Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation/Class Actions, December 2009
On December 14, 2009, the Ontario Superior Court of Justice concurrently released two decisions in Silver et al. v. IMAX Corp., certifying a class action law suit against IMAX Corp., and certain officers, as well as granting leave for the plaintiffs to pursue statutory remedies for misrepresentations made by the company under s. 138.3 of the Ontario Securities Act (the OSA). This is the first decision in Canada dealing with s. 138.3 or analogous sections found in other provincial Securities Acts, which create secondary market liability, including deemed reliance for corporate misrepresentations. Section 138 came into force on December 31, 2005.
Section 138 enables investors to bring an action for damages against issuers, directors, officers, influential persons and experts for misrepresentations (or failure to make timely disclosure) in secondary market disclosures. Once a misrepresentation is proven, liability is established, subject to certain statutory defences. Investors therefore do not have to establish that they relied upon the misrepresentation. (For greater detail on these provisions of the OSA and analogous provincial Securities Acts, please see previous Blakes Bulletins on Securities Law – November 2002, (http://www.blakes.com/english/legal_updates/class_actions/dec_2009/Civil_Liability2002.pdf) May 2003, (http://www.blakes.com/english/legal_updates/class_actions/dec_2009/Alert75.pdf) February 2005, (http://www.blakes.com/english/legal_updates/securities/v120/Bulletin120.pdf) August 2005, (http://www.blakes.com/english/legal_updates/securities/v125/Bulletin125.pdf) December 2006, (http://www.blakes.com/english/legal_updates/litigation/dec_2006/SecuritiesAct(Alberta).pdf) November 2007 (http://www.blakes.com/english/legal_updates/securities/v178/SecuritiesClassActionExposure-November2007.pdf) and October 2008.) (http://www.blakes.com/english/legal_updates/securities/oct_2008/BC_Sec_Reg_Class_Actions-Oct2008.pdf) Given the scope of liability created by s. 138, it is expected that this will be the first of many decisions addressing how s. 138 will operate with respect to corporate misrepresentations and the rights of investors to recover damages under the OSA.
BACKGROUND
IMAX Corp. is a Canadian corporation with headquarters in Mississauga, Ontario and shares listed on the Toronto Stock Exchange and NASDAQ. The plaintiffs, shareholders of IMAX, claimed the company misrepresented its revenue and compliance with GAAP in financial statements filed with Canadian and U.S. securities regulators, as well as in company press releases. IMAX later issued a press release indicating it was responding to an informal inquiry into its revenue recognition of certain theatre installation projects. Subsequently, IMAX restated its financial statements and acknowledged that the company had erred in recognizing certain revenue (and complying with GAAP) since a number of the installation projects had not, in fact, been completed at the time of filing the financial statements and issuing the original press releases.
The plaintiffs argued that the financial statements and press releases were misrepresentations that formed the basis for their claims under both the common law and the OSA. The plaintiffs claimed damages of C$200-million, plus an additional C$10-million for punitive damages, against the defendants for negligent and "reckless" misrepresentation, negligence and civil conspiracy. The plaintiffs also sought damages pursuant to s. 138.5 of the OSA.
At the hearing, the plaintiffs sought certification of a global class (Canadian and non-Canadian shareholders) against IMAX, its two chief executive officers and its chief financial officer for both common law and statutory claims relating to the misrepresentations. Additionally, the plaintiffs sought leave to pursue a claim under s. 138.3 of the OSA against the defendants, as well as IMAX's directors and Vice-President, Finance and Controller.
LEAVE TO PURSUE CLAIM UNDER ONTARIO SECURITIES ACT
In order to obtain leave to pursue a s. 138 claim, the plaintiffs must prove two elements: the action is brought in "good faith" and has a "reasonable possibility of success" at trial in favour of the plaintiff. Since this was the first case under s. 138, Justice van Rensburg was tasked with determining how "high the court should set the bar for a prospective plaintiff" to establish the two elements.
Good Faith
The plaintiffs argued that the threshold for determining good faith should be low and actions should proceed unless they are clearly an abuse of process. The defendants argued for a more stringent test that would require the plaintiffs to establish their motives and that the case had "obvious merit". Further, the defendants argued good faith meant that the action had to be initiated for the benefit of the corporation and not for individual benefit.
