Canada: Ontario Court Of Appeal Turns Against Cross-Border Securities Class Actions

Last Updated: August 26 2014
Article by H. Michael Rosenberg and Sapna Thakker

In the recent decision of Kaynes v. BP, PLC, 2014 ONCA 580, the Ontario Court of Appeal stayed a proposed secondary market securities class action on the basis of forum non conveniens.  Writing for a unanimous Court of Appeal, Sharpe J.A. found that Ontario could assume jurisdiction over claims by Canadian residents who purchased their shares on foreign exchanges.  Nevertheless, he held that Ontario should decline jurisdiction on the basis that foreign courts were better positioned to decide claims arising from transactions on foreign exchanges.

Kaynes puts a damper on Ontario's recent enthusiasm for global securities class actions.  Whereas the province once seemed destined to become a "Shang-ri-la" for cross-border litigation, global claims will now be subjected to closer scrutiny as courts ponder whether the matter should be adjudicated elsewhere.

At the very least, this is a welcome development for foreign and cross-listed issuers, who have long felt that founding a global class on a tenuous connection to Ontario is, to use the words of Sharpe J.A., "both opportunistic and a classic example of the 'tail wagging the dog'".

The broader question is whether Kaynes closes the door on any claims arising from transactions on foreign exchanges.  If it does, then the Ontario Court of Appeal has fundamentally altered the course of cross-border securities class actions.  Given its potentially far-reaching implications, Kaynes will be a decision to watch.

Stretching the long arm of Ontario jurisdiction

A brief review of the facts will help to put Kaynes in context.  The plaintiff alleged misrepresentations in public disclosure relating to an oil spill at BP, PLC's Deep Water Horizon rig in the Gulf of Mexico.  In turn, the plaintiff sought leave to commence a class proceeding under Part XXIII.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5, to recover the losses incurred by BP's shareholders.  BP brought a motion to dismiss the action for want of jurisdiction, which was heard before the motion for leave to proceed with the class action.

From the outset, it seemed as though there was little reason to litigate this claim in Ontario.  BP is a UK company with its principal offices in London, England. BP's common shares are listed on the London Stock Exchange and the Frankfurt Stock Exchange, and its American Depository Shares ("ADS") are available on the New York Stock Exchange.  While small volumes of BP's ADS once traded on the Toronto Stock Exchange, they were delisted before BP made the alleged misrepresentations.  Moreover, the proposed representative plaintiff purchased his shares on the NYSE.

The plaintiff's jurisdictional "hook" lay in the fact that BP was required to provide its Canadian shareholders with the same disclosure materials that it circulated to their American counterparts.  The plaintiff argued that the misrepresentation took place in Ontario when BP delivered its disclosure materials.  On this basis, the plaintiff sought to advance a class action on behalf of all Canadian residents who had purchased BP shares during the relevant period, regardless of where those shares were purchased.

An initial embrace of the global class

At first instance, Conway J. dismissed BP's jurisdictional motion.  Applying the test articulated in Club Resorts Ltd. v. Van Breda, 2012 SCC 17, Her Honour found that there was a "real and substantial connection" between the province and the plaintiff's claim.  Conway J. reached this conclusion by classifying the claim under Part XXIII.1 of the Securities Act as a statutory tort.  Her Honour then determined that the place or situs of the tort at common law was where the misrepresentation was received and relied upon.  Because the claim under the Securities Act does not require the investor to prove reliance, however, Conway J. held that the statutory tort is committed in Ontario when the issuer merely makes a misrepresentation to an Ontario resident.

On this basis, Conway J. rejected BP's argument that the class should be limited to the small number of plaintiffs who purchased their shares on the TSX.  On the contrary; Her Honour concluded that the place of purchase was irrelevant.

Conway J. also rejected BP's argument that Ontario should decline to exercise jurisdiction on the basis that the UK and US courts were more appropriate fora in which to litigate the claims of the proposed class.  Her Honour reasoned that (a) an Ontario action would be inevitable, (b) it would be premature to say that the parallel US proceeding would be certified, and (c) UK procedure would not permit the plaintiffs to commence a class action.

A return to common sense

On appeal, Sharpe J.A. agreed that Ontario could assume jurisdiction over the claims of Canadian residents who purchased shares on foreign exchanges.  Although any contractual claims would have arisen in the jurisdiction where the shares were purchased, the Court of Appeal accepted that the alleged misrepresentation took place in Ontario when BP knowingly distributed the impugned disclosure to Ontario residents.  As a presumptive connecting factor under Van Breda, the location of the tort was sufficient to ground Ontario jurisdiction.

