Canada: Will Recent Decision "Open the Floodgates" To Securities Class Actions Against Foreign Issuers?

The recent decision of the Ontario Superior Court of Justice in Kaynes v. BP (Kaynes) has determined that the statutory cause of action for secondary market misrepresentation pursuant to Part XXIII.1 of the Ontario Securities Act is a "statutory tort" that, if committed in the province, will create a presumption that Ontario courts have jurisdiction over the dispute. Importantly, the Court ruled that the fact that the securities at issue were purchased over a foreign exchange will not be sufficient to rebut the presumption of jurisdiction. The decision suggests that Ontario courts, unlike their American counterparts, will readily assume jurisdiction over securities class actions with strong foreign elements. The decision could have significant implications for public companies that are not reporting issuers in Ontario (or other Canadian provinces) because it increases the likelihood that they may be subject to Canadian secondary market liability regimes. It also increases the likelihood that issuers will face duplicative proceedings in different jurisdictions over the same secondary market transactions.

BACKGROUND TO THE KAYNES DECISION

The plaintiff has commenced a proposed class action in Ontario against BP, plc (BP), alleging that the company made misrepresentations in its public disclosures relating to its operational and safety programs prior to the April 2010 Deepwater Horizon oil spill in the Gulf of Mexico and in relation to the company's clean-up efforts thereafter. He contends that the oil spill was a "corrective disclosure" which revealed the inaccuracy of the company's prior statements about its safety programs and that he and a class of Canadian-resident investors suffered damages from the resulting drop in the price of BP shares. The plaintiff asserts common law negligent misrepresentation claims and statutory misrepresentation claims pursuant to Part XXIII.1 of the Ontario Securities Act.

The proposed class includes Canadian residents who purchased BP securities on stock exchanges in Toronto (TSX), New York (NYSE), London, and Frankfurt (the European Exchanges). Common shares of BP only trade on the European Exchanges. However, depository receipts trade over the NYSE and, until August 2008, traded on the TSX. BP ceased to be a reporting issuer in Ontario and other Canadian provinces in January 2009.

The plaintiff, an Ontario resident, holds American depository receipts (ADRs) which he purchased exclusively over the NYSE. A parallel proposed class action against BP is already underway in the U.S., and is being pursued on behalf of investors who purchased BP ADRs over the NYSE.

BP sought an order to stay or dismiss the action on the basis that the Ontario Court did not have jurisdiction over the dispute. While BP conceded that jurisdiction could be assumed over members of the proposed class who bought BP depository receipts on the TSX before they were delisted in 2008, it argued that the Court had no jurisdiction over the claims of proposed class members who bought BP securities on exchanges other than the TSX. BP contended that the statutory cause of action for secondary market misrepresentation only applied to the purchase or sale of a security listed on an Ontario stock exchange – a position consistent with the "exchange-based" approach adopted by the U.S. Supreme Court in Morrison v. National Australia Bank. Alternatively, BP argued that Ontario was not the convenient forum to adjudicate the claims of the non-TSX purchasers.

THE DECISION

Justice Conway dismissed BP's motion, concluding that Ontario courts may assume jurisdiction over the claims of both the TSX and non-TSX purchasers of BP securities. She also rejected BP's argument that the U.S. or U.K. courts were more appropriate forums in which to adjudicate the claims of the non-TSX purchasers.

BROAD JURISDICTION OVER "STATUTORY TORT" RECOGNIZED

An Ontario court will assume jurisdiction over a foreign defendant when it concludes that there is a "real and substantial connection" between the province and the claim. This concept is reflected in the "responsible issuer" definition in Part XXIII.1, which establishes that issuers who are not reporting issuers in Ontario may nonetheless be subject to the province's statutory liability regime for secondary market misrepresentations when a "real and substantial connection" is established.

