Five Notable Canadian Securities Litigation Decisions From 2023

The Blakes national Securities Litigation team has identified, and examines in this article, five noteworthy cases from 2023. These cases from across Canada span various tribunals, including the Supreme Court of Canada, Court of Appeal for Ontario, and provincial securities commissions.

The cases arise from a variety of contexts, including class actions, enforcement proceedings and transactional litigation. While some of them set important precedents, others represent developing trends or practice points that prompt a re-evaluation of conventional strategies. Taken together, they reflect:

1. Welcome appellate clarification as to the type of conduct that will meet the test for certain important statutory obligations and offences, including tipping and the obligation to disclose material changes (Markowich/Peters; Re Baay)
2. Guidance about the jurisdictional reach of provincial securities commissions and the appropriate forum for the adjudication of specific types of securities disputes (Sharp; Mithaq)
3. Insight into the level and type of conduct by enforcement staff that could rise to the level of abuse of process (Morabito)
4. Practical considerations for issuers, their directors, officers and legal teams in ensuring compliance with securities laws and in managing securities litigation risks.

1. INSIGHT ON JURISDICTION: SHARP V. AUTORITÉ DES MARCHÉS FINANCIERS

In Sharp v. Autorité des marchés financiers, the Supreme Court of Canada (SCC) held that the Financial Markets Administrative Tribunal (FMAT), a Quebec administrative tribunal, had jurisdiction over out-of-province defendants who allegedly engaged in a transnational "pump-and-dump" scheme. While this decision provides insight into securities regulation, it also offers lessons that will affect many other areas of law. The SCC also dealt extensively with the relationship between the Civil Code of Quebec (C.C.Q.) and other Quebec statutes.

The dispute that gave rise to the case pitted the Autorité des marchés financiers (AMF), an administrative agency that regulates Quebec's financial sector, against four British Columbia residents (B.C. Defendants). Suspecting that the B.C. Defendants were involved in a manipulation scheme with links to Quebec aimed at driving up the price of a stock, the AMF asked the FMAT to issue various orders against the B.C. Defendants. The latter soon filed motions for a declinatory exception, contesting the FMAT's jurisdiction over them.

The SCC ruled that the FMAT had jurisdiction over the B.C. Defendants under Quebec's securities legislation. In confirming the broad territorial jurisdiction of securities regulators, the SCC first considered not the securities legislation itself, but the preliminary provision of the C.C.Q. stating that the C.C.Q. "lays down the jus commune" and "is the foundation of all other laws". Accordingly, the starting point for any civilian interpretative exercise, even of special statutes, should be the C.C.Q. In addition, unless otherwise provided by law, the C.C.Q. may be applied to the special statute even if no private right is directly at stake. Applying these principles, the SCC concluded that the C.C.Q. did not give the FMAT jurisdiction.

Continuing its analysis, the SCC then turned to the "sufficient connection" test established in its previous decision, Unifund Assurance Co. v. Insurance Corp. of British Columbia (Unifund). This test is typically used to restrict the application of provincial laws outside of the enacting province. Here, however, the SCC applied the Unifund test to determine territorial jurisdiction and the territorial limits of administrative tribunals exercising a regulatory function, such as the FMAT. In applying this test, the SCC affirmed the transnational nature of modern securities regulation in a context where securities markets often transcend borders and require concerted enforcement.

There were many indicia of a sufficient connection between Quebec and the B.C. Defendants in this case, including the fact that the company through which the B.C. Defendants allegedly engaged in the scheme was a reporting issuer under Quebec law. As such, the SCC found that the FMAT had jurisdiction over the B.C. Defendants.

IMPLICATIONS

The ruling is expected to be relied upon by provincial administrative tribunals and regulators to exercise their jurisdiction as broadly as Unifund allows, which could result in competing enforcement measures by different provinces. However, arguably the biggest – and incidental – impact of the ruling will be how litigants, in various areas of law, will use it to challenge interpretations of statutes that conflict with principles found in the C.C.Q.

2. THE MEANING OF "MATERIAL CHANGE": MARKOWICH V. LUNDIN MINING AND PETERS V. SNC-LAVALIN

In May 2023, the Court of Appeal for Ontario (ONCA) released two companion decisions, Markowich v. Lundin Mining Corporation (Markowich) and Peters v. SNC-Lavalin Group Inc. (Peters). Both cases involved motions for leave to commence statutory market claims premised on a defendant issuer's alleged failure to promptly disclose "material changes" in accordance with the Ontario Securities Act (OSA). Both decisions consider the meaning of a "material change" under the OSA and clarify the analytical approach that courts should follow in applying that meaning to the facts of a given case.

