Canada: Securities Litigation E-Communiqué - November 2017

The Ontario Superior Court of Justice has declined to certify a class action against underwriters in LBP Holdings Ltd. v. Hycroft Mining Corporation, holding for the first time that underwriters do not owe a duty of care to potential investors to perform due diligence or price securities in a particular way.

Key Takeaways

  • No recognized duty of care at common law. The Court found that the ostensible duty of care advanced by the plaintiff did not fall into a recognized category for claims of pure economic loss.
  • No basis to recognize a new duty of care. The Court also found that no new duty of care should be recognized in the circumstances, holding that the novel duty proposed by the plaintiff was neither foreseeable, proximate, nor justified on public policy grounds.
  • Not the preferable procedure in any event. Despite finding that the cause of action criterion was met for the negligent misrepresentation claim advanced by the plaintiff, the Court declined to certify that claim on the basis that a class proceeding would not be the preferable procedure.

Summary and Background

The Ontario Superior Court of Justice refused to certify a negligence and negligent misrepresentation class action against underwriters of a secondary public offering, holding that (i) the negligence claim did not disclose a reasonable cause of action and (ii) a class action would not be the preferable procedure to pursue either the negligence claim (had it met the cause of action criterion) or the negligent misrepresentation claim.

The plaintiff commenced proceedings against a corporate defendant and two of its senior executives for primary market misrepresentation under section 130 of the Ontario Securities Act and equivalent securities legislation in other provinces in relation to a secondary public offering.  The plaintiff also advanced a statutory claim against the underwriters of that offering, but subsequently abandoned that claim and opted to proceed against the underwriters only in respect of common law claims of negligence and negligent misrepresentation. 

The plaintiff’s claim against the underwriters was based on the allegation that the prospectus for the offering contained misrepresentations. The plaintiff argued that the underwriters owed the prospective class a duty to perform due diligence to ensure that all material facts had been disclosed in the prospectus and a duty to price the shares in a particular way.  The plaintiff contended that those duties emerged from the underwriting agreement between the issuer of the shares and the underwriter.

In dismissing the motion for certification as against the underwriters, the Court held that the duty of care asserted by the plaintiff was novel and should not be recognized. The Court also held that a class action was not the preferable procedure to pursue a claim in negligence or negligent misrepresentation.

No New Duty of Care

With respect to duty of care, given that the claim was for pure economic loss, the Court first addressed whether the alleged duty fell within one of the following established categories: (i) negligent misrepresentation; (ii) professional negligence; (iii) products liability; (iv) the liability of public authorities; or (v) relational economic loss. The Court held that the plaintiff’s claim did not fit into one of these categories. The Court then addressed whether a new duty of care should be established, having regard to questions of foreseeability, proximity, and public policy.

With respect to foreseeability, the Court asked whether the harm that occurred was the reasonably foreseeable consequence of the underwriters’ actions. In this regard, the Court held that “even in the circumstances of a bought deal, an underwriter would not anticipate that purchasers would be relying on it to act as a gatekeeper beyond and distinct from its duties of care under s. 130 of the Ontario Securities Act and its common law duties with respect to misrepresentations in the prospectus.”

With respect to proximity, the Court held that underwriters, “in their role in a distribution of securities pursuant to a prospectus, do not stand in the same relationship of proximity to shareholders as do the others involved in the distribution.” Rather, underwriters only make “weak representations” that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief.

Finally, the Court asked whether there were broad policy considerations that would make the imposition of a duty of care unwise in the event that harm was a reasonably foreseeable and proximate (after finding that it was neither). In doing so, the Court considered the six policy factors identified by the Supreme Court of Canada as relevant to determining whether a duty of care for pure economic loss should be recognized:

  1.  Whether extending recovery for pure economic losses would create circumstances of indeterminate liability;
  2.  Whether extending recovery for pure economic losses would deter useful economic activity;
  3.  Whether extending recovery for pure economic losses would encourage or discourage economically efficient conduct;
  4.  Whether extending recovery for pure economic losses would interject tort law as after-the-fact insurance against failures to pursue alternative strategies or opportunities or to act with due diligence or self-vigilance, a necessary ingredient of commerce;
  5.  Whether extending recovery for pure economic losses would introduce the courts to a significant regulatory function when other causes of action already provide remedies for misconduct; and
  6.  Whether extending recovery for pure economic losses would encourage needless litigation and a multiplicity of lawsuits in place of allowing market forces to operate.

Ultimately, the Court held that these policy factors would negate any duty of care because extending an underwriter’s liability for pure economic loss beyond what is currently recognized (i.e., for negligent misrepresentation or for statutory liability under the Ontario Securities Act) would, in effect:

  1.  Deter useful economic activity where the parties are best left to allocate risks through the autonomy of contract, insurance, and due diligence;
  2.  Encourage a multiplicity of inappropriate lawsuits;
  3.  Arguably disturb the balance between statutory and common law actions envisioned by the legislator; and
  4.  Introduce the courts to a significant regulatory function when existing causes of action and the marketplace already provide remedies.

Not the Preferable Procedure

With respect to preferable procedure, the Court approached its analysis through the lens of judicial economy, behaviour modification, and access to justice. The Court found that “the elements of reliance, causation, and damages are matters that raise highly individual issues that must be proven at individual issues trials,” and that individual issue trials against the underwriters in this case were inevitable. Further, the plaintiff’s claims against the underwriters did not have the same factual or legal basis as the claims advanced against the corporate and individual defendants, and any findings made in connection with the statutory claim would be of little benefit to the a resolution of the common law claims as a result.

The Court also considered practical alternatives and noted that, given the size of the individual claims and the plaintiff’s position that it would proceed as against the underwriters whether its claims were certified or not, an alternative route for access to justice – namely joinder – was reasonably available.

The Upshot

Ultimately, the significance of this decision (in addition to its development of the law relating to whether the cause of action and preferable procedure requirements are met on a motion for certification) is the finding that underwriters do not owe a duty of care to prospective investors to perform due diligence or price securities in a particular way.

The decision in LBP Holdings Ltd. v. Hycroft Mining Corporation is available here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Wendy Berman
Danielle DiPardo
Lara Jackson
David Kelman
Christopher Selby
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions