Canada: Setting Limits: The Supreme Court Confirms A Robust Gatekeeper Approach To Secondary Market Liability Actions

Last Updated: December 16 2015
Article by Miranda Lam and Paul Davis

Most Read Contributor in Canada, September 2018

In a much anticipated decision, the Supreme Court released its rulings in three Ontario securities class actions on December 4, 2015: Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60 ("Green"). This trilogy of secondary market class actions has been discussed extensively in previous postings on this blog (see this blog's discussion of the Ontario Court of Appeal decisions, in the Top Ten Appeals to Watch in 2015 and in the SCC Monitor after the appeals were argued at the Supreme Court).

In Green, the Supreme Court made three important determinations:

  • First, the Court unanimously confirmed that the merits test for leave to proceed is to be construed as a "robust deterrent screening mechanism" in Ontario, which requires real scrutiny of the merits of a claim. The Court adopted the analysis it recently applied under Quebec's analogous statute in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18.
  • Second, by a 4-3 majority, the Court reversed course on the limitation period applicable to statutory secondary market misrepresentation claims in Ontario. Overruling the Ontario Court of Appeal (which had overruled its own prior decision), the Court held that the limitation period for such claims does not stop running until the Superior Court grants leave to proceed under Ontario's Securities Act. However, the impact of this determination is limited given recent amendments to Ontario's Securities Act which prescribe a different limitation period going forward.
  • Third, the Court unanimously rejected a U.S.-style "fraud on the market" theory that individual investors' reliance on a misrepresentation could be inferred on a common basis. The Court nonetheless upheld certification of aspects of common law misrepresentation claims related to a defendant's conduct.

The Merits Test

In sharp contrast to the limitations issue discussed below, the Supreme Court's comments on the merits component of the leave to proceed test will affect all statutory secondary market class actions going forward across Canada and were unanimous.

Under Part XXIII.1 of Ontario's Securities Act, aggrieved investors may bring statutory actions for secondary market misrepresentation against issuers, their directors and officers (and others) without the need to establish individual reliance on the alleged misrepresentation, which is required for common law negligent misrepresentation (s. 138.3). However, an investor must first obtain leave from the Superior Court of Justice to proceed with the statutory cause of action by showing that the action is brought in good faith and has a reasonable possibility of success on the merits (s. 138.8). The second part of the test was in issue in the CIBC appeal.

The Supreme Court confirmed that its analysis in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18, applied under Ontario's Securities Act (see our earlier post on Theratechnologies). Instead of a "low threshold," Theratechnologies characterized the leave test as a "robust deterrent screening mechanism"1 which requires the investor to show a "plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim".2

The Court's decision to apply a leave test with teeth can be considered an endorsement of the approach taken by Ontario's Superior Court of Justice in three recent decisions where leave to proceed was denied.3

Despite its strong statement on the leave test, the Supreme Court did not directly analyze the merits of leave in the CIBC appeal. Instead, both of the principal opinions of the Court simply concluded that the plaintiff's evidence and arguments met the applicable standard, even though Strathy J. had applied a less stringent test,4 and the defendants in the CIBC case had relied upon certain of the statutory defences in the Securities Act. As a consequence, the scope of these defences and the manner in which a court is to assess evidence of such defences are issues to be determined another day.

The Decision on Limitations: Back to the Future

The focus of the Supreme Court's decision in Green was the limitations issue. However, the practical implications of the Supreme Court's decision on the limitation period are, well, limited. In the wake of the Ontario Court of Appeal's decision in February 2014, Ontario's legislature reversed that Court's decision by amendment to the Securities Act, which tolled the limitation period once an investor filed a Notice of Motion with the court seeking leave to proceed under Part XXIII.1. The Supreme Court's decision therefore applies only to those claims commenced before the legislative amendment.

Nevertheless, the Court's analysis of the leave question highlights the competing policies at the heart of the statutory secondary market liability regime. These principles will continue to animate the case law relating to this regime.

