In the proposed $1 billion class action
Rooney v. ArcelorMittal S.A., the Ontario Court
of Appeal has clarified that security holders who sell their
securities in the secondary market in connection with a take-over
bid have no right to pursue an action for misrepresentation under
Section 131(1) of the
Securities Act (Ontario). The question was one of
first impression before the Court. Consistent with the overriding
policy objectives of the Securities Act, the Court
confirmed that security holders who sell their securities in the
secondary market cannot bypass the strict leave requirements,
liability caps, and other elements of Part XXIII.1 included by the
Legislature as part of the balance struck in creating statutory
secondary market liability for misrepresentations.
Background to the Action
The plaintiffs were security holders of Baffinland Iron Mines
Corporation ("Baffinland"). On September 22, 2010,
Baffinland was the subject of an unsolicited take-over bid by
Nunavut Iron Ore Acquisition Inc. ("Nunavut Iron Ore").
ArcelorMittal S.A. then made a friendly bid for Baffinland on its
own behalf and ultimately made a joint take-over bid with Nunavut
Iron Ore. That joint take-over bid expired in February 2011.
The appellants commenced a proposed class action, naming
Baffinland, Nunavut Iron Ore and ArcelorMittal, along with a number
of related entities and individuals. Amongst other things, the
appellants alleged that the relevant take-over bid circular and
related documents that were sent to Baffinland's security
holders and filed with the Ontario Securities Commission contained
misrepresentations about the business and affairs of Baffinland.
The appellants relied in part, on Section 131(1) of the
Securities Act, which provides as follows:
131. (1) Where a take-over bid circular sent to the security
holders of an offeree issuer as required by the regulations related
to Part XX, or any notice of change or variation in respect of the
circular, contains a misrepresentation, a security holder may,
without regard to whether the security holder relied on the
misrepresentation, elect to exercise a right of action for
rescission or damages against the offeror or a right of action for
The Decision of the Motions Judge
The defendants brought various motions to strike the
plaintiffs' statement of claim, including a motion to strike
the claims of security holders who sold their shares in the
secondary market and who sought to rely on Section 131(1) of the
Securities Act. The relief requested in respect of
secondary market sellers was granted. The motions judge held that
security holders who transacted in the secondary market could not
rely on Section 131(1) to assert a claim.
The Court of Appeal Decision
The plaintiffs appealed the decision of the motions judge. The
appeal was dismissed. Hourigan J.A., writing for the Court, held
that non-tendering security holders could not advance a Section
131(1) right of action for the following reasons:
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
The Legislature is presumed to have
created a coherent and consistent legislative scheme and Part
XXIII.1 of the Securities Act already extends a remedy to
secondary market sellers for misrepresentation in a take-over bid
The aim of Section 131(1) is to
assist sellers in making an informed choice about whether to tender
an offer to a bid, not to make an informed decision about the sale
of shares in the secondary market.
In drafting Part XXIII.1 of the Securities Act, the
Legislature sought to include adequate protections to prevent
unmeritorious claims and inordinate delays in the prosecution of
statutory secondary market class actions. It was for this reason
that the Legislature included a leave requirement in Part XXIII.1
and capped liability. By its decision, the Court of Appeal has made
it clear that proposed representative plaintiffs cannot use Section
131(1) to bypass these restrictions.
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