Canada: Silvercorp Metals: Ontario Court Of Appeal Confirms Robust Test For Leave In Securities Class Actions And Affirms Costs Award

Silvercorp Metals: Ontario Court of Appeal confirms robust test for leave in securities class actions and affirms costs award1

The Ontario Court of Appeal recently released an important decision in a securities class action that (1) summarized the law with respect to the "robust" statutory screening mechanism which plaintiff investors must meet, (2) affirmed a significant costs award against the unsuccessful investor. On August 24, 2016, the Ontario Court of Appeal released its decision in Mask v. Silvercorp Metals Inc. ("Silvercorp"),2 an appeal from a refusal to grant leave to proceed to a secondary market class action. In the wake of the Supreme Court's recent3 decisions4 in secondary market cases, the unanimous decision dismissing the appeal confirms that the robust screening mechanism of a leave to proceed motion permits weighing of competing factual and expert evidence. It also confirms that a motion judge's analysis of that evidence will be subject to appellate deference, and that unsuccessful plaintiffs on leave to proceed motions may, like unsuccessful defendants, face significant costs awards.

Background and Motion Decision

The claim in Silvercorp had its genesis in anonymous Internet postings. In two blog posts in September 2011, a short seller alleged that Silvercorp, a Vancouver-based company that owns and operates mining projects in China, was overstating the quantity and quality of its mineral reserves. Silvercorp's shares, which trade on the New York and Toronto Stock Exchanges, declined significantly in the aftermath of the postings. While Silvercorp's investors lost, the short seller cleared a profit of $2.8 million.5

The proposed representative plaintiff commenced an action against Silvercorp seeking leave to proceed with a claim for secondary market misrepresentation on the basis that the previous Technical Reports Silvercorp had filed were prepared negligently, and that the company had, in those reports and its other disclosure, misrepresented its production results and mineral reserves. The plaintiff delivered expert evidence to support those allegations. In response, Silvercorp delivered (1) independent expert evidence that the earlier Technical Reports were appropriately prepared, and (2) evidence from AMC Mining Consultants (Canada) Ltd., the author of Silvercorp's 2012 Technical Report, which the plaintiff alleged demonstrated inaccuracies of the company's earlier Technical Reports. The author of that report stated that the plaintiff's expert had misunderstood the 2012 AMC report's conclusions.

In October 2015, Justice Belobaba dismissed the plaintiff's motion for leave to proceed under Part XXIII.1 of the Ontario Securities Act. Taken alone, Justice Belobaba indicated that the plaintiff's expert evidence gave the case a reasonable possibility of success. However, he accepted the evidence from the author of the 2012 AMC Report, to which, he concluded, the plaintiff's expert had not responded, and on which the affiant had not been effectively cross-examined. After dismissing the motion, Justice Belobaba ordered costs of $500,000 against the plaintiff. He concluded that the costs limits in favour of plaintiffs applied on a motion for certification under class proceedings legislation do not apply to leave to proceed motions under the Securities Act where the parties file extensive competing evidence.6

Court of Appeal's Decision

On appeal, the plaintiff's primary argument was that Justice Belobaba should not have looked to Silvercorp's evidence once he was satisfied that the plaintiff's evidence and alone could meet the statutory threshold. In doing so, the plaintiff argued, Justice Belobaba had set too high a bar for leave to proceed, which is not intended to be a final assessment of the parties' evidence in the case, but rather to show that the case is not a strike suit.

The Court rejected the plaintiff's argument. Chief Justice Strathy reasoned that the "reasonable possibility" test necessarily entails scrutiny of the evidence of both sides and that failing to weigh the competing evidence would render the leave requirement "hollow":

[41] ... Far from undermining the objective of the legislation, such scrutiny of the entire body of evidence is necessary to give effect to the purpose of the screening mechanism.

...

[43] ... a "reasoned consideration of the evidence" must include scrutiny of the evidence proffered by both sides, and some weighing of the defence evidence against that adduced by the plaintiff. To suspend the analysis when the plaintiff has presented a case that could satisfy the "reasonable possibility" test is inconsistent with the leave test acting as a "robust deterrent screening mechanism". ... [T]he motion judge must do more than simply ascertain whether the plaintiff has presented evidence of a triable issue. Instead, the motion judge must review all the evidence adduced by both parties to ascertain whether there is "a reasonable or realistic chance that the action will succeed".7

The Court also deferred to Justice Belobaba's assessment that the plaintiff's evidence of negligence in the preparation of the previous Technical Reports was not sufficient to satisfy the leave to proceed standard.8

Finally, the Court of Appeal rejected the plaintiff's appeal of the costs award. It identified no error in Justice Belobaba's analysis and deferred to his experience with the individual case and with securities class actions generally.

Implications

Silvercorp has three important implications for secondary market leave cases going forward:

  • First, Silvercorp confirms that evidentiary scrutiny on leave motions is to be robust, and that a court will analyze all of the evidence filed on the motion for leave.
  • Second, appeal courts will afford deference to leave motion judges' analysis of the evidence. The Ontario Court of Appeal confirmed the standard of review on a motion judge's analysis of the facts underpinning a leave to proceed decision: the appellate court must be satisfied that the judge made a palpable and overriding error.9
  • Third, the Court's costs decision confirms that unsuccessful plaintiffs can be exposed to significant costs awards.

More generally, the Court's reasoning in Silvercorp recognizes that one goal of the secondary market liability regime is to balance the rights of (former) shareholders alleged to have suffered a loss with those of (present) shareholders who now have to bear the costs of a lawsuit. This decision builds on the Ontario Court of Appeal's first secondary market decision after the Supreme Court decisions of 2015, Goldsmith v. National Bank, which confirmed the application of the leave test as a robust screening mechanism to achieve that goal. (A summary of Goldsmith v. National Bank, released in January 2016 can be found here.)

To view the original article, please click here.

Footnotes

1 McCarthy Tétrault LLP acted as counsel for Silvercorp Metals Inc. and the other defendants on the leave to proceed and certification motions, and on appeal.

2 Mask v. Silvercorp Metals Inc., 2016 ONCA 641.

3 Theratechnologies Inc. v. 121861 Canada Inc., 2015 SCC 18.

4 Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60.

5 The British Columbia Securities Commission Investigated and prosecuted the short seller, but the Commission ultimately concluded that although his conduct was "unsavory" and "morally unsupportable", it did not constitute a prohibited act: see Re Carnes, 2015 BCSECCOM 187.

6 2015 ONSC 7780.

7 Silvercorp at paras. 41, 43. Internal citations omitted.

8 Silvercorp at paras. 50-54.

9 Silvercorp at para. 51.

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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