In addition to the leave requirement, Part XXIII.1 creates another screening mechanism to limit the risk of unmeritorious strike suits proceeding against issuers: s. 138.14 requires investors to bring their claims within three years after the date of the misrepresentation.5 The issue before the Supreme Court was the interaction between the three-year leave requirement in Part XXIII.1 and the limitation period tolling provision of Ontario's Class Proceedings Act (CPA). Section 28 of the CPA suspends the running of a limitation once a cause of action has been "asserted". In a two-year period, the Ontario Court of Appeal had reversed itself on the question of whether a cause of action was "asserted" only after leave was granted or at the time a Claim was commenced: the 2012 decision in Timminco said the former, while a five-judge panel in Green said the latter.

The Supreme Court divided on the limitations question. Justice Côté (with McLachlin C.J. and Rothstein J. concurring) agreed with the Ontario Court of Appeal's approach in Timminco, while Karakatsanis J. (with Moldaver and Gascon JJ. concurring) agreed with that court's decision in Green. The tiebreaker fell to Justice Cromwell, who wrote separate reasons. On this issue, he joined with Justice Côté.

In addition to closely parsing the words of s. 138.14 of the Securities Act and s. 28 of the CPA, both Justice Côté and Justice Karakatsanis looked to the purposes of the statutory right of action for secondary market misrepresentation in Part XXIII.1 to determine which interpretation of those sections should be adopted. Unsurprisingly, they emphasized different statutory purposes.

Justice Côté focused on the objective of eliminating unmeritorious strike suits against issuers "as early as possible":

The leave requirement for actions under Part XXIII.1 OSA was developed by the CSA and reported in CSA Notice 53-302. This requirement arose out of a concern for the potential of U.S.-style "strike suits" in Canada. Strike suits are meritless actions launched in order to coerce targeted defendants into unjust settlements...

... The overriding policy concern was for long-term shareholders, who are unfairly affected by the volatility of share prices that results from spurious claims. In setting out the nature and the components of [the screening] mechanism, the CSA stressed the importance of screening out unmeritorious actions as early as possible in the litigation process ...6

In contrast, Justice Karakatsanis highlighted the access to justice and judicial economy impetus for the secondary market provisions:

[This] interpretation of s. 28 furthers the CPA's goals of judicial economy and access to justice. It guarantees the class members' access to the courts by maintaining one of the main benefits of the class action: the suspension of the limitation period for all class members. Section 28 protects potential class members, including the representative plaintiff, from the running of their individual limitation periods during the collective pursuit of their claims through the class proceeding vehicle. This protection ceases and the individual limitation periods resume running on the occurrence of any of the six events set out in s. 28(1) that end that collective pursuit. Effective protection of potential class members during the collective pursuit of their claims necessarily entails protecting the rights that those class members seek to pursue in a class proceeding as opposed to in individual actions...7

In the result, the earlier approach in Timminco carried the day. The CPA only suspends the limitation period once a judge grants leave to proceed under s. 138.3 of the Securities Act. Because none of investors in the three cases before the Supreme Court had been granted leave in time, the ruling should have terminated all three actions. However, Justice Côté applied the doctrine of nunc pro tunc – Latin for "now for then", under which a court may essentially back-date a decision where no statute prevents it and doing so is in the interests of justice – to allow the investors to continue with their claims against CIBC and IMAX.8 She refused to apply the doctrine in favour of the investors in Celestica, because the plaintiff in that case had not filed a motion for leave before the expiry of the limitation period.9 The Court also refused to apply any other doctrine which would overcome the expiry of the limitation period.10

Fraud on the Market Rejected but Common Law Misrepresentation Not Dead

In the CIBC case, the defendants had argued that no aspect of a common law misrepresentation claim should be certified because, in their submission, the Part XXIII.1 statutory misrepresentation regime were "preferable" to common law claims.11 The Court unanimously rejected this argument. It held that the common law claims relating to the defendant's conduct could proceed. However, the Court did not discuss – and therefore did not overrule – the Ontario Court of Appeal's decision that, contrary to the investors' argument, reliance could not be inferred on a class-wide basis as a common issue, based on a theory that an efficient market incorporates all publicly available material into the price of a security (that is, the theory of "fraud on the market"); instead, individual investors would be required to establish actual reliance on the misrepresentation after a successful common issues trial.

