July 19, 2016
Securities class actions are a significant risk for all public issuers. Even in the absence of a misrepresentation, a sudden drop in share price can lead to lawsuits – which can divert attention from the business, impede the raising of capital, harm reputations and lead to enforcement proceedings. In-house counsel must be prepared to respond quickly and effectively.
This 45 minute presentation by Osler litigators Mark Gelowitz and Allan Coleman and Sullivan & Cromwell litigator Matthew Schwartz offers key strategies for mitigating the impact of a lawsuit, specifically:
- How you should respond when a securities class action investigation or lawsuit is announced
- How you can manage multiple proceedings, including cross-border proceedings
- How you can use preliminary motions to narrow or dispose of a lawsuit at an early stage
Video transcript
MARK GELOWITZ: Good afternoon, everybody. I'd like to welcome you to our webinar on Managing Securities Class Action Risk. My name is Mark Gelowitz. Here with me in Toronto is my partner Allan Coleman. We're both partners in Osler's National Litigation group, and we're the co-chairs of the firm's securities and corporate litigation group.
In that area of specialty, we often defend issuers, directors, officers, and other defendants in securities class actions across Canada. We're delighted to be joined today by Matt Schwartz of Sullivan and Cromwell.
Matt's partner Bob Giuffra had also planned to join us, but unfortunately circumstances intervened and he is not able to be here. But we have had the pleasure of working with both Matt and Bob on cases cross-border cases in the past. And they are certainly in our view two of the top securities litigators in the United States.
Today's presentation is going to focus on issues to consider when you're faced with the prospect of a securities class action. And crucially, issues created by the fact that securities class actions against Canadian companies often have a cross-border element in the US.
So we're going to focus on giving you some practical tips about managing cross-border proceedings and an overview of these lawsuits as they occur both in the United States and Canada. And I'd like to turn things over now to Matt Schwartz. And Matt, perhaps you could give us some comments on the circumstances that are ripe for the launching of a class action of this kind.
MATTHEW SCHWARTZ: Thanks, Mark. Yeah, I think it makes sense to begin at the beginning here. Because there are often ways in which in-house counsel can help prepare for the onset of a class action even before a complaint is filed.
The way it's worked in the United States for a long time in the way it's developed in Canada more recently is that on both sides of the border, there are many plaintiffs firms that specialize in particular in bringing securities class action lawsuits. These firms are typically well-funded because they do these on contingency, so they often have to wait several years before they make a recovery. And they often have deep relationships with institutional investors like pension funds who are willing to act as plaintiffs in class action lawsuits.
Typically, what will happen is these law firms will keep a watch on all the prices of listed stock in the United States and in Canada. And if they see a significant stock drop in the stock of any listed company, that has a decent market cap size, the plaintiffs' firms will then analyze whether they think this is economically worth bringing this case, and whether they think the circumstances and the fact that they know could support a complaint that would survive an initial motion to dismiss on either side of the border. And that's how they go about making that business decision.
And so as most companies, eventually suffer a significant stock price drop regardless of whether there's been any underlying misconduct or fraud. All companies are basically at risk of having a securities class action filed against them. And that's true even for companies that have a history of extremely high integrity and compliance with laws and regulations.
I think just because of the nature of certain industries in the different countries, we've seen a lot of class actions filed against certain types of companies. So for example, in Canada, historically mining companies, energy companies, and financial services companies have been the targets of class actions. And in the United States, the companies most prone to class actions are tech companies, health service companies, particularly pharmaceuticals, and like in Canada financial services companies.
But of course, the risk exists in any industry. And we've seen basically companies in every single industry be subject to securities class actions over the last few years. As I said, these lawsuits are typically driven by significant stock price declines.
So very often, a company and in-house counsel will know that if their company has just suffered a significant price decline, that there may very well be a securities class action coming around the corner. And you can even start to prepare for those securities class actions before there's an announcement by a plaintiffs firm that they filed a complaint.
Or most likely in the United States, what you do is you have a law firm that will put out a press release on its website or through the business wire saying they're investigating the stock price drop. And it's a way for them to announce that they're about to file a complaint, and also try to get institutional investors to be interested in filing a complaint.