Nevertheless, the Court of Appeal found that Conway J. had erred in rejecting BP's argument for forum non conveniens.  In reaching this conclusion, Sharpe J.A. focused on the principle of comity.  His Honour found that both US and UK law limit misrepresentation claims to the jurisdiction in which shares were purchased.  His Honour further noted that the US district courts claim exclusive jurisdiction over misrepresentation claims under US securities law.  Indeed, Sharpe J.A. noted that there was a proposed class proceeding in the Southern District of Texas on behalf of all those who purchased shares on the NYSE.

In these circumstances, Sharpe J.A. found that "[o]rder and fairness will be achieved by adhering to the prevailing international standard tying jurisdiction to the place where the securities were traded and a multiplicity of proceedings involving the same claims or class of claims will be avoided."  In the result, His Honour reasoned that Canadian residents who purchased their shares on foreign exchanges would hardly be surprised that their claims would be determined in the jurisdiction of purchase.

In the final arithmetic, the Court of Appeal stayed the action.  However, BP had conceded that Ontario was the appropriate forum for the resolution of claims by the small number of TSX ADS purchasers.  Accordingly, the Court of Appeal granted leave to amend so as to advance a claim on behalf of these plaintiffs.

A new approach to cross-border securities class actions?

Some will discount Kaynes on the basis of its peculiar facts.  They will note that BP had no contacts with Ontario, other than its obligation to circulate continuous disclosure.  It is certainly more common to see claims against issuers with stronger ties to the jurisdiction, such as a local head office or an active cross-listing on the TSX.  Additionally, some will focus on the fact that a parallel class proceeding had been commenced in the US, suggesting that NYSE purchasers, at least, might have their claims adjudicated in another forum.  Although the proposed Ontario class definition excluded plaintiffs who did not opt out of the Texas action, the fact of a parallel proceeding was difficult to ignore.

Nevertheless, these peculiarities do not explain the result in Kaynes.  BP's contacts with Ontario spoke only to the question of establishing jurisdiction simpliciter.  Ontario might have more readily assumed jurisdiction over the matter if BP's contacts were stronger, but it was sufficient that the misrepresentation was made in Ontario.  As framed by the Court of Appeal, Kaynes was not a case about whether Ontario could assume jurisdiction, but whether it should do so.

Likewise, the existence of a parallel proceeding is not determinative.  Admittedly, Sharpe J.A. found that "[w]hat should be avoided is litigation in more than one jurisdiction over the same claims of the same parties".  However, His Honour also noted that purchasers on UK and European exchanges would not have the benefit of any class proceeding, and no parallel litigation had been commenced in those jurisdictions.  His Honour further noted that the Texas action had not yet been certified, and indeed, certification had been denied at first instance.

Because the Court of Appeal stayed the claims of all those who purchased shares on foreign exchanges, and not simply those who purchased on the NYSE, the decision in Kaynes cannot have turned on the existence of a parallel proceeding.

Stripping away the peculiar facts of this case, what remains is an apparent embrace of the American model of exchange-based jurisdiction over securities claims.  In this sense, Kaynes represents a bold judicial stroke.  As Sharpe J.A. notes, the bar on extraterritorial securities claims in the US and the UK is a creature of statute.  By contrast, Sharpe J.A. accepted that Ontario's Securities Act permits claims arising from foreign transactions.  Thus, the decision to decline jurisdiction in Kaynes was based not on statute, but on the principle of comity among nations.

Only time will tell whether Kaynes has sounded the death knell for global securities class actions in Ontario courts.  Certainly, this decision appears to be inconsistent with the earlier holdings in cases like Silver v. Imax Corporation, 2009 CanLII 72334 (Ont. S.C.J.), and Abdula v. Canadian Solar Inc., 2012 ONCA 211, where Ontario readily assumed jurisdiction over claims arising from transactions on foreign exchanges.  It is hard to see how these earlier decisions can be squared with the "prevailing international standard tying jurisdiction to the place where the securities were traded", to use the phrasing of Sharpe J.A.

It is possible that the importance of Kaynes will be minimized by a further appeal to the Supreme Court of Canada, or by subsequent decisions that confine its scope.  At present, however, we may be witnessing the backswing of the pendulum in a jurisdiction that had once seemed so welcoming to cross-border securities class actions.

Case Information

Kaynes v. BP, PLC, 2014 ONCA 580

Date: 2014-08-14

Docket: C57876

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