Theme #5 - Developments in Securities Class Actions

2014 was a significant year for securities class actions in Ontario, beginning with the Court of Appeal’s leading decision in Green v. CIBC (“Green”) in February 2014, and continuing through the Court of Appeal’s recent decision in Bayens v. Kinross Gold Corporation (“Bayens”), released on December 17, 2014.  There were three noteworthy developments of interest for defendants.

1. Limitation Defence Weakened

Part XXIII.1 of the Securities Act requires a plaintiff to obtain leave of the court before proceeding with a statutory claim for misrepresentation. The Act provides for a three year limitation period after the date of the alleged misrepresentation. In February, a specially convened five-judge panel of the Court of Appeal for Ontario held in Green that the limitation period for statutory class action claims will be suspended once a plaintiff:

(a) pleads a cause of action based on section 138.3 of the Securities Act; and

(b) pleads the intent to seek leave.

The effect of the decision is to limit the circumstances in which the limitation period will be available to bar a claim, since the representative plaintiff can effectively “stop the clock” for the class by serving a claim and filing a motion for leave to certify the statutory cause of action.

Just two years prior in the case of Sharma v. Timminco, the Ontario Court of Appeal held that the plaintiff must obtain leave of the court to proceed with his statutory claim within three years of the date of the alleged misrepresentation – otherwise the claim will be statute-barred. In Green, the Court of Appeal took the unusual step of reversing its prior ruling, noting that Timminco resulted in some claims being statute-barred because of factors outside of the plaintiff’s control (for example, when the leave hearing cannot be heard or decided within three years as a result of back-log in the courts). Although the Supreme Court of Canada has granted leave to appeal in Green, its decision will likely have limited impact on the limitation period issue, at least as far as Ontario is concerned, as the Ontario Act was amended in July 2014 to expressly provide that the limitation period is suspended once the motion for leave is filed. The Supreme Court’s decision will be of particular relevance to other jurisdictions across the country, however.

2. Test for Leave Has Teeth  

In Green, the Court of Appeal also addressed for the first time the test for leave and confirmed that the test is higher than a “mere” possibility of success and requires a “reasonable” possibility of success. As the Court explained, the purpose of the leave provision is to discourage and eliminate bad faith strike suits that do not have a reasonable possibility of succeeding. This requires the court to weigh and assess the evidence in respect of each alleged misrepresentation, and find, on the evidence, that there is a reasonable possibility that the plaintiff will succeed on his claim.

In Bayens, the Court of Appeal affirmed these principles, and clarified that, although the standard for obtaining leave – a “reasonable possibility of success” – is the same standard that is applied at the certification hearing to determine if the claim discloses a cause of action, because the standard is applied in different contexts, it has different implications. On certification, the facts in the pleadings are assumed to be true and the court is simply tasked with assessing if the pleading discloses a cause of action. However, at the leave stage, it is necessary for the court to consider the evidentiary record and weigh the evidence. If the defendant disproves key facts on which the plaintiff’s claim relies, the Court may find that the claim has no reasonably possibility of success and deny leave.

Given that the leave test is a merits-based test, in appropriate cases, it may be beneficial for defendants to put forward a robust defence to leave, including through competing fact and expert evidence and cross-examination of the plaintiff’s affiants.

Having said that, it is not necessary for a defendant to put forward any evidence on the leave motion. Indeed, in two other cases released in 2014 – Millwright Regional Council of Ontario Pension Trust Fund v. Celestica Inc. (“Celestica”) and Abdula v. Canadian Solar –a number of the plaintiffs’ claims were denied leave, even though the defendants did not lead competing evidence. In Celestica, the court also held that a plaintiff should not be granted leave to investigate potential misrepresentations in an effort to determine whether a misrepresentation occurred. As Justice Perell held: “Leave is not granted to determine whether leave should be granted.”

3. Common Law Negligent Misrepresentation Claims are Not Suitable for Certification 

Part XXIII.1 expressly provides that plaintiffs may pursue civil remedies in addition to their statutory remedies. Unlike the statutory remedy which is subject to a cap on damages, civil claims for negligent misrepresentation are not capped, and so are typically pleaded alongside the statutory claims. While it is not necessary to prove reliance to succeed on the statutory claim, reliance remains a necessary element of any claim in negligent misrepresentation.

In Green, the Court of Appeal confirmed that plaintiffs may not avail themselves of the “fraud on the market” doctrine to establish reliance on a group-wide basis. In this respect, the Court’s decision can be contrasted to the recent decision of the U.S. Supreme Court in Halibruton Co. v. Erica P. John Fund Inc., where the U.S. Supreme Court confirmed that investors could continue to rely on the fraud-on-the-market doctrine in the United States (although it should be noted that the U.S. Supreme Court did accept Haliburton’s alternative argument that defendants should have an opportunity to rebut the presumption of an efficient market before certification through evidence that the alleged misrepresentation did not actually affect the price of shares).

In Canada, the fraud on the market doctrine has not been accepted, and accordingly the question of reliance must be established by each individual class member for their claim in negligent misrepresentation to succeed. As the Court of Appeal recently confirmed in Bayens, the need to prove reliance, causation and damages by each individual class member will typically make common law claims for misrepresentation unsuitable for certification.

This is particularly the case where the common law claims rest on the same factual foundation as the statutory claims, and where the court has already determined that leave should be denied. As the Court of Appeal held in Bayens, if the statutory misrepresentation claims are found to have no reasonable possibility of success and the common law misrepresentation claims are based on the same evidentiary foundation, the outcome of the leave motion is relevant to determining whether a class action would be the preferable procedure to resolve the class members’ claims, and, obviously, favours the conclusion that it is not.