And so once you see that or once you see a stock price drop, you can very easily start to make the types of preparations that we're going to talk about in the rest of the webinar. Allan, I don't know if you have thoughts about any differences in the way that securities class action start in Canada versus the United States as I just described.
ALLAN COLEMAN: Yes. Thanks, Matt. Historically, in Canada, it has taken somewhat longer for a securities class actions to start. Over I would say recently Canada seems to be moving to a more similar model as the US.
When a Canadian plaintiff's firm announces that it's investigating a potential securities class action is often a sign that the firm is looking for investors willing to serve as plaintiffs. But in Canada is most frequently or more frequently retail investors rather than institutional investors as institutional investors. To date in Canada have been less likely to put them forward themselves forward as representative plaintiffs.
And as more and more common in Canada for there to be multiple class actions in respect of the same alleged wrongs brought by multiple plaintiffs law firms in multiple jurisdictions, which is a topic. I will return to later as unlike the US Canada has no legislative mechanism for resolving these conflicts.
I'd like to now turn to what the steps the company should take at the outset once they're aware of a potential securities class action. Or securities class action has been filed on one or both sides of the border.
The first topic I'd like to address is document preservation. And I can't hear people that are participating in the conference. But I'm sure that elicited a collective groan because document management issues are not anyone's favorite topic even securitize litigators.
But immediate document preservation can be crucial in defending a securities class action. Because the allegations in these types of actions tend to span several months or years tend to involve a large number of employees and directors. Potentially multiple lines of businesses. And it can occur in circumstances of great upheaval for the company, which often coincide with layoffs or departures of key employees.
Now, in fact, the preservation of documents requires coordination among a company's legal, human resources, and IT departments. In other words, it is more than just preparing and distributing a document preservation memorandum. Although that is an important and crucial step.
It's about staying on top of the employees to ensure that the dictates in the memorandum are actually being implemented and not treated as a bureaucratic event. In a particular, attention has to be paid to individuals, such as outside directors whose electronic communications may not be on the company's server, and additional steps may have to be taken in that respect.
The second topic that an in-house counsel can address at the outset is anticipating and protecting communications based on privilege. And companies need to treat all discussion of the litigation as confidential and implement internal processes to maintain privilege going forward. This may include limiting circulation of communications about the litigation to those who have a need to know, advising employees to direct communications about the litigation through counsel, or to seek legal advice before preparing and sending any documents, concerning the subject matter of the litigation.
And in general, avoiding internal electronic conversations about the substance of the litigation when possible. Now, those are all ideals that we should strive for. But we also have to realize that we are acting in the real world. And in instances where the alleged misrepresentations and correct disclosure go to the heart of the company's business.
These ideals may not be able to be adhered to strictly. So it's a part about communicating a culture, where people, when before they put pen to paper or fingers to keyboards are thinking about what would this look like if it were disclosed in a court filing.
And with that, I want to turn it over to Matt to discuss something that often occurs in the case of securities class actions or in conjunction with securities class actions, which is a parallel regulatory investigations.
MATTHEW SCHWARTZ: Thanks, Allan. I think both SEC and Osler have had the pleasure of working on securities class actions where there is no parallel regulatory investigation and the displeasure of working on them when there is. And that's something that needs to be determined really at the outset of the litigation is there, or is there likely to be a regulatory investigation into the underlying conduct that's alleged in these securities class action by a regulator like the United States Securities and Exchange Commission, or the US Department of Justice, the Ontario Securities Commission, or any of the other numerous regulators that have been coming after companies in the last several years.
In our experience, the type of issues that most interest regulators include whistleblower complaints, environmental issues as we've seen recently. The sale of company stock by executives and board members when the stock is at an allegedly inflated price i.e. insider trading.
Product recalls for companies and accounting discrepancies and restatements. There are obviously a lot of other things that interest regulators. But those are the ones that most prominently come to mind.
So when weighing whether or not to take an enforcement action, a lot of these regulators and particularly the DOJ and the SEC have formal guidelines that place a premium on a company's cooperation with an investigation. Meaning that you're going to most likely come out with a better outcome if the SEC and the DOJ or the other regulators think that you've been working frankly and honestly with them to discuss the conduct at that issue.
And as a practical matter, a company often has much more to lose from a bad regulatory outcome and a bad relationship with its regulators than it does from a securities class action which tend to be manageable. And that means that companies really need to figure out how they're going to cooperate with the regulators and work with them to best resolve the regulatory inquiry, while at the same time, still fighting against the securities class action.
