On August 27, 2013, Justice Perell released his decision (2013 ONSC 5490) approving three settlements
valued at $10.85 million, bringing the class action against Zungui
Haixi Corp. ("Zungui") and others to a close. Under the
approved settlements, Zungui will pay $8.1 million, auditors Ernst
& Young ("E&Y") will pay $2 million and the
company's underwriting syndicate (CIBC World Markets Inc.,
Canaccord Genuity Corp., GMP Securities LP and Mackie Research
Capital Corporation) will pay $750,000. In an earlier May 2013 decision, Perell J. had certified the class
action for settlement purposes in respect of the Zungui and E&Y
As summarized here, the proposed class action brought by
Zungui's investors stemmed from an August 22, 2011 announcement
that E&Y had suspended its audit of Zungui's 2011 financial
statements. The company's shares immediately dropped by 77% and
were subsequently cease-traded. The proposed class was comprised of
various groups of investors (each represented by separate counsel),
including purchasers in the initial December 2009 IPO, investors
who received shares in exchange for securities of a Zungui
subsidiary prior to the IPO, and secondary market purchasers.
The proposed plan of distribution under the settlements
allocated various levels of compensation to the investor groups
depending on, amongst other factors, when investors acquired or
sold their shares. The plan did not, however, contemplate any
compensation to class members who acquired shares on or following
the August 22, 2011 E&Y disclosure (though the settlements
included a release of these class members' claims). One
investor who had purchased his shares on August 22, 2011 objected
to the fairness of the plan of distribution on the basis that the
August 22, 2011 disclosure "[did] not clearly foreshadow the
events that followed" and that "there was no way of
knowing that the worst possible outcome would come to pass, with
investors unable to trade their shares ever again".
In considering whether the plan of distribution was fair and
reasonable, Perell J. noted that if class members such as the
objecting investor had appreciated that the parties had only
included them in the class as a bargaining chip and would
eventually exclude them from the plan of distribution while
releasing their claims, those investors would likely have opted out
of the class action. As it stood, Perell J. found it
"inappropriate and unfair to include August 22, 2011
purchasers as Class Members and then exclude them from the Plan of
Distribution". He thus revised the plan to include August 22,
2011 purchasers but discounted their claims to reflect the
increased risk of their investments.
While the precedential value of this decision is likely limited
by the fact that the court's authority to vary the plan of
distribution was expressly provided for by the settlement
agreements, Perell J. made it clear that he would not have approved
the settlements without this authority. Perell J. also noted that
s. 26 of the Class Proceedings Act, 1992 provides the
court with ample discretion and scope for creativity in determining
or approving a plan of distribution where a judgment has been
issued. Based on these comments, class counsel would be wise to
expressly advise settling class members of the court's ability
to vary distributions, especially in cases involving objecting
class members or other potential fairness concerns.
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