Securities class actions have come full circle. Two years ago, a "thunderbolt" decision from the Ontario Court of Appeal barred class actions for secondary market misrepresentation under the Ontario Securities Act unless the plaintiffs won the court's leave (that is, permission) to proceed within three years of the misrepresentation. The decision was Sharma v. Timminco, and the quote is from a defence counsel in Green v. CIBC, another secondary market securities class action. Justice Strathy was hearing Green's certification and leave motion when Sharma came out. He would have granted leave and certified the class, but three years had passed, so he applied Sharma and dismissed the motion. Green's plaintiffs appealed, and the Court of Appeal overturned its own decision in Sharma. This means that a proper pleading will suspend the three-year limitation period for secondary market misrepresentation claims in class actions. Significantly, the appellate panel also certified part of the action's common law misrepresentation claim by separating out problems with proving individual reliance. They rejected the "fraud on the market" theory of inferred reliance, but otherwise the decision is a major boost for securities class actions.
The Issues in Sharma
The Court of Appeal's decision in Sharma addressed a combination of factors that often apply to securities class actions:
- the statement of claim explicitly seeks to make a secondary market misrepresentation claim under s. 138.3 of the Ontario Securities Act;
- s. 138.8(1) of the Act requires the court's leave before the s. 138.3 claim may be commenced;
- the court has not yet granted leave; and
- the claim must be commenced within three years of the misrepresentation, according to the limitation period in s. 138.14.
In this situation, the question is whether s. 28(1) of the Ontario Class Proceedings Act suspends the limitation period in s. 138.14 before leave is obtained, or whether leave must be obtained before s. 28(1) applies.
S. 28(1) provides that "any limitation period applicable to a cause of action asserted in a class proceeding is suspended in favour of a class member on the commencement of the class proceeding". The limitation period resumes running in certain enumerated circumstances.
Sections 138.3, 138.8(1), and 138.14 all fit into Part XXIII.1 of the Securities Act, which provides the framework for "Civil Liability for Secondary Market Disclosure". Part XXIII.1 was intended to provide relief for investors who buy publicly-traded securities on the secondary market (i.e. after the securities are initially issued and then resold by investors), suffer a loss because a misrepresentation affects the securities' value, but cannot bring a class action because all investors must individually prove they relied on the misrepresentation when they bought the securities. S. 138.3 allows these purchasers to bring a class action without proving reliance. However, before they can commence the action, s. 138.8(1) requires them to show the action was brought in good faith with a reasonable chance of success.
In Sharma, the plaintiffs did not try seeking leave under s. 138.8(1) until about three years after the alleged misrepresentations. They brought a motion to declare that s. 28(1) had suspended the three-year limitation period when they issued their statement of claim, which sought to advance a s. 138.3 cause of action. The motions judge granted the motion.
The Court of Appeal overturned his decision, reasoning that the s. 138.3 cause of action cannot be asserted until leave is obtained, such that s. 28(1) will not suspend the limitation period until that time. Without leave, the court found that s. 138.3 creates no legal right that can be enforced.
The Issues in Green
Green involved a full-scale certification and leave motion and raised many more issues than Sharma. In particular, Justice Strathy, the motion judge, had to consider the following:
- whether the action satisfied the s. 138.8(1) leave requirement of being brought in good faith with a reasonable chance of success;
- whether the action was time-barred by the three-year limitation period in s. 138.14; and
whether the action met the test for class action certification,
- a tenable cause of action;
- an identifiable class;
- common issues;
- that the class action be the preferable procedure; and
- a suitable representative plaintiff.
Securities class actions tend to be higher-profile cases. Green is especially so because the defendant is a major Canadian bank and the allegations are that it misrepresented its exposure to the U.S. residential mortgage market and caused a large drop in its share value during the recent global financial crisis. The plaintiffs in Green used a common strategy in securities class actions by claiming both the s. 138.3 statutory cause of action, which does not require individual reliance, and the common law cause of action for negligent misrepresentation, which does.
