Divided Court of Appeal Certifies a “Global” Class Action
In Excalibur Special Opportunities LP v Schwartz Levitsky Feldman LLP, a majority of the Court of Appeal for Ontario certified a “global” class action even though most of the proposed class members had little or no connection to Ontario. The majority concluded that Ontario’s connection with the defendant and the claim against it was enough to establish jurisdiction, and the reasonable expectations of absent class members was not a reason for refusing certification.
Background and previous decisions
Excalibur Special Opportunities LP (“Excalibur”) was one of 57 investors that purchased privately-placed shares of Southern China Livestock International Inc. (“Southern China”), a company incorporated in Nevada. Each investor received a private placement memorandum that included a clean audit report prepared by Schwartz Levitsky Feldman LLP (“SLF”), a Montreal and Toronto-based accounting firm. In 2011, Southern China went bankrupt. Excalibur started an action for negligence and negligent misrepresentation against SLF. Excalibur claimed that SLF could not have issued a clean audit under generally accepted accounting principles given the state of affairs at Southern China at that time.
Excalibur tried to certify a class action on behalf of all 57 investors, 98 percent of whom were non-residents of Ontario. Justice Perell dismissed the certification motion because, in part, he found that the proposed action did not satisfy the “identifiable class” requirement. He observed that the vast majority of class members were “non-residents of Ontario making substantial investments in American dollars in an American corporation in a transaction that was governed by American corporate and securities law.” From the class members’ perspective, it was not reasonable to expect that their legal claims would be determined by an Ontario court. Therefore, Justice Perell concluded, there was no “identifiable class” because there was no real and substantial connection between Ontario and the dispute.
Justice Perell’s decision was upheld at the Divisional Court (we have previously commented on these earlier decisions; see here, here, and here). Excalibur then obtained leave to appeal to the Court of Appeal.
Court of Appeal splits on certification of the global class action
Justice MacFarland (who wrote the majority opinion) concluded that Justice Perell had erred by focusing on the connection between the class members’ investments and America, and asking whether they could reasonably expect to have their claims decided by an Ontario court. There was a real and substantial connection between Ontario and the action because the action was against a defendant who resided in Ontario, carried on business in Ontario, and prepared the audit report (the subject of the dispute) in Ontario. Therefore, she concluded that the appeal should be allowed.
Justice Blair dissented. While he agreed that the Ontario court had jurisdiction to certify the global class, he concluded that the jurisdiction should not be exercised in this case. He agreed with Justice Perell that Ontario courts should exercise restraint before taking jurisdiction over a case with foreign elements and consider the reasonable expectations of absent foreign class members. In this case, Excalibur was the only class member that resided in Ontario and the class members’ claim would have to be decided within an “entirely foreign-related factual matrix”. Therefore, Justice Blair would have deferred to the original decision declining to certify the class action and dismissed the appeal.
What impact will the decision in Excalibur have over the certification of global class actions, absent a further appeal?
On the one hand, the majority decision provides a low hurdle for establishing jurisdiction to certify a global class. It also holds that jurisdiction will depend on the connection between the defendant or the claim and Ontario, not the reasonable expectations of absent class members or the class members’ connections with Ontario. That will likely help parties arguing that an Ontario court has the jurisdiction to certify a global class action.
However, as observed by Justice Blair, there are two steps in any jurisdictional analysis: whether a court has jurisdiction and whether it should exercise that jurisdiction. For the most part, the majority’s reasons do not engage with the second question. Justice MacFarland simply observed that the principles of order and fairness, and the ability to provide procedural fairness to class members were not seriously in question. The identity of all but one of the class members was known; therefore, it would be a relatively simple matter to notify them about the claim and their opt-out options.
Concerns about order and fairness or about procedural fairness for absent class members may be far more significant in future certification motions, especially in cases where the proposed class is not a clearly-defined and ascertainable group of investors. Therefore, even if the threshold for establishing jurisdiction remains relatively low, these concerns may provide a basis for defendants to successfully resist the certification of global class actions in the future.