In Tucci v. Smart Technologies
Inc., a recent certification decision of
theOntario Superior Court of Justice, Justice Perell excluded
investors who purchased securities of the defendant on the
secondary market from a proposed class of investors pursuing claims
for prospectus misrepresentation under subsection 130(1)of the
Securities Act (Ontario) (theAct). The decision reinforces
existing case law establishing that subsection 130(1)does not apply
to secondary market purchasers (such as someone who buys securities
on the Toronto Stock Exchange (TSX)) even if the secondary market
purchase was made during the "period of distribution" of
the prospectus offering.
The decision emphasizes the distinctions between primary and
secondary market claims in the context of class certification and
should discourage creative attempts by plaintiffs to certify
secondary market claims without confronting the specific burdens
and restrictions imposed by Part XXXIII.1.
On July 15, 2010, Smart Technologies Inc., made an initial
public offering (IPO) of shares in Canada and the United States. As
the shares began trading on the TSX and NASDAQ on the same date,
certain secondary market purchases were made during the period of
distribution of the IPO.
In a proposed class action, the plaintiff, a primary market
purchaser, sought damages under section 130 of the Act and
equivalent provisions of other Canadian securities legislation,
alleging that the prospectus contained misrepresentations that
became apparent when corrective disclosure was made on November 9,
The defendants consented to the certification of a class of
primary market purchasers but opposed the inclusion of secondary
market purchasers within the class. Justice Perell's decision
focused on this narrow issue.
The plaintiff argued that secondary market purchasers whohad
acquired shares after the date of filing of the prospectus but
before theclosing of the IPO (i.e., "during the period of
distribution or during distribution to the public") should be
included as members of the class since the two groups were
similarly situated and, accordingly, it would be good public policy
to treat them in the same manner rather than imposing the leave
requirement set out in section 138.8 of the Act on the secondary
Justice Perell concluded that existing precedents, including the
British Columbia Court of Appeal's decision in Pearsonv.Boliden Ltd., confirm
that the remedies provided under subsection 130(1) are available
exclusively to primary market purchasers. He noted that subsection
130(1) includes a remedy of rescission against issuers, selling
security holders and underwriters, in addition to the remedy of
damages. As such, an expansive interpretation of the provision to
include claims brought by secondary market purchasers would create
an undesirable inconsistency. Secondary market purchasers would not
have access to the rescission remedy because it is not available
against vendors in secondary market transactions.
Justice Perell went on to determine that the
plaintiff's"unconventional" interpretation of
subsection 130(1) was "not necessary to serve the purposes of
the Act" which includes distinct remedial regimes for primary
and secondary market purchasers who allege they have been harmed by
misrepresentations. He concluded that there "is no legislative
purpose to be served by adding a special class of secondary market
purchasers whose purchases happen to occur during the primary
This decision limits the application of subsection 130(1)to
primary market purchasers of securities under a prospectus and
underscores the distinctions between primary and secondary market
statutory liability regimes. This is encouraging for public issuers
and their directors and officers, who would lose the benefit of
pro-defendant provisions of Part XXIII.1 – such as the leave
requirement, liability limits and "loser pay" cost rules
– if plaintiffs are permitted to avoid them through recourse
to section 130.
Significantly, the case may support future arguments that, even
if primary and secondary market claimants may pursue their claims
within the same class proceeding(subject to leave being granted to
pursue secondary market claims), the claims of primary and
secondary market investors are sufficiently distinct to require
separate subclasses, with a separate representative plaintiff
appointed to represent each group.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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