Securities Class Actions Increasingly Target Public Issuers in the Mining Industry
Part XXIII.1 of the Ontario Securities Act, and comparable legislation in other Canadian
provinces (the Securities Acts), now provides a statutory right of action
against public issuers, their directors and officers, and various related
parties for misrepresentations or omissions affecting the price of the issuer’s
securities on the secondary market. The legislation, which excuses plaintiffs
from the common law onus of proving that they actually relied to their
detriment on the alleged misrepresentation or omission, is designed to
facilitate the certification of class actions.
Although Part XXIII.I has been in force since December 31,
2005, it is only now that significant numbers of cases commenced under the new
civil liability provisions are starting to be considered by our courts. The
jurisprudence is still in its infancy — no case has reached trial and appellate
guidance on the preliminary issues that have been determined remains scant — but
two observable trends should be of concern to mining industry issuers:
the initial decisions will likely only
encourage investors and their counsel to pursue increasingly speculative
lawsuits; and
- the mining industry is and will
continue to be a target for such lawsuits.
Why Securities Class Actions are on the Rise
There are currently at least seven active secondary-market
securities class actions against mining companies that trade over Canadian
exchanges and three such actions have recently been settled. A further two
mining issuers are under “investigation” by Canadian class action plaintiff
firms; this means these plaintiff firms are seeking investors who are prepared
to act as class representatives so that an action may be commenced.
The bases for the allegations in these actions vary. They can
arise from errors in the issuer’s technical reporting, as in the case of a
proposed class action against Canada Lithium Corp., which recently disclosed,
after an internal review, that a mineral resource estimate contained material
misstatements. Or, they can arise from alleged failures to make timely
disclosure of developments affecting the company’s ability to reach earning
targets, as in a proceeding against Eastern Platinum Limited, which alleges that
the company failed to disclose material information about the interruption of
operations at one of its mines. Practically any correction, restatement or
public disclosure which provokes a drop in an issuers’ share price can lead to
a class action—plaintiff firms monitor for such market reactions and the
prevailing approach may be characterized as “sue first and ask questions
later".
Three developments in the case law are leading to the increase
in securities class actions:
- The Securities Acts impose a leave requirement
on plaintiffs, who must demonstrate to a
court that the action has been commenced in good faith and that there is a
“reasonable possibility” that it will be resolved in the plaintiff’s favour at
trial before an action can be commenced. However, the decision in Silver v. IMAX (IMAX) suggests that
the leave requirement sets a low threshold and is unlikely to pose a serious
impediment to plaintiffs in many scenarios. This comes as a disappointment for
public companies in light of the fact that the leave test was intended to
function as a preliminary screening mechanism to protect issuers against
unsubstantiated claims.
- It was also determined, in IMAX, that national and even global classes of investors may be
certified in Ontario. Although the law is not settled on this point, and
questions of jurisdiction are likely to be “live issues” for some time to come,
there is support in the early case law for the argument that when an issuer’s
shares trade over a Canadian exchange and also over an exchange in a foreign
jurisdiction that does not have comparable secondary market liability
legislation, investors who purchased their shares over the foreign exchange may
nonetheless participate in a Canadian class action brought pursuant to
statutory causes of action available under our law — thereby increasing the
issuer’s exposure to damages.
- In IMAX
and Dobbie v. Arctic Glacier, Ontario courts determined that common law claims
for misrepresentation can be certified and pursued in tandem with statutory
secondary market misrepresentation claims brought pursuant to Part XXIII.I.
This provides a further incentive to plaintiff investors and their counsel
because it suggests that liability limits imposed under the Securities Acts
which, in many cases, will severely restrict the potential damages that may be
payable to an investor class, may not apply. The question remains unsettled as
an Ontario court reached the opposite conclusion in McKenna v. Gammon Gold,
but the lack of clarity on this point is unsettling for defendants. The concern
is that plaintiffs could be entitled to “have their cake and eat it too” by
relying on a statutory cause of action to achieve the certification of claims
that were previously considered to be uncertifiable at common law, while at the
same time avoiding liability caps that were designed by the legislative
drafters to protect issuers against potentially unlimited liability.
Why the Mining Industry is a Target
The extent of mining companies’ reporting obligations, the
frequency with which they tend to report news to the markets, and the relative
volatility of mining stocks make mining issuers particularly vulnerable to
securities class actions. In the current climate, mining issuers cannot rest
assured that securities class actions only happen in catastrophic “Bre-X scenarios”. No matter how
meticulous and well-advised a company may be in the preparation of its public
statements and in its adherence to reporting obligations, there are an
increasing set of circumstances in which a class action may be practically
unavoidable.
Part XXIII.I, and comparable legislation in other Provinces,
provides for a variety of defences. Significantly, a defendant may avoid
liability by demonstrating i) that a reasonable investigation was conducted
into the accuracy of a public statement before it was made and ii) that it had
no reasonable grounds to believe it contained a misrepresentation at the time
it was made. However, even defendants with strong defences often find
themselves under considerable pressure to settle a securities class action at a
preliminary stage. These suits can be highly disruptive to a mining issuer’s
operations by distracting management, impeding financing, and dampening
investor confidence.
Preventative Steps
Here are five preventative steps that mining issuers should
consider:
- Review insurance policies. Ensure that both
directors and officers and the issuer itself have appropriate coverage for
securities claims.
-
Make sure officers, directors and other senior
management are fully aware of their own potential liability and that of the
issuer for misstatements or omissions.
-
Ensure that appropriate procedures are in place
for vetting and verifying all public statements. These procedures should
include the documentation of the verification steps that are followed — if
litigation is commenced, a clear record that appropriate diligence was
performed can be of critical importance.
-
In particular, evaluate the approach to the
vetting and verification of oral statements. Most issuers have a clear
understanding that written documents, and in particular, documents filed with
the regulator, can attract civil liability but many are surprised to learn that
even oral statements can be the source of securities class actions when they
are made by persons with actual, implied or apparent authority to speak on
behalf of the issuer. Media training can be an asset for directors or personnel
who speak publicly on behalf of the company.
-
Have an action plan in place for addressing
errors or omissions if they are discovered or suspected. Damages under Part
XXIII.I, and comparable legislation in other Provinces, are measured with
reference to the drop in the price of the security following a corrective
disclosure. How an issuer handles the correction of an erroneous statement or
omission can have a profound impact on its potential liability. This is an area
where involving external counsel early can make a big difference. For example,
if an issuer “over-corrects” misinformation, it could expose itself to disproportionate
liability for damages. However, if the issuer only partially corrects the
misinformation and later has to make a further correcting statement, it may
face the argument that the first correction was itself a misrepresentation,
giving rise to further, potentially more extensive damages.
In short, in the post-Part
XXIII.I environment, a mining issuer needs to think like a defendant before it
becomes one. Litigation awareness and other preventative measures can help to
avoid class actions before they are started and can also minimize the
potentially devastating effects of these lawsuits once they are issued.