On November 5, 2013, Justice Perell released his decision in Bayens v. Kinross Gold Corp. denying leave to commence a statutory misrepresentation claim under Part XXIII.1 of the Ontario Securities Act (the "OSA") and holding that as a result of the failure to obtain leave for their statutory claim, the plaintiffs' putative class proceeding could not satisfy the criteria for certification of a class action, including with respect to the common law claim for negligent misrepresentation.
In Bayens, several Trustees of the Musicians' Pension Fund of Canada ("Musicians") commenced a secondary market misrepresentation claim against Kinross Gold Corporation, a Canadian international mining company, and several current and former officers and directors of Kinross. The proposed class action was brought on behalf of purchasers of Kinross shares from May 3, 2011 to January 16, 2011 and related to Kinross' purchase, in September 2010, of Red Back Mining Inc., which owned the Tasiast mine in Mauritania and the Chirano mine in Ghana. The plaintiffs asserted three core allegations of misrepresentation pertaining to Kinross' acquisition of the mines: first, in May 2011 Kinross should have reported a write down of its goodwill associated with the two mines because Kinross' failure to achieve certain expectations regarding the Tasiast mine within six to eleven months of Kinross' purchase of Red Back Mining Inc. was a triggering event for a write down (the "Goodwill Misrepresentation");1 second, certain Kinross disclosures were misleading because they implied that the presence of lower grade ore in certain areas of the Tasiast mine was a new discovery (the "Low-Grade Ore Misrepresentation"); and third, Kinross misrepresented that the expansion project for the Tasiast mine remained on schedule (the "On-Schedule Misrepresentation").
A similar class action commenced against Kinross in the United States was partially dismissed. The US District Court for the Southern District of New York permitted the plaintiffs' claim that Kinross had misrepresented the schedule for the Tasiast expansion project to proceed. Notably, Justice Perell found that the result in the US class action played a role in shaping Musicians' case on the leave motion.
The Leave Motion
Section 138.8(1) of the OSA permits the court to grant leave to commence a secondary market claim, where the court is satisfied that (a) the action is being brought in good faith; and (b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. As Kinross did not challenge whether Musicians had satisfied the good faith requirement, Justice Perell was only required to resolve the issue of whether there was a reasonable possibility that the action would be resolved at trial in favour of Musicians for any or all of its three core allegations of misrepresentation.
As a preliminary matter, Justice Perell confirmed that the test of a "reasonable possibility of success at trial" imposes a low evidentiary threshold. However, low threshold notwithstanding, the leave test is a genuine screening mechanism that sets a higher evidentiary standard than the "some basis in fact" standard applied to certification motions. Accordingly, in determining whether there is a reasonable possibility of success at trial, Justice Perell clarified that the court may assess and weigh evidence; albeit in a limited way that does not impose an onerous burden on the plaintiff.
Turning to the issue of whether or not there is a reasonable possibility that Musicians' action would succeed at trial, Justice Perell noted that the action was launched by Musicians with nothing more than "speculation" and "suspicion." With respect to the Goodwill Misrepresentation claim, Justice Perell held that Musicians' case for a triggering event for a good will impairment based on what Kinross knew or ought to have known had no possibility of success. In particular, there was no evidentiary basis to support an argument that because of what Kinross knew about its drilling results in 2011, Kinross should have changed its expectations for new discoveries at the Tasiast mine from high hopes to disappointment and accordingly written down the Tasiast mine's goodwill. In finding that the Goodwill Misrepresentation claim had no reasonable possibility of success, Justice Perell rejected the evidence of Musicians' accounting expert on the basis that the expert witness made "three mutually exclusive mechanical and analytical errors," each of which caused Musicians' argument that there was a triggering event in 2011 requiring a write down of goodwill for the Tasiast mine to implode.
Justice Perell also rejected the Low-Grade Ore Misrepresentation claim which was based on the allegation that certain public disclosures made by Kinross in 2011 that confirmed the presence of lower grade ore in the West Branch zone of the Tasiast mine were misleading because the disclosures implied that the presence of lower grade ore was a new and recent discovery, whereas Kinross was aware of the existence of the low grade ore at the time of its acquisition of Red Back Mining Inc. Justice Perell held that the misrepresentation claim had no chance of success at trial because Kinross' statement confirming the presence of lower grade ore did not imply a new and recent discovery as Musicians contended. To the contrary, as found by Justice Perell, the alleged misrepresentation meant exactly the opposite of what Musicians asserted; it conveyed the meaning that no new low grade ore had been discovered but the existing low grade ore was being reassessed for its economic value.
Regarding Musicians' On-Schedule Misrepresentation claim, Justice Perell found that the claim had not been pled in Musicians' Amended Statement of Claim and appeared to have been advanced at the leave motion because of the US plaintiffs' success in pleading a similar claim against Kinross. Justice Perell held that it would be "procedurally improper and unfair to permit Musicians to advance the claim for the leave motion."
As Musicians could not establish a reasonable possibility of success at trial on any of its core misrepresentation claims, Justice Perell denied leave under section 138.8 of the OSA.
The Certification Motion
In the decision, Justice Perell provided his views on the necessity of the court restructuring its approach to the normal certification criteria for a class action in the case of a Part XXIII.1 claim. From Justice Perell's perspective, if leave to commence a Part XXIII.1 claim is granted, "the court should certify a class action for both the statutory and the common law negligent misrepresentation claim" subject to the provisio that the reliance element of the common law misrepresentation claim must be proved at individual issues trials. His Honour noted that it is appropriate to certify the common law negligent misrepresentation claim as well as the statutory claim because, by satisfying the stricter merits based leave test, the plaintiff will have also satisfied the less onerous certification test. However, if leave is not granted, neither the statutory claim nor the common law claim can be certified but the plaintiff may proceed with an individual common law claim for negligent misrepresentation.
Applying this approach to Musicians' motion for certification, Justice Perell held that because he refused to grant leave to commence the statutory claim, Musicians' certification motion should be dismissed. Had he granted leave for the secondary market claim, Justice Perell would have certified a class action for both the statutory claim and the common law negligent misrepresentation claim because, by successfully obtaining leave, Musicians would have satisfied the first four of the five criteria for certification and would likely have been in a position to satisfy the fifth criterion.2
1. "The goodwill in a mine is the anticipated, speculative, value of the yet-to-be discovered ore, and the goodwill is calculated as a multiple of the net asset value of the mine."
2. An action may be certified as a class proceeding under section 5(1) of the Class Proceeding Act if: (i) the pleading discloses a cause of action; (ii) there is an identifiable class; (iii) the claims of the proposed class members raise common issues; (iv) a class proceeding is the preferable procedure; (v) there is a suitable representative plaintiff.
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