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:

  1. the initial decisions will likely only encourage investors and their counsel to pursue increasingly speculative lawsuits; and

  2. 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.