The analytical framework for applying the "real and substantial connection" test was recently rearticulated in the leading decision of Club Resorts Ltd. v. Van Breda. There, the Supreme Court of Canada identified a non-exhaustive list of "connecting factors" that create a presumption of jurisdiction, one of which is "a tort is committed in the province". The presumption of jurisdiction that is established when a plaintiff shows that a tort has been committed in the province may be rebutted by the defendant. In Kaynes, Justice Conway held – for the first time – that the statutory cause of action created by Part XXIII.1 is a "statutory tort", and is "tantamount to 'a tort committed in Ontario' or sufficiently analogous to one that it qualifies as a 'new connecting factor'". The question then becomes whether the statutory tort was committed in Ontario.

BP's arguments that the statutory tort at issue could only have been committed in Ontario with respect to securities purchased on the TSX were all rejected. Specifically, Justice Conway found:

• Nothing in the language of Part XXIII.1 restricts the cause of action to investors who purchase shares on an exchange located in Ontario.
• If a responsible issuer makes a misrepresentation and the Securities Act deems the Ontario investor to have relied on the misrepresentation when he or she purchased shares of that issuer, the statutory tort must be considered to have been committed in Ontario. The site of the statutory tort of secondary market misrepresentation is not determined by the location of the exchange on which the share purchase occurred.
• BP's position was inconsistent with the recent Ontario Court of Appeal decision in Abdula v. Canadian Solar, where an Ontario resident who had purchased shares of a non-reporting issuer was entitled (subject to being granted leave) to bring a secondary market claim against the defendant company in Ontario despite having purchased his shares on a foreign exchange.

Ultimately, Justice Conway was satisfied that the plaintiff's statutory secondary market claim had a real and substantial connection to Ontario. BP's attempts to rebut the presumption that the statutory tort was committed in Ontario were rejected with little analysis.

The Court similarly rejected BP's alternative argument that jurisdiction should not be exercised because alternative forums (here, the U.S. and the U.K.) were more appropriate for the resolution of the claims. BP's evidence was that the trading volume of BP shares on the TSX was negligible during the proposed class period, amounting to 0.001% of the volume of trading on the NYSE and 0.001% of the adjusted volume on the London Stock Exchange. BP's forum arguments were dismissed on several grounds, including that (1) there would be an Ontario action concerning the claims of the ADR purchasers over the TSX regardless of the outcome of the motion, (2) the parallel U.S. proposed class action was still at the pre-certification stage and might not be certified, and (3) purchasers over the European Exchanges would be required to bring individual actions against BP in the U.K. (which does not have class proceedings legislation similar to that of Canada and the U.S.).

IMPLICATIONS

The decision in Kaynes should be considered in light of its own specific facts, including the fact that BP was a reporting issuer in Ontario for a portion of the alleged class period and a very small volume of BP depository receipts did trade over the TSX during this period. The decision may also be subject to appeal. However, if it survives appellate scrutiny, it is likely to have a number of broad implications for Canadian securities class action litigation:

Together with Abdula v. Canadian Solar, Kaynes suggests that Ontario courts are taking an expansive attitude to jurisdiction in securities class actions, and are quite willing to assume jurisdiction over foreign issuers whose securities do not trade over a domestic exchange. This approach contrasts sharply with that of American courts, which are taking a narrow "exchange-based" approach that leads them to decline jurisdiction over claims of investors who purchased securities over non-domestic exchanges, even when those investors are U.S. residents.

Ontario (and potentially other Canadian jurisdictions with parallel provisions in their Securities Acts) could become "go to" jurisdictions for securities class actions with significant foreign elements much as the U.S. was a jurisdiction of choice for such claims prior to the Morrison decision. It is not presently clear what links between a foreign issuer and a Canadian province will be required in order to establish jurisdiction, other than the presence of secondary market purchasers within the province.

Public issuers around the world may be unable to control whether they will face claims in Ontario or other Canadian provinces for alleged misrepresentations in their public disclosures. A decision not to be a public issuer in Ontario (or to cease being a public issuer in Ontario) may do little if anything to protect against liability under Part XXIII.1. While companies may choose the jurisdictions in which they wish to be reporting issuers and may choose the exchanges over which their securities will be traded, they simply cannot control where secondary market purchasers of their securities will reside.

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.