Justice Strathy refused to certify the common law cause of action. He reiterated the traditional view that it is not possible to prove reliance by individual class members in the context of a class proceeding. However, he would have granted leave and certified the s. 138.3 cause of action class but for the Court of Appeal's interpretation of the s. 138.14 limitation period in Sharma. As a result, Justice Strathy dismissed the plaintiffs' certification and leave motion, in his words, "with considerable regret".
The rulings in Sharma and Green attracted such attention that the Court of Appeal decided to hear Green's appeal along with two other cases where similar issues arose. One was Silver v. IMAX, the first class action for secondary market misrepresentation to be certified in Ontario, and the other was Trustees of the Millwright Regional Council of Ontario Pension Trust Fund v. Celestica. In those cases, the judges actually avoided the s. 138.14 limitation period by deciding it was possible to grant leave to proceed retroactively, or nunc pro tunc, which contradicted Justice Strathy's decision in Green (for The Litigator's comment on the Silver v. IMAX decision, please see here).
The Court of Appeal's five-judge panel reversed the court's previous ruling in Sharma, deciding that it is possible to assert the s. 138.3 cause of action before obtaining leave. The court ruled that its earlier decision put too much emphasis on "enforcing" a right when interpreting the word "assert". On reconsideration, the panel reasoned that "assert" can also mean "to make a claim" or "invoke a legal right". They added that, given the limitation period's potentially harsh consequences for class plaintiffs, any ambiguity in the interpretation of "assert" should be resolved in their favour.
Therefore, when a plaintiff properly commences a class action by asserting a cause of action that does not need leave, such as negligent misrepresentation, and also "asserts" a s. 138.3 cause of action by pleading it along with the necessary facts and the intention to seek leave, the limitation period will be suspended. The Court of Appeal then upheld Justice Strathy's decision granting leave in Green, deciding that a reasonable chance of success under s. 138.8(1) means the same thing as the first branch of the test for class action certification – that there be a tenable cause of action, except that the leave test involves evidence and the certification test's first branch does not.
But the Court of Appeal also also went further than Justice Strathy and revived the plaintiffs' common law negligent misrepresentation cause of action, which Justice Strathy had not certified. The panel agreed that reliance could not be certified as a common issue. It also dismissed the plaintiffs' argument that reliance should be inferred based on an economic theory that misrepresentations create a "fraud on the market" as a whole. However, the panel found that other elements of negligent misrepresentation, such as whether CIBC owed the class members a duty of care, should be certified as a class action. The panel thus reversed Justice Strathy's decision, which declined to certify the cause of action as a whole, and partially certified negligent misrepresentation while leaving reliance and damages to be determined outside the class action, possibly by individual trials.
The Issues that Remain
The most important result of this decision is that Green, IMAX, and Celestica (and potentially many other securities class actions) will not be stopped be the three-year limitation period in s. 138.14 of the Securities Act, at least for now. It is quite possible that the defendants in these cases will seek and obtain leave to appeal to the Supreme Court. The Court of Appeal in Green made it clear that interpreting the s. 138.14 limitation period has national implications. Most provinces have statutory provisions for secondary market claims with leave requirements and limitation periods similar to s. 138.8 and s. 138.14. Provincial governments in both Ontario and Manitoba have respectively contemplated and undertaken legislative amendments to ensure that the applicable limitation period does not bar class actions in the way that Sharma did.
More generally, Green shows how unpredictable the law can be. First, it seemed clear to both plaintiffs and defendants that the Class Proceedings Act suspended the s. 138.14 limitation period. Then the Court of Appeal shocked everyone, decided the opposite, and the Supreme Court declined to review the decision. Then the Court of Appeal changed its mind, but the Supreme Court may yet pronounce a different view. The Court of Appeal does not often overturn its own decisions, but securities class actions, with their high stakes, complex issues, and evolving procedure, can certainly be an exceptional area of law. Observers should stay tuned. More "thunderbolts" may be on the horizon.
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