Ontario Court of Appeal clarifies approach to assessing public correction in secondary market misrepresentation claims
The secondary market liability provisions prescribed by the various provincial securities acts set out a framework for recovery of market losses attributable to misrepresentations contained in public disclosures. Broadly speaking, the amount of recoverable damages is measured with reference to the difference in share price between “the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected”.
Not surprisingly, the primary issue typically in dispute between the parties is whether the public disclosure in fact contained a “misrepresentation”. However, the legal analysis also requires the parties to engage on when – and whether – a correction of the alleged misrepresentation has been issued to the market. This public correction is commonly referred to as corrective disclosure. Oftentimes, the existence and timing of corrective disclosure will be self-evident. Where the allegations relate to misrepresentations “by omission”, however, the issue of corrective disclosure may be more complicated.
The Ontario Court of Appeal’s recent decision in Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v. Barrick Gold Corporation, 2021 ONCA 104 (“Drywall”), rendered in the context of an appeal from a motion for leave to commence an action under s. 138.3 of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “OSA”), provides a roadmap of the Court’s approach in assessing matters of corrective disclosure. In Drywall, the Court articulated the following three-part test for “proper” public correction:
- there must be some linkage or connection between the alleged misrepresentation and the alleged public correction;
- the public correction must share the same subject matter and, in some way, relate back to the misrepresentation; and
- the public correction must be reasonably capable of revealing to the market the existence of an untrue statement of material fact or an omission to state a material fact.
In applying the test, the Court clarified that a “purely semantic and mechanical” analysis of the public correction is insufficient, even on a motion for leave to proceed. Rather, “reasoned consideration of the evidence” is required to determine whether proper public correction is dispositive of such motions. These principles, the Court emphasized, are equally applicable to alleged misrepresentations by omission.
Drywall is an appeal from a decision that denied leave in part to proceed with an action brought by proposed representative plaintiffs of a putative class action against the defendant mining corporation for several alleged secondary market misrepresentations by omission (collectively, the “Appealed Misrepresentations”). In support of the motion for leave, the proposed representative plaintiffs filed a voluminous motion record of over 50,000 pages. However, the motion judge declined to engage in a detailed analysis of the evidence to assess whether there had been misrepresentations by omission. Rather, he simply “assumed” that the alleged misrepresentations could be established by the plaintiffs, and denied leave for the Appealed Misrepresentations on the basis that the omissions had not been “publicly corrected” within the meaning of the OSA. More specifically, the motion judge concluded that “there is no reasonable possibility that a trial court would find there has been a public correction of those misrepresentations”.
On appeal, the proposed representative plaintiffs argued that the motion judge erred in principle by:
- proceeding to an analysis of whether the Appealed Misrepresentations were publicly corrected without adequate consideration of whether they in fact contained misrepresentations; and
- taking an impermissibly narrow textual approach to determining whether the Appealed Misrepresentations were publicly corrected.
Evaluating public corrections
The Court rejected the first ground of appeal. In certain limited circumstances, judicial economy may favour the motion judge disposing of a motion for leave by assuming (rather than determining) that the alleged misrepresentations are false, and then proceeding directly to an analysis of whether corrective disclosure has been made. However, the Court cautions that this approach should only be used rarely as it bypasses the essential enquiry at the heart of the statutory cause of action for secondary market misrepresentation – whether the alleged misrepresentations actually exist.
In addition, even where the alleged misrepresentations are assumed to be false, the motion judge is still required to engage in “a reasoned consideration of evidence of the context in which the alleged public corrections were made and how the alleged public corrections would be understood in the secondary market” in instances where the alleged public correction does not clearly reveal the existence of the alleged misrepresentation on its face. That is, most often, a purely textual analysis of corrective disclosure will not be enough.
The Court ultimately held the motion judge had not engaged in the requisite reasoned consideration and granted the appeal in part on the basis of the second ground of appeal.
Drywall not only articulates the test for proper public correction, it clarifies the evidentiary burden on plaintiffs to establish that corrective disclosure has been made. Unless the public correction is obvious and identifiable from its text, a plaintiff will need to adduce both contextual evidence (e.g., when and how the correction was made) and evidence of how the correction is understood by the public (e.g., the market’s evaluation of the value of the securities that had been misrepresented). Absent such evidence, Drywall suggests that defendants have an opportunity to defeat such actions at the leave stage on the grounds that one of the central elements to the secondary market liability regime (i.e., the existence of corrective disclosure) has not been satisfied by the proposed plaintiffs.