A minefield of risk? Ontario court grants leave and certifies class for secondary market misrepresentation action
Public issuers operating abroad can face difficult decisions in relation to the disclosure of risks and contingencies arising from their foreign operations. In a recent decision, Dyck v. Tahoe Resources Inc. (2021 ONSC 5712) (Dyck), the Ontario Superior Court granted the plaintiff leave to commence a secondary market misrepresentation class action under section 138.8(1) of the Ontario Securities Act, finding there was a “reasonable possibility” the plaintiff could succeed at trial in proving that the defendant mining company, Tahoe Resources Inc. (Tahoe), did not sufficiently disclose that a lawsuit in Guatemala could suspend the company’s operations there. The Court certified the proposed global class, which included both Canadian and U.S. shareholders of Tahoe.
Summary of facts
The action arises out of an amparo lawsuit — or a “constitutional protection lawsuit” — brought by a non-profit organization in Guatemala to suspend Tahoe’s exploitation license for its flagship Escobal mine. In response, Tahoe issued a news release on May 24, 2017, generally disclosing the lawsuit and expressing its view that it was “confident” that it was “without merit.” On July 5, 2017, the Supreme Court of Guatemala provisionally suspended Tahoe’s license, effectively shutting down operations at the Escobal mine. When Tahoe issued a news release disclosing the suspension and that its operations may continue to be halted for up to 30 months, Tahoe’s share price fell by $3.50, representing a $1.1-billion decline in Tahoe’s market capitalization.
The plaintiff, a retail investor, alleges that Tahoe failed to disclose material facts in its May 24 news release relating to the risks of the amparo litigation, including that the licence could be suspended. In its defence, Tahoe argued, among other things, that its disclosure explained all relevant risks and that the risk of provisional suspension was not material.
Credible evidence of “reasonable possibility of success”
As we have discussed in a prior blog post, the test on a motion for leave to commence an action under s. 138.8(1) only requires a plaintiff to establish a “reasonable possibility of success” at a trial through a plausible interpretation of the law and some credible supporting evidence. While said to be a “robust screening mechanism” that is “more than a speed bump,” the test is a low threshold that is “very much stacked in the moving party’s favour”.
In granting the plaintiff leave, the Court found that there was a reasonable possibility that a trial court could make certain conclusions about the Guatemala litigation, including that there was a significant possibility of a lengthy suspension of Tahoe’s licence. While the Court acknowledged that it should not engage in an extensive review of the expert evidence on a leave motion, it nevertheless relied heavily on the evidence of the plaintiff’s expert on Guatemalan law. Both the plaintiff and defendant also put forward expert evidence about the materiality of the omissions. The Court noted that their conflicting evidence sent a “strong signal” of a reasonable possibility of success. Ultimately, the Court found that it was reasonably possible that a trial court could find that the Tahoe’s disclosure only sets out general risks to Tahoe’s operations, and not the specific risk of a lengthy suspension of operations as a result of the amparo litigation.
Two noteworthy factors also influenced the Court’s decision. First, in arguing there was sufficient disclosure, the defendants relied on a single analyst report regarding the negative implications of the ampara litigation. The Court found that “the comments of a single analyst do not constitute notice to investors.” Second, the Court noted that the defendants did not assert that they conducted a reasonable investigation before making the statements in the May 24 news release.
While the case affirms an unfortunately relaxed approach to the judicial assessment of “reasonable possibility of success,” the particular facts of the underlying dispute are sufficiently unique as to limit the decision’s application. More generally, the decision illustrates that plaintiffs are increasingly leveraging expert evidence to put forward “credible evidence,” which need only have a reasonable possibility of being accepted at trial. The Dyck decision is also useful in signaling to public issuers the extent to which specific litigation risks that affect their operations, both domestically and abroad, should be disclosed to investors to anticipate and better defend against allegations of misrepresentation.
 Dyck at para 95, citing Gowanlock v. Auxly Cannabis Group Inc., 2021 ONSC 4205, at para. 31.