The ONCA overturned the motion judge's decision to deny leave in Markowich on the basis that he had construed the meaning of "change" too narrowly. However, the ONCA upheld the motion judge's decision in Peters, finding that he had followed the correct analytical approach and that, in the specific circumstances alleged, there was no reasonable prospect that the plaintiff could establish that a change had occurred in the business, operations or capital of the company.

The procedural context in which the motions arose, and the relatively low onus placed on a plaintiff seeking leave to establish that there is a reasonable prospect they could be successful at trial, must be kept in mind. However, judicial guidance as to what constitutes a "material change", which must be disclosed by the issuer "forthwith," and how it may be distinguished from a "material fact", which must be disclosed during an issuer's continuous disclosure, is scant. As such, it can be expected that Markowich and Peters will have an impact beyond motions for leave to commence statutory secondary market misrepresentation claims.

Additionally, the varying outcomes in the decisions emphasize that what constitutes a material change will be heavily dependent on the circumstances that are particular to a defendant issuer's business.

Markowich

The plaintiff's claims in Markowich focused on the company's alleged failure to disclose issues relating to an unstable pit wall and a rockslide at one of its open pit mines. The motion judge dismissed the plaintiff's motion for leave, concluding that the instability issues did not result in a "different position, course or direction" to the company's "business, operations or capital" and therefore did not "change" the company's "business, operations or capital" in the manner contemplated by the OSA. The motion judge found that unstable pit walls and rockslides were inherent risks in the company's operations and did not affect its viability.

The ONCA overturned the motion judge's decision, holding that the motion judge employed an overly narrow approach to determining whether the instability issues constituted a "change" as that term is used in the OSA. The ONCA clarified that the analysis for determining whether there has been a "material change" is a two-step inquiry which involves:

1. An analysis as to whether there has been a change to the business, operations or capital of the company; and
2. A determination as whether the change (if any) is material to investors.

The ONCA held that, at the first stage of the analysis, the ambit of the term "change" is broad and will include any change that is internal to the company. Contrary to the motion judge's approach, the first step should not consider the magnitude or business impact of the alleged change; rather, that inquiry should be left to the second stage when materiality is considered.

In reversing the motion judge's decision, the ONCA also emphasized that at the leave stage, the plaintiff only needed to demonstrate a reasonable possibility of success based on a plausible interpretation of the statute and the evidence. It found that the plaintiff had met this requirement despite there being no direct evidence that the unstable pit wall and rockslide had actually affected the company's mining operations.

Peters

The central issue in Peters was whether a phone call between the company and federal prosecutors relating to a pending prosecution against the company for fraud and corruption constituted a "material change". During that phone call, prosecutors advised the company would not be invited to negotiate a remediation agreement for the purpose of settling the charges against it.

The ONCA upheld the motion judge's decision on the basis that the motion judge had followed the correct analytical approach and had employed a sufficiently broad definition of the term "change" at the first step of the inquiry. It held that he had properly concluded, based on that broad definition, that there was no reasonable prospect that the plaintiff's claim could succeed at trial and that leave was appropriately denied.

In considering the unique facts of the case, the ONCA agreed with the motion judge that the content of the call between the company and prosecutors did not constitute a "material change" to the company's "business, operations or capital", as it did not ultimately alter the risk of prosecution when it occurred. Among other factors, the company was already facing a potential prosecution before the call and, in fact, did engage in negotiations about a potential remediation agreement for several weeks after the call.

IMPLICATIONS

As both cases turned on their specific facts, and different results were reached, it is too early to say whether the Markowich and Peters decisions will lead to an increase in securities class action claims premised on alleged failures to disclose material changes. However, the following outcomes can be anticipated:

1. With greater clarity as to the analytical approach to be considered by courts in determining whether a material change has occurred, more consistency and predictability can be expected from lower courts.
2. In light of the importance placed on the question of whether a new development constitutes a change, irrespective of whether it is material, defendant issuers will wish to ensure that they file evidence at the leave stage which fully develops the factual context in which an alleged change occurred. It may not be sufficient to simply argue that a change is not material; defendants may wish to go further and show there has been no change at all.
3. While Markowich and Peters were determined on motions for leave to commence statutory secondary market misrepresentation claims, the analytical approach to determining whether there has been a material change will likely be applied in other contexts. Issuers encountering new developments will want to take ONCA's analysis into account when considering their disclosure obligations.

3. GUIDANCE ON AVOIDING TIPPING ALLEGATIONS: RE BAAY

In its May 2023 ruling in Re Baay, the Alberta Securities Commission (ASC) found that the CEO of Touchstone Exploration breached section 147(4) of the Alberta Securities Act (ASA) by sharing draft news releases with a registered dealer (Registrant) during off-market hours, which constituted "tipping" – the selective disclosure of confidential material information. In the agreed statement of facts, the CEO admitted that between December 2019 and April 2021, he shared six draft news releases (Releases) with the Registrant who administered Touchstone's stock option and was a long-time acquaintance and shareholder. The Releases contained material non-public information (MNPI) related to exploration drilling results, and the CEO shared them on evenings and weekends. Touchstone released final versions of the news releases to the public before markets opened for trading, making it impossible for the Registrant to act on the information before it was disseminated to the public.

