A recent decision of the Ontario Superior Court of Justice has established a framework that will make it relatively easy for shareholders to pursue class actions against public companies for misrepresentations in their disclosure.
Silver v. IMAX Corporation was the first case brought under Ontario's Securities Act regime creating civil liability for continuous disclosure misrepresentations. It was also the first case to consider the merits-based test for leave to make a claim under that regime. The plaintiffs sued IMAX and a number of its officers and directors, seeking leave to proceed with the claim under the Securities Act regime and asserting common law misrepresentation claims. Motions to certify the action as a class action and for leave to proceed under the Securities Act were argued together, and Madam Justice van Rensberg released her decisions at the end of 2009.
The Court granted leave to the plaintiffs and established a low threshold for leave to pursue a claim under the statutory regime. The Court also certified common law misrepresentation claims relating to the company's continuous disclosure, making it easier for plaintiffs to pursue securities class actions based on common law claims.
The Test for Leave
A key feature of the new secondary market statutory civil liability regime is the requirement that a plaintiff obtain leave from the court as a precondition to proceeding. To obtain leave, the plaintiff must show that the claim is being made in good faith and that there is a "reasonable possibility" of success at trial. The leave requirement is intended as a mechanism to screen out unmeritorious claims. There has been much speculation on how high a threshold the courts, through interpretation of the statute, would establish for the leave test.
The Court in IMAX concluded that to succeed at the leave stage of a case, a plaintiff needs to show only that there is something more than a de minimis possibility of success at trial. The Court describes this as "a relatively low threshold." In applying the test for leave to the facts in IMAX, the Court determined that the plaintiffs had met this test because IMAX subsequently had to restate the financial results that were the subject of the alleged misrepresentations. It is not clear from IMAX how the test will be applied in other cases.
In articulating the leave test, the Court has provided guidance on the role of the due diligence defence, the treatment of officer and director defendants and the defence of reliance on experts.
- Heavy onus for the due diligence defence. The
Securities Act regime provides a defence to a
misrepresentation claim if the defendant can show that in making
the misrepresentation in question, it exercised due diligence. At
the leave stage of the proceeding, a defendant resisting leave on
the basis of this defence must show that the evidence of due
diligence precludes the possibility of the plaintiff succeeding at
- The business judgment rule does not apply. The
Court in IMAX rejected the argument that business judgment
deference should apply to the Court's assessment of the
reasonableness of the defendant's due diligence efforts.
- Reliance on experts. The
Securities Act regime provides a defence to a claim when a
defendant relied on an expert in respect of the alleged
misrepresentation. The Court in IMAX held that this
defence does not apply to protect against liability for
misrepresentations in financial statements (or based on financial
statements) on which auditors have given a clean audit opinion,
since the financial statements are management's responsibility,
not the auditors'.
- Treatment of officers and directors. The Court
in IMAX considered whether each officer and director
defendant had individually made out a due diligence defence. Leave
was granted to proceed against officers, inside directors and
members of the audit committee in light of the evidence relating to
their positions in the company and their role in its financial
disclosure. Regarding outside directors who did not sit on the
company's audit committee, leave was granted in respect of one
director who attended the committee's meetings and received the
information the committee members had; but leave was denied in
respect of two directors who were not similarly involved in the
audit committee's activities. It is therefore likely that the
outcome of future leave motions against officer and director
defendants will depend on the individual circumstances of the
- Damages cap not considered at leave stage. The
Securities Act regime imposes a damages cap that does not
apply to an individual who was involved in disclosure decisions and
knew about a misrepresentation. The Court in IMAX held
that it was not appropriate to consider at the leave stage of the
proceeding whether there is a reasonable possibility the plaintiff
will succeed in showing a knowing misrepresentation on the part of
an individual defendant. If leave is granted to proceed against an
individual, there will always be a risk that damages awarded at
trial will not be capped.
Certification of Common Law Misrepresentation Claims
The Court in IMAX certified the plaintiffs' claims based on the Securities Act regime, and also certified the common law misrepresentation claims. The IMAX decision conflicts with other class action decisions addressing the certification of misrepresentation claims. Prior to IMAX, courts had refused to certify common law misrepresentation claims because of the need to prove reliance by each class member, thereby making theseclaims unsuitable for the class action procedure. The impetus for the creation of the Securities Act regime was to address the difficulty that plaintiffs had in pursuing common law misrepresentation claims as class actions by eliminating, for the purpose of the statutory claim, any need to prove individual reliance.
In certifying common law misrepresentation claims in IMAX, the Court accepted the plaintiffs' argument that reliance can be inferred from the fact that members of the class relied on the alleged misrepresentations by purchasing their IMAX shares in an efficient market where, according to the efficient market theory, the price of a security reflects information about the security, including the issuer's disclosure. The Court went further and held that it may be possible to infer "group reliance" on the part of the class as a whole, subject to the ability of defendants to rebut this inference. This aspect of the IMAX certification decision may result in more securities class actions being brought outside the Securities Act regime, where plaintiffs are not tested at the leave stage and their damages are not capped. The possibility that plaintiffs can pursue common law misrepresentation claims through class actions could ultimately make the Securities Act regime superfluous.
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