Canada: Securities Class Actions – Underwriter Duty Of Care: LBP Holdings V. Hycroft Mining

In LBP Holdings Ltd. v. Hycroft Mining Corporation, 2017 ONSC 6342, the Ontario Superior Court declined to certify a securities class action brought against underwriters¹ on the basis the common law claim of negligence failed to disclose a cause of action and a class proceeding was not the preferable procedure.

What You Need To Know

• This is the first reported Canadian case on the issue of whether underwriters owe investors who purchase securities under a prospectus a common law duty of care. The decision held that underwriters do not owe a general duty of care to prospective investors, either to perform due diligence or to properly price shares.
• The decision also applied the Supreme Court of Canada's 2013 direction² regarding class action certification of common and individual issues, in considering the important issue of whether a lone common law misrepresentation claim against investors should be certified (it should not).

Background

The plaintiff sued Hycroft Mining (formerly Allied Nevada) and two of its executives for primary market misrepresentation pursuant to section 130 of the Ontario Securities Act (and equivalent legislation) for alleged misrepresentations contained in a prospectus for a secondary public offering. The Hycroft defendants consented to certification.

The plaintiff originally brought the same statutory claim, in addition to common law claims, against the underwriters, who sold the shares in a bought deal. During the course of the motion for certification, the plaintiff abandoned its statutory claim against the underwriters and sought to certify only common law claims for negligence and negligent misrepresentation.

The basis of the plaintiff's negligent misrepresentation claim was that the prospectus contained misrepresentations notwithstanding the underwriters' certificate, indicating the prospectus made full, true and plain disclosure.

In respect of negligence, the plaintiff alleged the underwriters owed class members duties to properly price the shares and to perform due diligence to ensure comprehensive disclosure of material facts in the prospectus, and that those duties arose from the underwriting agreement between Hycroft and the underwriters.

Decision of the Superior Court

The Court dismissed the certification motion as against the underwriters.

The Court held that the cause of action criterion was satisfied for the negligent misrepresentation claim but not for the negligence claim. However, the action should not be certified because a class proceeding is not the preferable procedure for either cause of action.

Duty of Care

The Court found the duty of care pleaded in respect of the negligence claim was novel as it did not fall within one of the five recognized categories for claims for which a duty of care has been found with respect to pure economic loss. The Court then assessed foreseeability, proximity and policy considerations to determine whether a new duty of care should be found.³

The Court made the following findings:

• Foreseeability: Even in the bought deal context, an underwriter would not anticipate that purchasers would be relying on it to act as a gatekeeper separate and apart from its duties of care under section 130 of the Ontario Securities Act and its common law duties with respect to misrepresentations in the prospectus.
• Proximity: The role played by underwriters is different, more remote and less proximate than the role played by the issuers, the auditors, and others whose words and opinions are found in a prospectus. Underwriters are hired essentially to be distributers of another's goods, either as agents, or by assuming the risks of a bought deal. Underwriters make a weak representation that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief. They do not make strong representations of the nature made by the promoters, auditors, lawyers, and experts involved in the creation of the investment.
• Policy Considerations: Even assuming the underwriters had a duty of care for negligence, policy factors negate the duty of care. Extending an underwriter's liability for pure economic losses would: (a) deter useful economic activity where the parties are best left to allocate risks through the autonomy of contract, insurance, and due diligence; (b) encourage a multiplicity of inappropriate lawsuits; (c) arguably disturb the balance between statutory and common law actions envisioned by the legislator; and (d) introduce the courts to a significant regulatory function when existing causes of action and the marketplace already provide remedies.

Preferable Procedure

The law regarding whether common law negligence and reliance-based claims should be certified has been evolving and in a state of flux⁴ with the prevailing law being that common law, reliance-based claims may be certified as tag-along claims to other causes of action.

In the present case, the Court referred to the Supreme Court of Canada's ruling in AIC Limited v. Fischer that the preferability analysis must be conducted through the lens of judicial economy, behaviour modification, and access to justice. Applying the principles articulated by the Supreme Court in AIC, the Court held that the negligent misrepresentation and negligence claims did not satisfy the preferable procedure criterion, either standing alone or standing in combination with the statutory claim proceeding against the Hycroft defendants.

Having regard to the constituent elements of the torts, the Court held the elements of reliance, causation, and damages were matters that raise highly individual issues that must be proven at individual issues trials. It held that individual issue trials against the underwriters would be inevitable for both the negligent misrepresentation and the negligence claim. Moreover, while the misrepresentation claim and the negligence claim against the underwriters arose out of a common factual narrative that involved the Hycroft defendants, they did not rest on the same factual or legal foundation as the claim against the Hycroft defendants. The findings made in the statutory action against the Hycroft defendants would only moderately assist the prosecution of the tort misrepresentation claim. A cost-benefits analysis indicated little benefit would be added by subjecting the individual claims to the procedure of a class action.

Lastly, the Court found there was alternative route for access to justice given the size of the individual claims and the plaintiff's indication that if the action was not certified as against the underwriters, it intended to proceed with an individual action against the underwriters perhaps with other putative class members joined as co-plaintiffs.

Footnotes

1 The underwriters, Dundee Securities Ltd. and Cormark Securities Inc., were represented by Torys LLP.

2 AIC Limited v. Fischer, 2013 SCC 69.

3 Anns v. Merton London Borough Council, [1978] AC 728 (H.L.); Childs v. Desormeaux, 2006 SCC 18; Mustapha v. Culligan of Canada Ltd., 2008 SCC 27; Cooper v. Hobart, 2001 SCC 79; Hercules Managements Ltd v. Ernst & Young, [1997] 2 S.C.R. 165; Fullowka v. Pinkerton's of Canada Ltd., 2010 SCC 5; Martel Building Ltd v. Canada, [2000] 2 S.C.R. 860.

4 Musicians' Pension Fund of Canada (Trustee of) v. Kinross Gold Corp., 2014 ONCA 901; Fantl v. Transamerica Life Canada, 2016 ONCA 633; Sharbern Holdings Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23; Green v. Canadian Imperial Bank of Commerce, 2012 ONSC 3637, rev'd on other grounds, 2014 ONCA 90, affd, 2015 SCC 60.

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