van
Rensburg J. in Silver v. IMAX (which held that the leave
test imposes a low evidentiary burden on plaintiffs), Strathy
J.'s reasoning demonstrates that there is still considerable
scope for a motions judge to weigh evidence and make findings of
credibility at the leave stage. Strathy J. found that there was
conflicting expert accounting evidence, but that there was "no
reasonable possibility that a trial judge would accept [the
plaintiff's expert] evidence in preference to that of the
defendants' expert evidence". In reaching that conclusion,
Strathy J. was highly critical of the plaintiff's expert.
Strathy J. held that doubts about the expert's independence,
his willingness to engage in "blatant advocacy" and the
fact that he gave opinion evidence in areas in which he had no
expertise left him with "no confidence that [the expert's]
evidence can be relied upon."
In light of his finding that there was no misrepresentation, it
was unnecessary for Strathy J. to consider the "reasonable
investigation" defence available to the defendants under
section 138.4(6) of the Securities Act. However, Strathy
J. concluded that even if there had been a misrepresentation, the
evidence established that the defendants had conducted a reasonable
investigation, and had no reasonable grounds to believe the
financial statements contained a misrepresentation. Strathy J. also
refused to certify a proposed class action for conspiracy that was
largely based on the same unfounded misrepresentation, and held
that an Ontario court did not have jurisdiction over the
plaintiff's claim for oppression under British Columbia's
Business Corporations Act.
Although heavily dependent on its own facts, Western
Coal is a helpful example of the type of case in which
opposing leave with a substantial evidentiary record may pay off
for defendants. It is heartening for defendants and their counsel
to see that the leave requirement in Part XXIII.1 may have
"teeth" after all.
1 2009 CanLII 72342.
2 2012 ONSC 5184.
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