In a recent decision, Ontario Superior Court Justice Edward P. Belobaba found that two investment dealers are not experts under the Ontario Securities Act – and they couldn't be happier about it. In particular, it has been clarified that underwriters are not "experts" and therefore not proper targets for shareholder misrepresentation claims under Part XXIII.1 of the Securities Act that provides for liability for misrepresentations to investors on the secondary market.
In July and August 2014, gold mining company Allied Nevada and two of its executives were sued in the Ontario Superior Court by several investors in a proposed class action after Allied Nevada made several "corrective disclosures" to its financial results and the viability of its main gold mine, leading to the collapse of its share price. Almost a year later, Allied Nevada filed for bankruptcy protection under U.S. law. Two months after this filing, the plaintiffs filed a motion in Ontario to add as defendants the two investment dealers that had acted as underwriters on a US$150 million secondary public offering of Allied Nevada shares.
In a decision released in April in LBP Holdings Ltd. v. Allied Nevada Gold Corp., Mr. Justice Belobaba denied the plaintiffs leave to advance claims against the underwriters under the Securities Act and for unjust enrichment. The claims for common law negligence and negligent misrepresentation were not challenged at this stage and were allowed to proceed.
The first reason given by Justice Belobaba for not allowing claims against the underwriters to proceed under Part XXIII.1 of the Securities Act (which deals with liability to purchasers of securities on the secondary market, that is, the stock market) was that the underwriters had not been alleged to have made any actual misrepresentations. All that they were alleged to have said was that, to the best of their knowledge, the Prospectus of Allied Nevada "constitutes full, true and plain disclosure of all material facts relating to the securities offered....". Justice Belobaba found that this statement did not, in fact, repeat any misrepresentation previously made.
Of even more general significance in this decision is the clarification by Justice Belobaba that the provisions of Part XXIII.1 of the Securities Act simply do not apply to underwriters. Under Part XXIII.1 of the Securities Act, persons and corporations meeting the definition of "experts" can be held liable for misrepresentations made in their reports, statements or opinions that are then incorporated in a publically released document. Among others, auditors are considered to be "experts" under Part XXIII.1. Justice Belobaba found that underwriters are not experts. In his words:
...it is plain and obvious that the term "expert" in s.138.3(1)(e) is not intended to include underwriters. I do not mean to say that underwriters are not professionals or that they do not possess significant expertise. Indeed, it is no doubt true that underwriters have a "professional expertise in the capital markets." What I mean to say, and I know that all underwriters would agree, is 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.
It is significant, according to Justice Belobaba, that "underwriter" is a term that is specifically defined under the Securities Act and that the word "underwriter" is nowhere to be found in Part XXIII.1. Where such an express reference is "expected but absent", it follows that the legislature did not intend to include underwriters as experts under Part XXIII.1.
Unlike Part XXIII.1, the provisions in Part XXIII of the Securities Act dealing with liability for misrepresentations made in the primary market (that is, misrepresentations on a direct public offering by the company of shares or other securities) in a Prospectus do include underwriters as potential defendants. However, under Part XXIII a person has only 180 days after learning of a potential claim to bring an action. In this case, that limitation period had long passed by the time the plaintiffs sought to add the underwriters as defendants. As such, this proposed claim against the underwriters was also not legally tenable and was not permitted to proceed.
Finally, the plaintiffs' attempt to claim unjust enrichment and claw back the fees paid to the underwriters by Allied Nevada on its share offering was denied. Such a claim would require the plaintiffs to prove that there was no juristic reason for the payments to the underwriters. Justice Belobaba found ample juristic reason for such payments, as Allied Nevada had expressly agreed to pay the underwriters in its underwriting agreements with them.
In the result, the plaintiffs were permitted to add the underwriters as defendants to the proposed class action – but only as defendants to common law claims for negligence and negligent misrepresentation. Justice Belobaba described the result on the overall motion (which also dealt with motions to strike affidavits filed on the motion) as "equally divided." This would appear to be overly generous to the plaintiffs given the inherent difficulties in both certifying and succeeding in proving common law claims in securities class actions. Among other things, each proposed class member will have to establish that he or she relied upon a misrepresentation made by the underwriters in purchasing Allied Nevada shares or that he or she otherwise suffered damages directly as a result of something that the underwriters did. Under these remaining causes of action, it will be a very tall order for the plaintiffs to fix liability on the underwriters for their alleged losses.
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