And that can often be a difficult balance. And it's something that in-house counsel needs to work with outside counsel on quite a bit.
And it means you really need to be able to dive into the facts early on, present them accurately to the regulator, while at the same time, not giving away your strategy and not giving away your confidential information to the securities class action plaintiffs. Argue I think Osler and SEC share this is that even where there's no regulatory interest, and so there's no need to there's no technical need to immediately get on the ball and do a fact investigation, we think it's often very prudent for companies external counsel and in-house counsel to at least review key documents and speak with key witnesses at an early stage in the lawsuit.
These steps are very important for a few reasons. First of all, they help preserve witness recollections. And I would say that's key because very often the securities class action immediately follows a somewhat traumatic event for the company. And traumatic events often lead to witnesses and employees leaving the company.
And it's much easier to sit down and talk with somebody while they're still at the company and when they've left the company. And they tend to be more helpful in those situations.
Another reason to do this initial investigations, it helps educate counsel concerning strategy and arguments that could be made in initial motions and to identify the relevant issues witnesses and documents for future discovery if we ever get to that. The investigation I think importantly allows you to figure out what your exposure might be going forward whether this is a type of lawsuit that you want to dig your heels in and fight to the long term, or whether this is the type of lawsuit that just for or both business and economic reasons the company might want to consider resolving early on if they're not successful at the initial motion stage. And the motion stage something we'll talk about in a little bit.
And of course, the investigation will also allow outside counsel to best frame the issues for the court and get everything accurate, and not be subject to second guessing by the plaintiff's counsel when you get into motion practice. That's what we think you should do when you don't have regulatory interest. When you do have regulatory interest, it obviously becomes a lot more important to really dig into the facts early on so that you can work with the regulator as I mentioned.
There are a couple of things that you need to keep in mind when you have both a regulatory investigation and a securities class action. The first is protecting your communications with the regulators from being discovered by the plaintiffs. And the second is trying not to prejudice what we have in the United States is an automatic stay of discovery pending the initial motion to dismiss.
So in the United States, at least, the Department of Justice has published guidelines that differentiate the underlying facts that are uncovered by attorneys during an investigation. And the DOJ can ask the attorneys for those facts. And they differentiate that between poor attorney client communications and attorneys' legal analysis of those facts, The Department of Justice and the SEC are not supposed to ask for that latter category of analysis.
Another thing that's important when you're dealing with a regulatory agency in the United States is to try to enter into a confidentiality agreement with that agency. That at least can provide you some protection from discovery, from the plaintiffs in the class action, in the class action litigation.
So I think the law on that in the United States is pretty mixed. Having said that, there's really no harm in trying to negotiate a confidentiality agreement.
This day of discovery, as I mentioned, in the United States we have something called the Private Securities Litigation Reform Act. That was passed in 1995. One of its goals was to discourage strike suits, which basically meant that prior to 1995. Plaintiffs could file securities class actions, and they could immediately serve very burdensome discovery on the United States, on the United States defendant in the United States Court.
And the defendant could be looking at millions of in legal fees before the court even ruled on the initial motions in that action. So the Reform Act specifically tried to stop those types of strike suits. And it went ahead and it said that there's going to be no discovery until the court rules on the motion to dismiss.
There are some exceptions for that. For example, the automatic stay of discovery can be lifted by a court when it's necessary to avoid undue prejudice to the plaintiff. Some plaintiffs have argued that the day of discovery should be lifted where there's a reduction to a regulator because it puts the plaintiff in an unfair litigating position if the regulator is getting certain discovery and the plaintiff is not.
At the most federal courts have rejected that idea they don't find it particularly logical. But it's something that a company should be wary of when it's dealing with both an investigation and a lawsuit.
Related issue, of course, is that if you're dealing with a lawsuit in both the United States and in Canada, Canada doesn't have that same state of discovery as we do in the United States. If you're producing documents to plaintiffs in the Canadian action, I think there's a much better argument that the US plaintiffs have that they should be able to access those documents as well. Presumably, there's no additional cost on the company on the defendant in the United States, for example.