The ASC was clear that the circumstances relevant to the settlement included the CEO's immediate acceptance of responsibility, exemplary cooperation, the fact that he did not trade on the information and did not intend to benefit from the disclosure, and the fact that he had no previous record. The ASC also noted that "due to the timing of the emails, it was not possible for the Registrant, or any person with whom the Registrant might share the emails or the contents thereof, to trade in or purchase Touchstone securities with knowledge of the MNPI before the news releases were issued publicly."

Notwithstanding these factors, as a strict liability offence, disclosing this information constituted "tipping" under section 147(4) of the ASA and did not fall under the "necessary course of business" exemption. Accordingly, the ASC held that the CEO was strictly obligated to avoid selective disclosure of confidential material information to prevent insider trading opportunities. However, in this case, the ASC did not seek a market access ban due to the "unique circumstances of this case" and the immediate and complete cooperation by the CEO.

IMPLICATIONS

This decision underscores the fundamental principle that underpins securities regulation regarding equal access to information by investors that is necessary for informed investment decision-making. Further, it reinforces that courts view tipping as an affront to this fundamental principle as it disadvantages those in the market that do not receive the confidential information and disrupts market integrity.

The decision also provides a reminder that "tipping" is a strict liability offence, meaning that the ASC and other regulators are not required to prove any intent to establish the offence. Nor is there any requirement that the person "tipping" know or intend that the recipient of the information will buy or sell the securities in question. In other words, the mere act of informing another person of material non-public information is a breach of Alberta securities laws.

Finally, the decision underscores the importance of the fundamental principle of equal access to information and the need to ensure investor confidence in the market as a level playing field.

Accordingly, in all cases, individuals with material non-public information should be vigilant in maintaining its confidentiality, other than when in the necessary course of business, regardless of whether there is any potential harm to the capital markets. Specifically, individuals must be extra cautious when communicating with market professionals with whom they have a social relationship.

4. COMMENTARY ON DUE PROCESS: MORABITO V. BRITISH COLUMBIA (SECURITIES COMMISSION)

In Morabito v. British Columbia (Securities Commission), the applicants, Global Crossing Airlines Group Inc., formerly known as Canada Jetlines Ltd. (Jetlines), and Jetlines' director (who is also the company's executive chairman), have been awarded leave to appeal a decision of the British Columbia Securities Commission (BCSC), wherein a panel dismissed applications for a stay based on abuse of process. The underlying proceeding at the BCSC arose from a notice of hearing alleging that Jetlines failed to make timely disclosure of material information contrary to the B.C. Securities Act, and that the director authorized the contravention, and engaged in insider trading. The respondents' request for a stay of that proceeding was based on their assertions that the proceeding as a whole had become abusive by way of an overzealous investigation, persistent disclosure failures of the Executive Director, including that a key witness was terminally ill and about to die.

The British Columbia Court of Appeal (BCCA) granted leave to appeal the BCSC's interlocutory decision denying the stay request. In doing so, the BCCA noted the importance of the questions raised by the proposed appeal, the significance of the proposed appeal to the applicants, and the apparent merit in the proposed arguments.

The BCCA specifically identified the following two important questions of law:

1. Whether the analysis used in determining whether an administrative proceeding has become an abuse of process for reasons other than administrative delay requires an analysis substantially different from that established in Blencoe v. British Columbia (Human Rights Commission) and Law Society of Saskatchewan v. Abrametz; and
2. Whether the BCSC erred in failing to require the Executive Director to discharge an evidentiary burden to answer allegations of abusive conduct substantiated with some evidence.

Regarding the apparent merit, the BCCA held that there was an arguable case that the BCSC panel erred in giving inappropriately heavy weight to the presence or absence of prejudice suffered by applicants; there was some prospect that the BCCA would find that the evidentiary burden may shift to the Executive Director to respond meaningfully where there is some evidence supporting abuse; and that there was some prospect that the BCCA would conclude that the panel erred in failing to give any weight to the fact that the Executive Director shielded investigators from cross-examination about their conduct.

IMPLICATIONS

The anticipated appeal decision may provide new guidance on how allegations of abuse of process — for reasons other than delay — should be addressed by administrative bodies, including specifically provincial securities commissions. This decision may also address whether the evidentiary burden shifts onto the Executive Director of a securities commission to respond meaningfully when a respondent has raised allegations of abuse of process. It may also provide commentary about investigations by provincial securities commissions, as well as the ability of the Executive Director to shield investigators from cross-examination.

