Canada: Underwriters May Have Expertise But That Does Not Make Them "Experts"

In the LBP Holdings v. Allied Nevada Gold Corp. decision released on April 27, 2016, the Ontario Superior Court of Justice refused to allow the underwriters of a secondary public offering (SPO) to be added as defendants to a proposed statutory securities class action against the issuer in respect of statutory and unjust enrichment claims.

Among other things, the plaintiff argued that the underwriters were liable as "experts" within the meaning of Part XXIII.1 of the Ontario Securities Act (OSA). Justice Belobaba acknowledged that underwriters have professional expertise in the capital markets, but concluded that such expertise was not enough to expose them to liability as "experts" under Part XXIII.1 of the OSA.

BACKGROUND

LBP Holdings Ltd. (LBP) purchased 20,000 shares in a SPO of Allied Nevada Gold Corp. (Allied Nevada), a gold mining company. The SPO was financed as a "bought deal" with Dundee Securities Limited and Cormark Securities Inc. (Underwriters) acting as principals. Following a decrease in Allied Nevada's share price, LBP commenced a proposed securities class action against Allied Nevada. It alleged that there were material misrepresentations in Allied Nevada's published core documents and its prospectus in the SPO. Approximately eight months later, Allied Nevada filed for protection under U.S. bankruptcy law. LBP then brought a motion to add the Underwriters as defendants to the proposed securities class action in Ontario.

DECISION

The Underwriters argued that they had suffered non-compensable prejudice by LBP's delay in bringing the action against them and that the claims being advanced were untenable at law.

With respect to the first issue, the Underwriters argued that they were prejudiced by LBP's delay because of their inability to participate in the U.S. bankruptcy proceedings and recover legal costs for which they were entitled to be indemnified. Based on expert evidence put forward by the parties, Justice Belobaba concluded that the Underwriters had not established that they had suffered non-compensable prejudice as they may still be able to seek payment under Allied Nevada's insurance policies.

With respect to the second issue, the Underwriters argued that the primary and secondary market statutory claims brought pursuant to Part XXIII and XXIII.1 of the OSA, respectively, as well as the claim for unjust enrichment were untenable at law.

Justice Belobaba concluded that it was clear from the pleadings that the statutory primary market claim was statute-barred as it was brought after the expiry of the applicable limitation period. Justice Belobaba also rejected LBP's claim for unjust enrichment as untenable, holding that LBP had no reasonable prospect of showing that there was "no juristic reason" for the enrichment of the Underwriters given that the underwriting agreement provided a juristic reason for the Underwriters' receipt of its underwriting fees from Allied Nevada.

Most interestingly, LBP asserted a secondary market claim against the Underwriters under Part XXIII.1 of the OSA on the basis that the Underwriters were "experts" as defined in the OSA. In order for a party to be liable under Part XXIII.1 of the OSA, it must fall within the categories of potential defendants listed within that part. As "underwriters" are not listed in Part XXIII.1, LBP alleged that underwriters are "experts" within the meaning of Part XXIII.1. Justice Belobaba concluded that LBP's argument must fail for two reasons.

First, in order for an expert to be liable under Part XXIII.1, the misrepresentation that was contained in the prospectus must also be contained in a prior report, statement or opinion made by the expert. Even if underwriters could fall within the meaning of "expert" in Part XXIII.1, Justice Belobaba explained that an underwriters' certificate (which simply states that to the best of the underwriters' knowledge, information and belief, the prospectus constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus) does not repeat any misrepresentation previously made.

Second, Justice Belobaba held that underwriters could not satisfy the definition of "expert" in Part XXIII.1 of the OSA. While acknowledging that underwriters have professional expertise in the capital markets, Justice Belobaba stated that "underwriters are not intended to be caught by the secondary market liability provisions of Part XXIII.1. They are not 'experts' for the purposes of Part XXIII.1." In reaching this conclusion, he explained that the terms "underwriter" and "expert" are defined separately and differently in the OSA and that the definition of underwriter is a functional definition focused on the underwriter's role in the distribution of securities, rather than their being part of a profession. Furthermore, he noted that underwriters do not meet the same criteria as the types of experts listed in the definition of "expert," not being regulated or licensed or otherwise held to defined standards of conduct and skill.

Finally, Justice Belobaba turned to the doctrine of implied exclusion and held that it was implied that the exclusion of the term "underwriter" in the list of potential defendants in Part XXIII.1 was intentional from the fact that the legislature "obviously and expressly" provided for liability on the part of underwriters in the primary market under Part XXIII of the OSA.

CONCLUSION

Plaintiffs have increasingly been attempting to fit underwriters into one of the categories of potential defendants in secondary market claims under Part XXIIII.1 of the OSA, particularly where issuers are bankrupt or otherwise have limited resources to satisfy any judgment that may be made against them.

In another recent case, the plaintiff argued unsuccessfully that underwriters are "influential persons" as defined under Part XXIII.1. As is well explained by Justice Belobaba, the absence of the term "underwriter" from the list of potential defendants under Part XXIII.1; the lack of any misrepresentation by underwriters in a prior report, statement or opinion; and the express OSA provisions for underwriter liability in the primary market make it clear that underwriters are not to be subjected to secondary market liability as "experts" under Part XXIII.1.

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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