In its highly anticipated decision in Halliburton Co. v. Erica P. John Fund,
Inc. released this week, the U.S. Supreme Court
confirmed that plaintiffs in securities class actions could
continue to rely on the "fraud-on-the-market"
presumption. Where available, the presumption eliminates the need
for plaintiffs to demonstrate reliance on an alleged
misrepresentation on an individual basis. Industry commentators had
speculated that the Court might eliminate or materially modify the
fraud-on-the-market presumption, and in the process deal a critical
blow to the viability of securities class actions in the United
In a class action for misrepresentation under the U.S.'s
federal securities law regime, investors must demonstrate
individual reliance on an alleged misrepresentation in their
respective decisions to buy or sell a company's securities. In
1988, the U.S. Supreme Court, in Basic Inc. v.
Levinson, held that where certain conditions are
met, investors could avoid the need to demonstrate individual
reliance by invoking a presumption that the price of shares traded
in an efficient market reflects all public, material information
(which would include actionable misrepresentations). Defendants
could rebut this presumption, including by showing that the market
that the shares traded on was not efficient or that the alleged
misrepresentation did not actually affect the price of shares.
In its appeal to the Supreme Court, Halliburton sought to have
the presumption overturned or modified, with the result that
investors would have to go to back to proving reliance individually
(which would, in turn, make securities class actions largely
unsuitable for certification, given that the individual issues
would overwhelm those common to the whole class). Halliburton
argued that overwhelming empirical evidence now suggests that
capital markets are not fundamentally efficient, thus the
theory underlying Basic was no longer economically sound.
Although Justices Thomas, Scalia and Alito agreed with Halliburton,
the majority of the Court held that Halliburton had not shown the
"special justification" needed to overturn the precedent
of the Court's earlier decision in Basic.
The Court did accept Halliburton's alternative argument that
defendants should have the opportunity before
certification to rebut the presumption, through evidence that
the alleged misrepresentation did not actually affect the price of
the shares. The lower courts had held that the plaintiff had to
wait to seek to rebut the presumption until trial on the
Had the Supreme Court done away with the fraud-on-the-market
presumption, there would have been some potential for Canada to
become a more attractive destination for plaintiffs' class
action lawyers (Ontario's Securities Act, for example,
does not require a plaintiff to demonstrate reliance on an alleged
misrepresentation in a secondary market misrepresentations class
action). As it stands, the Halliburton decision is
unlikely to have much impact on securities class actions in Canada.
Issuers who are cross-listed in the United States and Canada, and
U.S.-listed issuers who are located or who operate in Canada, will
continue to face the risk of exposure to parallel securities class
actions in both jurisdictions.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).