Canada: Access Denied: Primary Market Liability Regime Not Available To Secondary Market Security Holders

In its recent decision in Rooney v. ArcelorMittal S.A. (Rooney), the Court of Appeal for Ontario (Court) held that primary market investors have the option of suing both the offeror and its directors and signatories for misrepresentations in a circular pursuant to section 131(1) (within Part XXIII) of the Ontario Securities Act (Act). However, secondary market investors must bring their claims under the secondary market liability regime in Part XXIII.1 of the Act, which includes more onerous requirements expressly created for secondary market claims.


Rooney is a class action brought by security holders of Baffinland Iron Mines Corporation (Baffinland) against Baffinland and others involved in a hostile take-over bid for Baffinland. The plaintiffs allege that the take-over bid circulars prepared by the defendants omitted material information and made material misrepresentations about Baffinland's business and affairs. The representative plaintiffs brought an action under section 131(1) of the Act, which provides a cause of action for misrepresentation in a take-over bid circular for security holders.

The defendants brought a motion to strike the claim on a number of grounds, including on the basis that the plaintiffs could not sue both the offeror and its directors and other signatories, and that security holders who transacted in the secondary market could not assert a claim pursuant to section 131(1) of the Act. The motion judge held that, in making their claims under section 131(1) of the Act, the plaintiffs had to choose whether to sue the offeror or its directors and other signatories, and that secondary market investors could not bring a claim under section 131(1) of the Act.


Applying Driedger's modern principle of statutory interpretation, the Court held that section 131(1) does not require plaintiffs to make an election as to whom to sue when making their claims for misrepresentations in take-over bid circulars. The Court explained that the use of the word "or" in section 131(1) is not conclusive on the issue of whether an election should be made, given that the word "or" can be both inclusive and exclusive. The Court determined that the word "or" in the context at issue has an inclusive meaning, which gives plaintiffs a right to pursue an action against an offeror as well as its directors and other signatories.

In addition, the Court reviewed the language of similar sections under the Act and the stated purposes of the Act and concluded that, although a plaintiff must elect between suing for damages or rescission, it would be inconsistent with the purposes of the Act to require a plaintiff to choose between suing an offeror or suing its directors and other signatories. In arriving at that conclusion, the Court noted that, since the Act's purpose is to protect investors from "unfair, improper or fraudulent practices" and to foster "fair and efficient capital markets" as well as confidence in those markets, it could not require directors and signatories of the offeror to sign certificates affirming the integrity of take-over bid circulars but then let them off the hook by requiring plaintiffs to choose between suing them or the offeror.


The Court rejected the plaintiffs' argument that the security holders who sold their securities in the secondary market during the currency of, and in connection with, the take-over bid rather than tendering to the bid could also assert a claim under section 131(1).

In its analysis, the Court explained that it would make no sense for security holders who sold their shares in the secondary market to be given a right of rescission. Therefore, section 131(1), which gives a right of rescission, was clearly not meant to include such security holders.

After reviewing the history of Part XXIII.1, the Court explained that it was meant to provide a complete scheme for secondary market claims. After all, if secondary market plaintiffs were permitted to bring claims under section 131(1), it would allow them to avoid the hurdles faced by plaintiffs bringing claims under the secondary market liability regime in Part XXIII.1, such as the leave requirement and damages caps. Thus, the Court found that, "...the [plaintiffs'] attempted reliance on s. 131(1) for secondary market participants is an impermissible attempt to avoid the restrictions placed on the operation of the statutory cause of action found in Part XXIII.1."


The Court's decision confirms that a plaintiff need not choose between claiming against the offeror or its directors and other signatories of the prospectus. The decision also confirms that Part XXIII.1 of the Act is a complete code relating to secondary market liability and the Court will not allow plaintiffs to sidestep the restrictions placed on the causes of action found in Part XXIII.1 by bringing their claims under Part XXIII.

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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