Justice van Rensburg concluded there was no reason to impose a "high" or "substantial" onus on the plaintiffs to establish good faith, given the purpose behind s. 138, which was implemented to enforce corporate disclosure obligations and to provide a means of protecting shareholders from secondary market misrepresentations. It was held that good faith requires plaintiffs to establish that they are bringing the action in the "honest belief that they have an arguable claim", consistent with the purposes of s. 138 and not for an "oblique or collateral purpose".
The court found that the plaintiffs' objectives in pursuing the action met this threshold. Both had a personal financial interest in the action as they suffered losses when IMAX's share prices decreased, allegedly due to the misrepresentations. The plaintiffs asserted that another reason for commencing the action was to hold the defendants accountable for the misrepresentations. The court was thus satisfied that the plaintiffs had no ulterior motive for commencing the action.
Reasonable Possibility of Success
The defendants argued that the plaintiffs must establish a reasonable possibility of success on each of the required elements under s. 138.3 and that the plaintiffs must rebut the available statutory defences (reasonable investigation and expert reliance). Conversely, the plaintiffs argued that they simply had to demonstrate some evidence that supported the alleged misrepresentations and any examination of the statutory defences should be for the trial judge.
The court concluded the threshold on this element is "relatively low" and intended to prevent abuse of process and claims from proceeding that are based purely on speculation or suspicion. An evaluation of all the evidence is required, including in relation to statutory defences, to determine whether the plaintiffs have a reasonable possibility of success at trial.
In reviewing the evidence against each defendant individually, Justice van Rensburg concluded that the plaintiffs had a reasonable possibility of proving their claims against IMAX and the individual defendants, except two directors. Her Honour also found that some of the individual defendants were unlikely to succeed in the reasonable investigation defence by virtue of their participation in the accounting and knowledge of the status of the projects. The court reached a similar conclusion with respect to the expert reliance defence. These findings, however, will not be binding on the trial judge.
Accordingly, the court concluded that the plaintiffs had met the threshold outlined in s. 138.8 and granted leave to pursue the statutory action against IMAX and some of the individual defendants.
CLASS CERTIFICATION
The plaintiffs sought class certification to pursue both common law and statutory claims for the misrepresentations. The defendants conceded that the OSA claims were suitable for certification. The main issues in the certification context were the scope of the common law claims to be certified and the identification of the class members.
The defendants sought to strike the claim for negligent misrepresentation on the basis that a corporation could not owe a duty of care to shareholders for pure economic loss given the potential for indeterminate liability. The defendants also argued that the plaintiffs failed to establish individual reliance on the misrepresentations. The court, however, certified all but one of the plaintiffs' claims. Even though the pleadings did not establish individual reliance, the court nevertheless concluded that the plaintiffs' claim disclosed a cause of action in negligent misrepresentation. Further, her Honour was not satisfied that policy reasons would preclude the plaintiffs from establishing that IMAX owed investors a duty of care.
In respect of defining the appropriate class, the plaintiffs sought to certify a global class that included Canadian and non-Canadian shareholders who held shares in IMAX on the TSX or NASDAQ during the class period. The defendants attacked this definition as overbroad since only 10-15% of IMAX's shareholders were Canadian residents. The defendants further argued against the proposed class on the grounds that a certification proceeding had also been initiated in the U.S. (no ruling had been made at the time of the hearing), and there was a possibility that a court would have to apply foreign laws because there were non- Canadian shareholders.
Notwithstanding the defendants' arguments, the court certified a global class due to the real and substantial connection between the plaintiffs' claims and Ontario. In doing so, the court noted that any issues with respect to the application of foreign laws could be addressed in the trial process by adjusting the common issues or recognizing sub-classes. The presence of a certification proceeding in the U.S. and the possibility of applying foreign laws were not sufficient to prevent the certification of a global class, despite the potential for added complexity. Further, the court found that the defendants' concerns regarding the potential class were not bona fide, but instead focused on limiting the size of the class and reducing potential liability.
Finally, the judge accepted that the class members' claims raised common issues, including those involving negligent misrepresentation and damages. In doing so, he rejected the defendants' argument that both issues required individual inquiries to determine reliance and whether the class members actually suffered any loss or damage.
CONCLUSION
The judge's findings with respect to the leave requirements under s. 138, as well as the global class certification, will likely be subject to an appeal. In the meantime, the threshold established in this case for advancing a claim under s. 138 for secondary market disclosures will not be onerous for investors to meet, which could increase liability concerns for corporations as well as their directors and officers.
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.