5. TAKEOVER DEFENSE STRATEGIES: MITHAQ CANADA INC. (RE)

In October 2023, Mithaq Canada Inc. commenced a takeover bid for Aimia Inc. during litigation between the parties in the Ontario Superior Court of Justice (ONSCJ), opening a second front before the Ontario Capital Markets Tribunal (ONCMT). The almost year-long engagement between Mithaq and Aimia provides insight into current takeover strategies in the courts and before securities regulators. It also reflects the regulator's current perspective on defensive tactics by takeover targets.

Aimia is a Toronto-based investment holding company that operated the Aeroplan loyalty business until 2018. Mithaq Canada Inc. is a subsidiary of Mithaq Capital SPC (Mithaq), an affiliate of Mithaq Holding Company, a family office based in Saudi Arabia.

In February 2023, Mithaq disclosed that it owned or controlled 19.99% of Aimia shares. In April 2023, Mithaq disclosed that it intended to vote against the re-election of the Aimia board at Aimia's annual meeting. When the Aimia board was narrowly re-elected, Mithaq commenced an application in the ONSCJ to review the proxies. Aimia commenced its own proceeding to stop Mithaq from requisitioning a meeting, voting its shares or acquiring additional shares. Aimia further alleged that the brother of Aimia's CEO, himself a former director of Aimia, was an undisclosed joint actor with Mithaq leading up to the annual meeting.

In May 2023, Mithaq disclosed that its ownership or control of Aimia shares had grown to 30.96% and in June, Aimia adopted a shareholder rights plan (SRP), without shareholder approval. The SRP provided that a bid must have a minimum tender condition of more than 50% of Aimia shares held by "independent" shareholders (as defined in the SRP) to avoid triggering the SRP. Aimia approved a second SRP in December 2023 when the deadline for the original SRP to be approved by Aimia shareholders passed.

In October 2023, Mithaq made a takeover bid which offered approximately a 20%-premium over then-current trading prices with a deadline of January 18, 2024.

Shortly thereafter, Aimia announced a private placement of up to 10.475-million common shares and an equal number of common share purchase warrants to close on October 19, 2023. The shares issuable would represent 24.89% of the then-outstanding Aimia shares. Aimia announced that it expected to raise C$32.5-million in gross proceeds to fund its operations for the next 12 to 24 months.

Also following the Mithaq bid, Aimia sought to expand its civil claims to allege that the brother of Aimia's CEO was an undisclosed joint actor with Mithaq, that Mithaq received material non-public information from him, and that the bid did not comply with Ontario securities law in several respects.

Two days before Aimia's private placement closed, Mithaq applied to the ONCMT for an order cease-trading Aimia's SRP and private placement as improper defensive tactics.

The ONCMT made an interim relief order expanding an undertaking by Aimia to rescind the private placement if Mithaq's application was successful. Subsequently, Aimia commenced a cross-application to restrict Mithaq's purchases of additional Aimia shares during the takeover bid.

Following a hearing in December 2023, the ONCMT issued an order dismissing both Mithaq's and Aimia's applications with reasons to follow. As part of the order, Aimia agreed to revoke the SRP. The ONCMT's reasons have not been released as of the date of this publication.

On January 3, 2024, Aimia announced that the civil litigation with the CEO's brother had settled. On January 11, 2024, Aimia announced the departure of its CEO. On January 18, 2024, Mithaq extended the deadline for shareholders to tender to its bid to February 15, 2024.

IMPLICATIONS

The much-followed contest between Mithaq and Aimia demonstrates a multi-pronged takeover defense strategy. The civil proceedings began as an attempt to govern shareholder meetings, but Aimia attempted to expand the proceedings to include improper use of non-public information and breaches of securities law. It is arguable that the ONSCJ was not the proper forum for these allegations and Aimia pre-emptively sought a date before the ONCMT in case the ONSCJ declined jurisdiction.

The ONCMT proceeding is the first case since the decision in Re Hecla Mining, to consider whether a private placement is an improper defensive tactic in a takeover bid. The ONCMT likely applied the framework it developed in Re Hecla Mining, but we await the ONCMT's reasons. It appears that the ONCMT found Aimia's evidence that it had a serious and immediate need for financing compelling. The ONCMT's decision, together with the earlier decision in Re Hecla Mining, may signal a relatively high threshold for an otherwise prudent private placement to be considered an improper defensive tactic in future cases.

CONCLUSION

These five notable cases provide insights into various aspects of securities law, including jurisdictional reach, disclosure obligations, regulatory offences, due process, and takeover bid defense. It will be useful for issuers and capital markets participants to understand and consider these cases as they develop and refine their regulatory, compliance and litigation practices and strategies within Canada's evolving legal landscape.

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