Canadian Class Action Defence Blog

Uncertainty of Liability Cap in Securities Act Influences Settlement Approval

Apr 8, 2016 3 MIN READ
Lauren Tomasich

Partner, Disputes, Toronto

The Ontario Superior Court in Donohue v Baja Mining, 2016 ONSC 1569, recently approved a Settlement Agreement for a certified class action which alleged misrepresentations with regards to a copper, cobalt, zinc and manganese mine. In approving the settlement, the Court accepted class counsel’s submissions that since the “liability cap” in the Securities Act had not yet been judicially interpreted, this settlement was fair and reasonable.

The Class Action

The plaintiffs alleged that the defendants made various misrepresentations with regards to the mine, a primary asset of the shareholders. The Court certified a class action under the Securities Act and shortly thereafter settlement discussions ensued.

The Settlement Agreement

The parties entered into a Settlement Agreement dated November 6, 2015. The approval of the Settlement Agreement would resolve the action in its entirety.

Under the Settlement Agreement, the plaintiffs would be paid $11 million by the Baja Defendants (Baja Mining Corp., John Greenslade, Rowland L. Wallenius, Michael Shaw, and Adam Wright) “without any admission of wrongdoing or liability and without any concession or admission of the truthfulness of any claim or allegation asserted in this action.”

Assessment of the Settlement Agreement

The Court accepted class counsel’s submissions that since all of the defendants denied that that there had been any misrepresentations made, the issue of liability would have been a significant one if the action proceeded.

Indeed, as class counsel explained, the “liability cap” under part XXIII.1 of the Securities Act, which would apply to limit the liability the defendants, has never been interpreted by a court. Under the Securities Act, section 138.7 limits the damages payable by a defendant when the actual damages assessed by the courts are greater than the liability caps listed under the section 138.1 definition of “liability limit.” This results in a cap as to damages a defendant can be ordered to pay in secondary market liability.

Class counsel also advised that based on its interpretation of the liability cap provisions, it was likely that the total liability would be capped at $12 million for the present case. Moreover, even if liability could be extended, it would require an innovative interpretation by the court and would likely result only in an increase of damages to $15 million.

Taking into account the risks associated with proving both the misrepresentations and class counsel’s submissions regarding the interpretation of the “liability cap” under the Securities Act, the Court agreed with class counsel that the settlement was “fair, reasonable and in the best interests of the class members.”

Key Take-Aways

It is interesting to note that in this case, the Court accepted the submissions of class counsel on the application and interpretation of the liability limit under the Securities Act where there had been no judicial guidance on this provision in order to allow the Court to support approval of the settlement

While the facts in this case may seem unique, this decision reminds us that provisions awaiting judicial interpretation may be ripe for settlement as a result of the uncertainty surrounding a finding of liability. As always, settlement is a fact-driven process, but this case can help parties convince a court to approve settlement where the jurisprudence is uncertain.