In a decision released early this month in Terry Longhair Professional Corporation v. Akumin Inc., Ontario's Court of Appeal upheld the decision of Madam Justice Akbarali certifying a securities class action and granting leave for it to proceed under s.138.8 of the Securities Act against medical imaging company, Akumin Inc. In doing so, Ontario's top court clarified what can amount to a "public correction" of a prior misrepresentation under Part XXIII and XXIII.1 of the Securities Act sufficient to potentially support a claim for damages by purchasers of securities on the primary and secondary markets.
In the proposed class action, the plaintiff is a former shareholder of Akumin who purchased its Common Shares on the secondary market. He alleged that the certain statements in Akumin's public disclosure documents and financial statements mis-stated (among other things) Akumin's revenue, accounts receivable and PP&E in 2019, 2020 and 2021, respectively; that these misstatements were "material" as defined in the Securities Act; and that Akumin publicly corrected the misstatements in its Disclosures on August 15, October 12, November 8 and November 15, 2021. In the appeal, Akumin primarily took issue with whether the plaintiff could meet the public correction part of the test for potential liability, as the August 15 disclosure did not do anything other than advise that the Q2 2021 financial statements would be late, and the subsequent disclosures in October and November 2021 were corrections but were not followed by the price declines in Akumin securities that it claimed were a necessary part of the test for a correction. Akumin further argued that its securities did not trade on an "efficient market" and that a statistical analysis of the effect of the correction was needed to found the claim before leave could be granted.
In a unanimous decision, the Court of Appeal panel agreed with the motions judge that the August 15, October 12, November 8 and November 15, 2021 could amount to public corrections sufficient to support primary and secondary market claims by Akumin investors, relying on three prior decisions of the Court of Appeal that defined a public corrections broadly as a disclosure that is "reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement." The appeal panel referenced decisions that have defined public corrections as including both express corrections, where a subsequent disclosure expressly or on its face states that an assertion in a previously issued document was untrue at the time it was made, and statements that are not a direct admission that a previous statement was untrue but nevertheless have the effect of correcting a prior misstatement and result in a drop in the share price. On materiality, a prior decision of the Court of Appeal in Cronos, was relied upon including its direction that "whether a correction is material is not a matter of semantics, but rather requires an understanding of how a specific correction would be understood in an efficient market and also requires a statistical analysis of the effect of the correction."
The Court of Appeal rejected the claim that at the leave/certification stage there needs to be either a full materiality analysis of a public correction or an immediate price drop that follows a correction. Rather, it prescribed a fairly straightforward test: "In all cases, the inquiry should be straightforward and functional: did the alleged correction actually correct the alleged misrepresentation or not?" In the case of Akumin, the appeal panel found that it was clear that there had been public corrections in all four of its disclosures and, as such, it upheld the granting of leave and the certification of the class action.
The appeal panel also rejected the assertion that the test for leave under s.138.3 of the Securities Act requires an analysis of whether the securities at issue trade on an efficient market, stating
"Moreover, as the motion judge correctly pointed out, the "efficient market" precondition proposed by the appellants would be inconsistent with the text of the statute as well as the underlying goals of the statutory scheme. The text of s. 138.3(1) contains no such "efficient market" limitation on claims for secondary market misrepresentation, while ss. 138.5(1), (2) and (3) (as well as the regulations),[6] provide formulas for determining damages or limitations on liability in respect of securities that do not trade on a "published market". Nor would such an efficient market requirement accord with the policy objectives underlying the enactment of the civil liability regime in Part XXIII.1 of the SA, which included protecting investors from corporate nondisclosure. In fact, it would frustrate those objectives by denying investors who had suffered losses from secondary market misrepresentation from accessing the statutory remedy merely because the market in which their securities traded was not an efficient one. There is no support for the view that the legislature intended to protect only investors in exchange-traded securities."
The Court of Appeal rejected the remainder of the appellant's arguments against certification and upheld the motion decision certifying the class action and allowing it to proceed.
This decision is just the latest chapter in the Ontario courts' efforts to interpret and define the test for leave prescribed by Part XXIII.1 of the Securities Act over the past two decades since it came into force. While many decisions have emphasized that the leave requirement is not a mere "speed bump" in a proposed class action, this decision illustrates that the courts will apply an expansive interpretation of the requirements under Part XXIII.1 to allow actions to proceed and will reject overly technical interpretations of the statute that would obstruct actions that may have merit.
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