So you're going to want to have US and Canadian counsel worked closely together to make sure that we can try to avoid producing discovery to Canadian plaintiffs while the stay of discovery in the United States. Of course, the last thing that I would think this might be the most important that everyone should consider when dealing with those regulatory investigations and securities class actions.
Is that if you have a regulatory investigation that's about to settle, and that involves some sort of admission of misconduct on the part of the company, or on the part of the company's employees, you should also consider whether it's advantageous to try to settle your securities class action either prior to the announcement of the regulatory settlement or basically at the same time. I think it's fairly well documented that when you have a securities class action that follows a regulatory settlement. That securities class action becomes much more difficult and much more expensive to settle simply because you have admitted conduct that the plaintiffs can now wave in front of the court or in front of a jury.
Allan, I think one of the issues that we could cover is the representation of individuals. I mentioned that sometimes there are issues with employees. And I think you guys have good thoughts on how to deal with handling individuals as defendants, as well as companies.
ALLAN COLEMAN: So plaintiffs in securities class actions in the United States and Canada often will name as defendants. The company itself, as well as any individual be it a director or officer within the company that is alleged to have made or been responsible for what is alleged to have been misleading public disclosure. I think the practice in the US is to name the key officers such as the CEO or the CFO in accounting related cases.
Whereas in Canada, I think it's a broader group of defendants that are typically named and often include, for example, the audit committee members in an accounting related cases. And there also may be defendants such as related companies, auditors, underwriters, in primary market cases that are also named. And with respect to whom the company may have indemnity, relationships.
And there may also be current and former employees who are not defendants in the case, but whom the plaintiffs at least in the US will seek to depose in the US proceeding given the broader discovery rights that exist in the US as compared to most Canadian jurisdictions. Now, defense counsel in the issuer usually strive to have the company and its current and former directors, officers, and employees represented by company counsel.
This is beneficial because it avoids the potential for multiple counsel making conflicting arguments on the same motion or multiple motions that would be contrary to everyone's interest. And it avoids the appearance of potential adversity between the company and any individual director and officer and it can also obviously cut down on costs.
However, when an allegation focuses on the alleged wrongdoing of a particular former or current employee, or where the company has identified in its public corrective disclosure of that employees potentially being involved in wrongdoing, it will be necessary for the company to provide separate representation for that individual.
And in addition to the question of representation in the class action is the question of indemnification of directors and officers, which may vary depending on the jurisdiction in which the company is incorporated and the articles and bylaws of the company and any indemnification agreements that the company has with its directors and officers.
So it's important to seek advice with respect to those issues because, for example, what may be permissive in terms of indemnification under the CBCA may become mandatory because of a provision in the bylaws of the company, and different jurisdictions have different requirements, for example, advancing funds to counsel for an individual defendant. For example, British Columbia requires that you obtain an undertaking from that individual defendant to repay any fees advanced in the event that it was determined that the individual had acted contrary to the best interests of the company.
And so it also can raise regulatory issues to the extent that there is indemnification of a person that is later found to have acted in a manner that was contrary to the interests of the company. The SEC has in its past looked at that as being an example of lack of cooperation on the part of the company. And I will now turn it over to Mark talk about the channels of communication within the company once faced with a potential or actual class action.
MARK GELOWITZ: Sure. One of the aspects of managing a class action is being a bit of a traffic cop when it comes to the dissemination of information. And that's a function that often almost always falls to in-house counsel with, of course, with the assistance of outside counsel.
And decisions need to be made about who needs to know, who definitely doesn't need to know, and developing a communication plan within the company around that. And so typically, there are groups within the company who need to be involved and whose responsibilities require that they stay informed.
And just there's a laundry list, you can consider the following groups. For example, senior management, the board of directors. If there's a particular line of business within the company that is directly involved in the allegations, they'll be involved the finance group, which is going to want to decide about perhaps taking a contingency to reserve for the outcome of the litigation or establish a budget for legal fees.
You're going to need to liaise with the information technology department to deal with the kinds of things. Allan was talking about earlier on document preservation and discovery. And then from an outward facing perspective you'll likely be involved directly with the investor relations group and the media relations group within the company.
Outside the company, entirely outside the company, another very important player to bring into the case early on is the company's DNO insurance carriers. And obviously, from the perspective of reporting litigation, you need to do that immediately. But you also need to liaise with them in the defense of the case.
And working with insurers, of course, can raise complicated issues regarding privilege. And so it's quite important to get advice before sharing any information to ensure that the company's interests are fully protected.
Now, a significant issue that always arises with a class action against a public company is the question of disclosure of the litigation to investors. And let me turn things over to Matt to give us some perspective on that.
MATTHEW SCHWARTZ: Thanks, Mark. On both sides of the border, it's pretty clear that securities regulations require companies to disclose material litigation. And while obviously, this is always done on a case by case basis in terms of what is material, in our view as a practical matter, securities class actions typically involve large financial exposure. Otherwise, they wouldn't have been brought by the plaintiffs bar.
And the proceedings are all public in any event. So there's typically little to be gained from not disclosing a securities class action. Of course, as I said, this is always on a case by case basis.
I think the initial reaction of most companies, especially investor relations media relations and in-house counsel is to simply issue a press release or disclosure saying that all the allegations are false, the case is frivolous, and the company intends to vigorously defend against all the allegations. This is a very understandable reaction. It's sometimes an appropriate reaction. But it's not always the best course of action.
And I think there needs to be a discussion amongst all the various stakeholders about whether or not to take that type of make that type of a disclosure. In particular, situations in which there are parallel regulatory investigations might make companies think twice about making that type of defensive disclosure.
You don't really want to tick off the regulators by saying that all the allegations of the complaint are completely frivolous while the regulators are investigating the same underlying conduct. And they have a very different view about whether or not those that conduct is frivolous.
So that's definitely something to consider. So in general, obviously, disclosure is appropriate and saying something defensive of the company can be appropriate to.
I note that depending on the complexity of the situation, how much media attention a particular securities class action is drawing for the company. Some of the issuers with which we've worked have decided to hire a dedicated public relations firms to handle those media inquiries. And from our perspective, it's very important to involve counsel and communications with those PR firms to make sure the PR firms aren't saying anything that can harm the company's position in the litigation going forward, and also to the extent possible to try to help maintain confidentiality and privilege over the communications between the company and the PR firm.
Mark, you know I don't know if you saw wrap these wrap some of these concepts up into how much lawsuits, how many lawsuits are being filed in Canada versus the United States, and how many are cross-border, so that in-house counsel can think about whether or not they are going to get lawsuits on both sides of the border or not.
MARK GELOWITZ: Yeah, that's a very good point. In Canada, about half of the securities class actions that are commenced in Canada already have a parallel US action underway.
And the flip side of that or the other side of the coin is a number of securities class actions will be commenced against Canadian companies in the US without any corresponding claim in Canada. For example, where the Canadian company is only listed on the US exchange.
So the result of that is that most securities class actions involving Canadian issuers do have a cross-border component. And so it's crucial for the company and in-house counsel to understand the interplay when you've got that dynamic.
That's really the context for this. And I think it would be good to get some detail both from Allan and Matt on the procedures on both sides of the border to give you a flavor for how things are different, and how they're the same, and how they often interact as these two litigations are moving on parallel tracks. So let me turn it over to Allan to give us an overview of class action procedure here on the Canadian side of the border.
ALLAN COLEMAN: Thanks. So the primary law that plaintiffs used to pursue securities class actions in Canada is part of a 23.1 of the Ontario Securities Act. And its equivalent in the other Canadian provinces securities legislation.
And that section applies to alleged misrepresentations by omission or commission in public disclosure, which affect the price of securities that trade in the secondary market. There is another part of the Securities Act that applies to misrepresentations, which affect the primary market in prospectuses and offering memoranda.
But most claims have been brought under 23.1, and it relate to the secondary market. Part 23.1 was compromise legislation that was designed to facilitate the certification of securities class actions, but also contained important protections for public issuers and other defendants, which include damages caps for issuers it's 5% of the market cap at the time of the misrepresentation, and that the requirement that the plaintiffs obtain leave of the court before commencing an action under part 23.1.
And in a recent decision of the Supreme Court, they found that until this was obtained any such action is a nullity. And in addition to these statutory claims, plaintiffs will bring common-law claims under the tort of negligent misrepresentation.
However, those are typically used as leverage to provide the potential for circumventing the market cap. And it would be difficult to have a full common-law claim certified because they need to prove reliance on the alleged misrepresentation.
So typically, the first order of business would be for the defendants to decide to contest the leave and certification motions. However, as I alluded to earlier, we are seeing more and more instances of multiple actions being filed by different consortium of plaintiffs law firms in either one jurisdiction or multiple jurisdictions within Canada. And this seems to occur of course more when the size of the companies is the highest in the price drop the greatest because the market share or the potential realization for the plaintiffs is higher.
And so unlike in the US under the PSRA, in Canada, these fights are determined by way of carriage motion before the case management judge. And there's no real legislative mechanism for sorting this out.
And the main effect of these fights is that it will delay the actual substance of the action until the issue of carriage is resolved, which can be delayed from a few months to a year, or in the case of a recent decision by the Court of Appeal in Bearak two years from the date the action was commenced. And in addition to the carriage motions which are somewhat entertaining from the defense perspective just because it's interesting to watch, the plaintiff's counsel attack each other's theory of the case as being unwinnable and unprovable, or unjust attack each other.
In addition to carriage motions, there can also be motions regarding jurisdiction or formed on convenience, where there are actions commenced in different provinces. And for example, value a case that is currently pending before the courts, their actions commenced in Quebec.
And Ontario in which there was a carriage filed in Ontario, that was resolved. And now, one of the plaintiff's law firms is bringing a convenience motion in Ontario in favor of Quebec. So these preliminary battles can take up a lot of time and energy on the plaintiffs and the plaintiffs side.
Mark, maybe you could then talk about once those issues are resolved. The strategic concerns that face the company when the believe motion is brought.
MARK GELOWITZ: Right. So in the absence of either a jurisdiction issue or a carriage motion, the first big step in a Canadian securities class action is going to be the plaintiff's motion seeking leave to commence the action under the statutory provisions. And that just to get to a hearing in that motion can take anywhere from a year to three or four years after the action is commenced depending on the progress of the case.
And this motion is really a motion for the benefit of the defendants. It's a gatekeeper type of motion where the court applies a test to determine whether the plaintiffs are allowed to proceed.
And in order to get past that, that obstacle the plaintiffs have to show the court with evidence that the action is brought in good faith, and that there's a reasonable possibility. And that's a quote from the testimony statute.
A reasonable possibility that the action will succeed at trial. And there was a lot of early case on whether you know this test was basically a speed bump or a significant obstacle.
And the Supreme Court of Canada has eventually did confirm that it is meant to be a meaningful screening mechanism. And we've seen that applied in the cases.
There have been a number of cases in which leave been denied. And just coincidentally, those of us presenting to you today both are end and SEC acted together on behalf of Kinross in one of the first cases in Canada in which the plaintiff's motion for leave was dismissed in its entirety.
Now, just from a pragmatic point of view, the plaintiff in a leave motion is required to adduce evidence to support its case. But by contrast, the defendants are not required to file affidavits. But where they do of course they're going to be cross-examined.
And so there's automatically a strategic and tactical element to that about whether you're going to file evidence, whether you're going to expose representatives of the defendant to cross-examination and potential documentary disclosure at believe stage, or whether you're going to simply attack the plaintiff's motion based on the record put in by the plaintiff.
And so you have to consider that particularly in the context of a cross-border case because to the extent that it may be either advantageous or necessary to defend the leave motion on the Canadian side, you're going to be creating evidence and cross-examination transcripts and potentially document disclosure that could be used by the US plaintiffs.
Let me just make a few brief comments then about the certification motion, which is often the certification motion is a feature of any class action. Of course, not just securities class actions. But in the securities class action context, the certification motion often has what I might call a back seat role. It's often heard together with the leave motion, and it's often effectively determined by whether the leave motion succeeds.
In other words, if the leave motion succeeds, it's very likely that the securities class action is going to be certified. And if the leave motion doesn't succeed, then there's basically nothing to certify.
And so that's a thumbnail sketch up to that point on the Canadian side. Let's turn things over to Matt for an overview of US procedure.
MATTHEW SCHWARTZ: Thanks, Mark. I think I'll just highlight the differences between the US and the Canadian procedure. In the United States, the claims that are based on secondary market purchases of securities are governed primarily by section 10b of the Securities Exchange Act of 1934.
And the major differences I think between the US and the Canadian legal regimes here are that the US statute requires the plaintiffs to plead, and then ultimately to prove that there was fraudulent intent involved, and that can be either knowledge or extreme recklessness.
And also, the United States unlike Canada does not have damages caps on what the plaintiffs can ultimately recover. Typically, there is a practical damages cap namely the entire market cap dropped due to the stock price decline. But there certainly is no much narrower damages cap like there is in Canada.
In the United States, the main event and what sort of will determine the outcome of almost all securities class actions is the motion to dismiss. In the US, we go through a process where the court picks the lead plaintiff. It's nothing as contentious as it is in Canada.
Basically, the law firm that can find the institutional investor typically that has lost the most money as a result of the price decline is selected as the lead law firm and their client is selected as the lead plaintiff. And that typically will take a couple of months to resolve.
They'll then put in a complaint, which will typically flush out. A lot of the theories that may have been put forward by various plaintiffs beforehand.
The motion to dismiss is almost always the best chance for a defendant to end the case without any liability or settlement or significant legal fees due to discovery. And even if the case is not dismissed, the defendant can often be successful in significantly narrowing the claims and narrowing the exposure that the company or the individual defendants have.
If the motion to dismiss is denied largely or even in part, you then move on to discovery, which we'll talk about in a little bit. But that's going to lead to usually substantial costs and discovery and almost always a settlement of the claims prior to a jury trial.
So the motion to dismiss as I said is the main event. And what the motion to dismiss does is it test the adequacy of the allegations in the complaint itself. Typically, the defendants are limited to what's in the complaint and then also certain judicially noticeable documents, where there really can be no dispute about the contents of those documents.
And basically, what the defendant said is even if you accept everything that the plaintiffs have said in their complaint is true, they still have not played a viable securities class action claim. There are a lot of different popular defenses in the United States. Typically the strongest one is that the complaint fails to plead the required fraudulent intent.
Under the Reform Act, that Congress really tightens what's required in order to plead a plausible claim of fraudulent intent. And where we see dismissals granted, it's usually on that issue.
Though of course, there are issues that the statement simply wasn't false or whether or not the statement was false it didn't cause the decline. In terms of discovery, that's also an area that's a little bit different in the United States and Canada. Both when the discovery occurs.
In the United States, it doesn't occur until after the motion to dismiss is decided upon. And in Canada, it often happens before the motion. And it happens before the motion for class certification in the United States.
In the United States, we have very broad discovery. And I think probably a lot of you have had to live through that document production in the United States can be very substantial. The very time intensive process and securities class actions, especially ones that spend a large amount of time. It can often cover hundreds of thousands or even millions of documents.
And of course, the document production led then leads into depositions where current and former employees executives board members can often be forced to sit for seven hours and answer questions. And of course, the preparation time that goes into making sure that they are properly prepared for those depositions can also be substantial.
So the discovery can be important. It certainly will frame how the parties view their chances in the case going forward. The credibility of the witnesses what the internal documents say. And those need to be handled properly by counsel and in coordination with counsel and Canada as well. Because obviously discovery in the United States could affect the way that the Canadian plaintiffs look at their claims as well.
There's also the issue of cross-border discovery. And I turn that over to Allan who has some experience in that the area, where plaintiffs in Canada are seeking discovery in the United States.
ALLAN COLEMAN: Thanks, Matt. And so as Matt stated, in the US, there's no entitlement to discovery unless the stay is lifted until after the motion to dismiss is heard and decided. In Canada, the typical rule would be that there would be no discovery prior to leave and certification being determined.
And so you have a situation that if you have parallel cross-border litigation, that discovery should be stayed effectively until after the preliminary motions are determined. However, there is an idiosyncrasy that is caused by provision in the US code section 1782, which allows for a foreign plaintiff to obtain discovery in respect of, for example, a Canadian class action in the US even in circumstances where the plaintiff could not obtain such discovery if the witness was resident in Canada.
And this is an issue that is still being played out in the courts in Canada with respect to whether it's appropriate for Canadian plaintiffs to obtain such discovery in the US when they would not be otherwise entitled to it if the witness had been in Canada. But it is something that you should be aware of, particularly, in circumstances where the nature of the corrective disclosure was such that you have a lot of former employees that have potentially relevant information that are resident in the US. And with that, I'll turn it over to Matt to talk about certification in the US.