Because the Supreme Court only addressed the common law misrepresentation claim in connection with an action in which the statutory claims were allowed to proceed (Green v. CIBC), the Court left undisturbed the Ontario Court of Appeal's decision in an unrelated appeal which established that common law misrepresentation claims cannot satisfy the preferability requirement where leave has been refused for the statutory misrepresentation claims (discussed in a blog post here).12

Conclusion

On the issue of the merits test for leave to proceed, the Supreme Court has effectively endorsed the emerging line of Ontario case law which emphasizes that judges should apply real scrutiny to the evidence investors present to show a reasonable prospect of success as an essential part of the secondary market regime. There can now be no serious dispute that the test in Ontario is far more stringent than a pleadings standard.

On the limitations issue, the amendments to Ontario's Securities Act in the spring of 2014 to some extent render academic the Supreme Court's decision. Nevertheless, the policy rationales Justice Côté and Justice Karakatsanis emphasized in their respective judgments will undoubtedly find their way into arguments about other aspects of the statutory secondary market liability regime. Indeed, the Supreme Court's division on the limitation period question highlights the tensions between those policy rationales that courts have been grappling with since the statutory right of action was introduced in late 2005. Moreover, the Court's divided opinion on the applicability of nunc pro tunc may lead to further litigation on the scope of that doctrine in Ontario limitations law.

Finally, the Supreme Court's decision gave both issuers and investors something on the issue of common law misrepresentation. For issuers, the decision may finally close the door on inferred reliance through "fraud on the market" for common law misrepresentation claims. On the other hand, investors received the highest court's blessing for advancing defendant-focused aspects of common law misrepresentation claims. It remains to be seen whether and how this ruling might impact arguments in future cases relating to plaintiffs' attempts to commence common law causes of action alongside statutory causes of action where the statute does not, like Ontario's Securities Act, expressly preserve common law remedies.13

Case Information

CIBC v. Green, 2015 SCC 60

Docket: 35807, 35811, 35813

Date of Decision: December 4, 2015

Footnotes

1 Theratechnologies at para. 38.

2 Theratechnologies at para. 39; Green at para. 121.

3 See Goldsmith v. National Bank of Canada, 2015 ONSC 2746 at paras. 20-21, appeal is currently under reserve at the Ontario Court of Appeal; Coffin v. Atlantic Power Corp., 2015 ONSC 3686 at paras. 16-21; and Mask v. Silvercorp Metals Inc., 2015 ONSC 5348 at paras. 35-38, in which an appeal has been launched to the Ontario Court of Appeal but has not yet been scheduled.

4 Green at paras. 118-23, 129, 212.

5 Or, if an action has previously been commenced, within 6 months of a press release disclosing that leave has been granted for another action in respect of the same misrepresentation, whichever is earlier.

6 Green at paras. 67-68 Emphasis in original.

7 Green at para. 206.

8 Justice Karakatsanis did not need to consider this doctrine because on her analysis, there was no need to back date the decision.

9 Justice Cromwell agreed with this approach.

10 Justice Perell at first instance in the Celestica case had applied the doctrine of "special circumstances" to extend the limitation period. The Supreme Court rejected the application of that doctrine: see Green at paras. 116-17.

11 That a class proceeding is a "preferable procedure" is one of the requirements for certification under s. 5(1) of the CPA.

12 Bayens v. Kinross Gold Corporation, 2014 ONCA 901, application for leave to appeal withdrawn (S.C.C. Docket No. 36297).

13 The defendants' argument in such cases is typically that the statute creates a "complete code": see, for example, Shah v. LG Chem, Ltd., 2015 ONSC 6148 at paras. 178-228.

To view original article, please click here

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions