Canada: Court Endorses High Threshold For Leave, Certification Of Secondary Market Securities Class Actions

In its recent decision in Coffin v. Atlantic Power Corp. (Coffin), the Ontario Superior Court of Justice denied a proposed securities class action leave to proceed as a statutory secondary market action and refused to certify the remaining related common law claims.

The decision in Coffin continues the recent trend of courts in cases such as Theratechnologies Inc. v. 121851 Canada Inc. (Theratechnologies) and Bayens v. Kinross Gold Corporation (Bayens) of courts rigorously applying the criteria for granting leave to proceed in proposed statutory secondary market securities claims. For more information on Theratechnologies and Bayens, see our April 2015 Blakes Bulletin: First Secondary Market Class Action to Reach SCC Denied Leave and our December 2014 Blakes Bulletin: Court of Appeal for Ontario Clarifies Leave and Certification Standards. The decision in Coffin also adds to the growing body of case law that a class action is not the preferable procedure for resolving common law secondary market securities claims.

LEAVE UNDER THE SECURITIES ACT

In Coffin, the plaintiffs alleged that the defendants misrepresented their ability to maintain Atlantic Power Corp.'s dividend, causing shareholders and debenture-holders to sustain losses when the dividend was cut and the share price dropped. The plaintiffs moved for leave to commence a statutory action for misrepresentation under section 138.8 of the Ontario Securities Act (OSA).

Having found that there was no suggestion that the claim in Coffin was not brought in good faith, Justice E. P. Belobaba focused on determining whether "there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff." Citing Theratechnologies, Justice Belobaba emphasized that the leave threshold is intended to provide "a robust deterrent screening mechanism" to ensure that "cases without merit are prevented from proceeding," and that doing so required "a reasoned consideration of the evidence."

Justice Belobaba acknowledged that the Court of Appeal for Ontario articulated the leave threshold somewhat differently in Green v. Canadian Imperial Bank of Commerce (pending decision on appeal to the Supreme Court of Canada), but concluded that he was obliged to follow Theratechnologies and that, in his view, the test was the same in both cases: after considering all of the evidence presented by the parties, does any part of the plaintiffs' case have a reasonable or realistic chance of success at trial?

The defendants filed voluminous evidence including expert reports, affidavits, and other non-public, court-sealed internal and corporate narrative evidence. Justice Belobaba engaged in a thorough review of the evidence, which lead him to conclude that there were no actionable misrepresentations made by the defendants, and no reasonable possibility that the plaintiffs would be able to show otherwise at trial.

CLASS ACTION NOT THE PREFERABLE PROCEDURE

Justice Belobaba also declined to certify the plaintiffs' parallel common law claims under section 5(1) of the Class Proceedings Act (CPA), holding that the proposed class action was not the "preferable procedure" for resolving the dispute, as required by section 5(1)(d) of the CPA. There were two components to Justice Belobaba's reasoning.

First, Justice Belobaba referred to the Court of Appeal's holding in Bayens that "generally, common law negligent misrepresentation claims in securities cases are not suitable for certification" because a class action is not the preferable procedure for resolving reliance-based claims with individual issues of causation and damages. Justice Belobaba rejected class counsel's attempts to "side step" this reality on the basis that an "efficient market" for securities allows individual reliance to be inferred, holding that there is no authority to support this proposition in Canadian law.

Second, Justice Belobaba followed the Court of Appeal in Bayens by holding that the denial of leave for the statutory claim is a relevant factor in the preferability analysis. Since the leave motion for the statutory claims was dismissed on the grounds that those claims had no reasonable possibility of success, and since the common law claims rested on the same evidentiary foundation as the statutory claims, the common law claims were also destined to fail. Accordingly, there was no basis to conclude that a class should be certified: "encumbering the parties and the courts with a complex class action that is destined to fail promotes neither judicial economy nor access to justice. Therefore, a class action is not a preferable procedure."

CONCLUSION

The Coffin decision follows Theratechnologies and Bayens, showing that the more stringent application of the leave requirements for statutory misrepresentation claims in those cases has gained a firm foothold. The Coffin decision further shows that filing comprehensive evidence can be an effective strategy in opposing motions for leave to proceed with statutory misrepresentation claims, whereas the more common strategy is for defendants to file little or no evidence. Coffin also offers further support for the proposition that common law negligent misrepresentation claims in securities class actions are not suitable for certification, particularly when leave to proceed with a parallel statutory claim has been denied. It is anticipated that the leave and certification standards will be further addressed by the Supreme Court in its forthcoming decision in Green v. CIBC.

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.

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