MATTHEW SCHWARTZ: So I'll just touch on class certification and then the settlement process which typically in the last two major aspects of the US securities class action. Class certification in the United States typically goes concurrently with discovery production of documents or the depositions. It's a pretty key issue. It's really one of the last places that a defendant can get rid of a case before you get to trial if you haven't been completely successful on the motion to dismiss.
And that's because as a practical matter, if the court doesn't certify a class, it's economically implausible for either the plaintiff or plaintiffs counsel to go forward on an individual basis. Typically even a large institutional investor will have tens or hundreds of thousands worth of potential damages at the top end. Whereas trying one of these cases for the plaintiffs' firms will cost them millions of dollars to go forward. So the recovery just isn't there.
And effectively, if you can get a class, a class certification motion denied, that's more or less going to end the case from any significant perspective. There's been a lot of recent case law in the United States dealing with class actions. In the securities class action context and in other contexts. That have made it a little bit more difficult for the plaintiffs to certify a class.
But the bottom line is that typically classes are certified if they get past the motion to dismiss. I think about 74% of cases that survived the motion to dismiss and got to the class certification stage had classes that were certified in 2015.
And so I would say that it was about 74% get to that stage, and then 83% are actually certified. So there are opportunities to defeat class certifications in certain situations. But I think that people should go into class certifications knowing that it's sometimes a plaintiff friendly process.
The last thing I think that's important to note about US securities class actions is that almost all US securities class actions are dismissed or they're settled prior to trial. This appears to be the trend in Canada though of course the Canadian securities class action regime is still in its relative infancy compared to the United States regime.
The vast majority of US settlements are reached through mediation. The bottom line is there's a lot of money at stake and unlike many litigations. It's often not worth it for the company to take the exposure, or for the plaintiffs firm to walk away with nothing after they put their investment in.
Mediation is an extremely important process. It's important in the United States because it helps to bring the parties together it can often help the DNO insurers better understand what the settlement posture is.
And the court also has to approve in class action situations whether or not the settlement is fair, and looking to an arm's length mediator who brokered the agreement will often give the court comfort that the settlement is fair. In all of these settlements that I've seen, there's a settlement made without any admission of liability by the company or by any of the individual defendants. And that's obviously good from a reputational standpoint.
And typically, in the United States, we have this rule of thumb that settlements will be between 2% and 4% of the company's overall market cap drop that was caused by whatever the plaintiffs are alleging was fraudulent. This can vary significantly to be well below the 2% or you can be above the 2%. And that's going to be based on the strength of claims the size of the market cap drop.
Any insider trading that's there. Any government investigation. And of course, how far along you are in the litigation process.
In the United States, we see typically that the further you are along in the process, the more expensive it is to settle securities class action. I think that gives you an idea of the US process. And I would just turn it back to Mark for any concluding thoughts that he has.
MARK GELOWITZ: Thanks, Matt. I think just to wrap things up. What we've seen from this discussion I think is that if you're faced with a securities class action, a large settlement or going all the way through to trial are not the only options, they're not the only plausible outcomes in both Canada and the US.
There are meaningful preliminary motions that do give defendants opportunities to either narrow or completely dispose of a securities class action at an early stage. And in our experience, I think it's fair to say, on both sides of the border. The company's chances of succeeding will depend quite a bit on the extent to which steps have been taken immediate steps to investigate and respond to the issues.
And this success also defense depends on effective teamwork between the company, its in-house counsel, and its Canadian, and American litigation counsel. And part of the bottom line here is that the unfortunate fact is that securities class actions are a risk even if you follow best practices.
The plaintiffs law firms are not necessarily looking for meritorious cases. They're looking for cases that simply arise from a stock price drop. And you can be vulnerable to that. The company can be vulnerable to that without any misrepresentation, or wrongdoing, whatsoever.
So if you do ever find yourself in that situation, we had [INAUDIBLE] or our friends at Sullivan Cromwell would be certainly happy to help. And of course, any questions that may have arisen from the discussion today, feel free to reach out to us either individually or collectively. And we'd be happy to help you with that as well.
So thanks very much to Matt in New York. And thanks to all of our attendees today. We hope this was a helpful discussion.