Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulations/Class Actions, October 2008
The Canadian provinces, including those of Ontario, Alberta, Quebec and most recently, British Columbia, have enacted amendments to their respective Securities Acts to create civil liability for misrepresentation in disclosure documents and public oral statements together with failure to provide timely disclosure of material changes (please refer to our previous bulletins on Securities Law – November 2002, May 2003, February 2005, August 2005, November 2007 – which highlight and summarize that legislation).
Proceedings to Date
To date, there have been approximately a dozen of these actions which engage this new legislation. In addition, the Quebec decision in Nguyen et al v. CP Ships Limited was recently released which relied primarily upon civil law principles in Quebec, having been commenced prior to any Quebec secondary market legislation being in force. A corresponding action filed against CP Ships in the United States was dismissed for failure to plead scienter with adequate particularity. That decision was appealed in the U.S. and, in the interim prior to its hearing, the plaintiffs settled their action for US$1.3 million. The gravamen of the Quebec complaint was an alleged failure to disclose, in the financial statements published for the financial years 2002 and 2003, a change in the accounting system of CP Ships. That omission was allegedly repeated in all quarterly reports published during the years 2003 and 2004 up to August 9, 2004. The petitioners alleged that the market prices were artificially inflated during that period as a result of the omission to disclose such information. A further allegation was made against the individual respondents who were claimed to have benefited personally from the omission by means of the bonuses they received and the profits resulting from the value of the sale of their shares.
As mentioned, the Quebec action involving CP Ships was commenced prior to any Quebec secondary market legislation being enacted and, as a result, some plaintiffs' counsel have suggested that litigants may attempt to avoid the leave requirements required by the new legislation, as discussed below, and commence secondary market actions based upon ordinary common law/civil law principles. That said, in applicable circumstances, the new legislation provides dual presumptions of reliance and loss causation which have typically been obstacles because they require individualized assessments which are not conducive to obtaining class action certification. Accordingly, it is more likely that litigants will seek the benefits of the new provincial legislation in seeking leave to commence such secondary market actions and related class action certification.
A further development arose in the case of Ronald Martin v. Southwestern Resources Corp. and John Patterson, which was filed in Ontario on July 26, 2007. It was alleged in that claim that certain press releases, material change reports and management discussion and analysis disclosing the gold mining project in question as being of "considerable merit" were false and misleading. While the proposed representative plaintiff lived in B.C. and the defendant corporation was incorporated pursuant to the laws of B.C. with a head office in Vancouver, the representative plaintiff claimed that the action should be governed by the law of Ontario because the company was a reporting issuer in Ontario, the shares of the company traded on the TSX and a substantial portion of the class members were in Ontario. Prior to any application for leave or certification, the action was settled for C$15.5 million which was the first major securities class action settlement to occur subsequent to the new provincial legislation being enacted.
Most of the judicial guidance in this emerging area has arisen in connection with the first proposed class action brought under the Ontario legislation in Martin Silver et al v. IMAX Corporation (IMAX). Those proceedings were initially commenced by two separate proposed class actions which were later joined as a joint statement of claim which sought damages against IMAX and certain other defendants for common law causes of action, including negligent and fraudulent misrepresentation and conspiracy. In November 2006, a motion was served for leave under the Ontario legislation for certification of those proceedings as a class action and for leave to add certain additional persons as defendants. It was agreed that while there was no requirement for the certification and leave motions to be heard together, the applications would be heard together. With respect to claims made under the Ontario legislation, the plaintiffs alleged that IMAX's financial results between February 17, 2006 and August 9, 2006, did not comply with Generally Accepted Accounting Principles (GAAP) and were materially false and misleading. It is alleged that an IMAX press release issued in February 2006 reported that the company had successfully completed 14 theatre system installations in the most recent quarter – a record for a single quarter. On June 20, 2006, the U.S. Securities and Exchange Commission (SEC) wrote to IMAX to request an interview to discuss, among other things, IMAX's revenue recognition policies and practices. Thereafter, on August 9, 2006, IMAX issued a press release disclosing the SEC request and that, of the 14 theatre systems it had previously stated were completed in Q4 of 2005, 10 had not opened during that quarter, and that the screens for seven of the 10 were not installed until 2006. Initially, IMAX took the position with the SEC that its 2005 financial statement complied with GAAP, however, IMAX later restated its 2005 financial results in July 2007. IMAX moved the revenue that it had initially recognized in respect of the ten theatre installations in Q4 of 2005 to subsequent reporting periods.
Under each provincially-enacted legislation as described above, a plaintiff must apply for leave of the court, to commence a secondary market action which can only be satisfied where it is demonstrated that:
- the action is being brought in good faith; and
- there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.
Since no action has proceeded to that stage yet, there is no judicial guidance as to the applicable test required to establish those factors. Typically, in class action certification applications, the putative plaintiffs need only demonstrate that the pleadings disclose a cause of action. That threshold has been described by the courts as a "very low threshold" which allows a "generous accommodation" of the pleadings. However, it appears clear that the threshold test to obtain leave under the provincial Securities Acts will result in a higher burden on applicants. In particular, the mere allegation of a reasonable cause of action will not be sufficient but rather, applicants will have to proffer evidence in support of their claims sufficient to meet the higher test. Indeed, the legislation in certain provinces, including B.C., Alberta and Ontario, requires that each plaintiff and defendant, in contemplation of a leave application, are required to file affidavit evidence in support of their respective positions.
Scope of Cross-Examination
In the IMAX action, the defendants (including proposed parties to be added as defendants) had sworn affidavits together with a proposed defence expert and an affidavit of a law clerk employed by one of the defendants' counsel. The cross-examinations upon those affidavits resulted in a number of refusals which were subject to an application to the Ontario Superior Court of Justice. The court noted that the legislation provided no guidance as to the interpretation of the threshold test discussed above and what type, quality and quantity of evidence a court is to consider in making a determination of the applicable test. It was also noted that there was no indication in the legislation that evidence put forward or examined upon must be restricted to only what is on the public record. The court held that in deciding what were relevant lines of inquiry for cross-examination, it must take a "hard look" at what facts were potentially relevant and material to the statutory claim and defences as presented in the pleadings and applicable affidavits. That decision was upheld on appeal. Given that the provincial legislation indicates that cross-examinations are to be determined based upon the respective provincial Rules of Court which vary and are subject to differing jurisprudence, it is unclear as to what precedential value the IMAX decision will have in other jurisdictions. In any event, given the relatively wide latitude of cross-examination allowed by the Ontario Court, it is clear that proposed defendants will have to carefully consider the type of evidence filed at the leave stage.
Although, as mentioned, the legislation in certain provinces, including B.C., Alberta and Ontario, requires the mandatory filing of affidavits, some jurisprudence, including jurisprudence in Alberta, suggests that a defendant is entitled to cross-examine upon an applicant's affidavit prior to having to file its own material. Other jurisdictions such as Quebec and B.C. are silent on the procedure to be employed. As a result, where the situation is warranted based upon provincial jurisprudence, and applicable Rules of Court, defendants may wish to proceed in that fashion as opposed to filing affidavits on a concurrent basis together with the applicants.
The IMAX matter will be the first matter which considers the applicable test under the Ontario legislation for leave and is expected to provide guidance in this emerging area.
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.