The Ontario Court of Appeal has confirmed an important decision
limiting the exposure of investment banks to secondary market
misrepresentation class actions. In Goldsmith v. National Bank of Canada,
the Court refused to extend the meaning of the term
"promoter" in Part XXIII.1 of the Ontario Securities Act to cover conventional
banking and advisory services. "Something more" is
required before an action lies against an issuer's bankers for
secondary market disclosure.
Poseidon Concepts Corp. collapsed in 2013 after briefly
operating as a publically traded energy services company. In
Poseidon's wake sprung thirteen proposed class actions alleging
misrepresentations in Poseidon's financial statements and
disclosure documents. Ms Goldsmith sought leave under Part XXIII.1
to sue National Bank for its role in the reorganization and public
offering of Poseidon. She alleged that National Bank was liable for
secondary market disclosure as a "promoter" of Poseidon
that "knowingly influenced" the release of two misleading
Under Part XXIII.1 of the Securities Act, an action for
secondary market disclosure lies against an "influential
person" – which includes a "promoter" –
who "knowingly influenced" the issuer to release a
document containing a misrepresentation. A "promoter" is
someone who "takes the initiative in founding, organizing or
substantially reorganizing the business of an issuer." The
court must grant leave before anyone may commence an action against
a "promoter" under Part XXIII.1.
The motions court denied Ms Goldcorp leave to sue
National Bank on the basis that conventional banking and advisory
services do not a "promoter" make. It was not sufficient
that National Bank provided essential loans for the reorganization
of Poseidon or that its wholly owned subsidiary acted as financial
advisor and underwriter of the public offering. These banking
activities did not amount to taking "the initiative in
founding, organizing, or substantially reorganizing"
For more on the motions court decision, see our post of June 16, 2015.
Robust Standard For Leave Under Part XXIII.1
The Court of Appeal emphasized the "robust[ness]" of
the test for granting leave to commence an action under Part
XXIII.1. Following the Supreme Court of Canada's recent
decisions in Theratechnologies Inc. v. 121851 Canada
Inc. and Canadian Imperial Bank of Commerce v.
Green, the Court of Appeal held that the general standard
for interlocutory factual review was "inappropriately
low" in this context. Rather, the threshold for granting leave
under Part XXIII.1 is "more stringent" to meet the
"objective of screening out unmeritorious claims at an early
The Court of Appeal defined a two-part burden on the claimant to
obtain leave under Part XXIII.1:
First, the claimant must offer
"a plausible interpretation of the applicable legislative
provisions" supporting the theory of liability.
Second, the claimant must offer
"credible evidence sufficient to convince the court that there
is a reasonable possibility that the action will be resolved at
trial in the claimant's favour."
For more on the standard for leave to commence a proposed
secondary market class action, see our post of April 17, 2015 regarding the Supreme
Court's decision in Theratechnologies.
"Something More" Than Conventional Banking And
The Court of Appeal held that Ms Green failed to meet either
part of her two-part burden to obtain leave to sue National Bank.
She offered neither a credible interpretation of the term
"promoter" nor credible evidence to hold National Bank
liable for secondary market disclosure as a promoter.
The Court of Appeal's approach is significant for other
capital market participants, particularly investment banks and
other advisors to public companies. To come within the definition
of "promoter," a person must take a leading role in the
organization or reorganization of the company. This means that the
person must be active and autonomous and have meaningful control.
Merely providing advice, regardless of how important, to the
company's decision-makers is not sufficient.
As the Court of Appeal put it, "something more" than
advice and banking services is required for a capital market
participant such as National Bank to qualify as a
"promoter." To get over the leave stage, there must be
credible evidence of this "something more" to support
liability as a promoter.
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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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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