A “Core” Decision: Lessons on the Leave Test for Alleged Misrepresentations in U.S. Disclosure Documents

In providing a statutory right of action  in respect of misrepresentations contained in secondary market disclosure, the Ontario Securities Act (OSA) distinguishes between those misrepresentations contained in “core documents” and misrepresentations contained in non-core documents. In the latter case, a person or company will only be liable where the plaintiff proves knowledge of the misrepresentation, willful blindness to the misrepresentation, or  gross misconduct.  The recent decision of the Ontario Superior Court in Abdula v. Canadian Solar Inc.  addressed the question  whether “core documents” are limited to documents that are required to be filed with the Ontario Securities Commission (“OSC”) or whether they also include similar types of documents filed with the SEC. The court also further clarified how the test for leave will be applied in circumstances where only the plaintiff has filed evidence.

The Facts

Canadian Solar was incorporated pursuant to the CBCA and its executed offices are located in Toronto. Its shares trade only on the NASDAQ.  It is not a “reporting issuer” pursuant to the OSA, however, in a widely reported earlier decision  the Court determined that it is a “responsible issuer” under the OSA and thus falls within the ambit of section 138.3.  In his claim, plaintiff alleged that there were misrepresentations in Canadian Solar’s financial statements for Q1, Q2, Q3 and Q4 2009, in Canadian Solar’s 2008 annual report, and in a prospectus supplement.

Core vs. Non-Core Documents

Canadian Solar argued that all of the documents at issue were “non-core” documents, because all of the documents included in the definition of “core document”, such as prospectuses, take-over bid circulars, annual financial statements, etc., have a technical meaning under the OSA and are limited to documents that must be filed with the OSC.

Justice Taylor rejected this argument, finding that the legislature did not intend to distinguish between documents that must be filed with the OSC and equivalent documents that are filed with other securities regulators, including the SEC. Rather, the distinction between “core” and “non-core” documents relates to whether they are formal documents, such as prospectuses, AIFs, annual financial statements and MD&As, or informal documents, such as press releases, voluntary disclosures, and annual and quarterly reports (excluding the MD&A and financial statements contained therein, which are “core documents”). As such, Justice Taylor held that there was a reasonable possibility that the plaintiff would be successful at trial in showing that the misrepresentations at issue were contained in “core documents.”

Evidentiary Burden on the Test for Leave

Justice Taylor also addressed the question  whether the plaintiff had a reasonable possibility of establishing that there were misrepresentations in the documents. Canadian Solar conceded that there was a reasonable possibility that the plaintiff would establish at trial that there was a misrepresentation in relation to its Q4 2009 financial statements. Of note, however, is how the Court applied the leave test for those documents in respect of which plaintiff’s expert opined that he could not determine if the financial statements were materially misleading (Canadian Solar did not lead any expert evidence.)

Following the case of Millwright Regional Council of Ontario Pension Trust Fund v. Celestica Inc., which we have previously written about here, Taylor J. held that there is no obligation on the defendant to file any material in opposition to the motion for leave. The onus is on the plaintiff to produce satisfactory evidence, without the ability to obtain production or discovery from the defendant. If the plaintiff if unable to do so, leave should be denied. Since the plaintiff had not led any affirmative evidence with respect to the Q1, Q2 and Q3 2009 financial statements that would show a “reasonable possibility of success” at trial, Justice Taylor held that leave must be denied regarding these documents.

Similarly, with respect to the alleged misrepresentation contained in Canadian Solar’s annual report, Taylor J. found that because there was no affirmative evidence from plaintiff’s expert that the statement at issue was materially deficient, there was not a reasonable possibility that the plaintiff would succeed at trial in proving a misrepresentation.

Justice Taylor’s analysis therefore confirms that the test for leave is a genuine screening mechanism that requires the court to assess and weigh the evidence in respect of each alleged misrepresentation and determine whether the plaintiff indeed has a reasonable possibility of success. It is not merely a “bump in the road” on the way to certification. Indeed, even where the defendant files no evidence, leave may be denied where the plaintiff’s record is deficient.