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Ontario Court of Appeal Holds that Companies Trading Exclusively on Foreign Exchanges Can Be “Responsible Issuers” in Ontario

Author(s): Mary Paterson, Kevin O’Brien

Apr 4, 2012

On March 30, 2012, the Court of Appeal for Ontario released its decision in Abdula v. Canadian Solar Inc., 2012 ONCA 211. The Court held that an issuer’s shares need not be traded on a Canadian exchange for that issuer to be subject to the liability regime under Ontario’s Securities Act for misrepresentations made in the secondary market, provided that issuer has a “real and substantial connection” to the province.

Canadian Solar is a putative class action commenced by an Ontario resident seeking to hold Canadian Solar liable for alleged misrepresentations made with respect to its financial results in press releases, financial statements and an annual report. The issue before the Court was whether Canadian Solar was a “responsible issuer” as defined in Part XXIII.1 of the Securities Act (which establishes the secondary market misrepresentation liability regime). The phrase “responsible issuer” is defined in section 138.1 as (a) a reporting issuer or (b) any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded. Canadian Solar was not a “reporting issuer” in Ontario. Further, the question of whether it had a “real and substantial connection to Ontario” was not under appeal. It was therefore the narrow issue of whether the second part of the definition of responsible issuer in section 138.1 may be interpreted so as to apply to issuers that do not trade on any Canadian exchange that was before the Court of Appeal.

Canadian Solar argued that the definition of responsible issuer should be implicitly read as requiring an issuer’s shares to be “publicly traded in Canada” such that an issuer whose shares traded exclusively on foreign exchanges would not be caught by the definition and therefore could not be subject to the regime under Part XXIII.1, regardless of whether it had a “real and substantial connection to Ontario”.

Canadian Solar’s appeal was dismissed. Writing for the Court, Hoy J. held that the definition of responsible issuer did not require that the issuer’s securities be publicly traded in Canada. The Court relied on the plain and ordinary meaning of the provision read in the context of the Act as a whole, the object and intention of the legislature in enacting Part XXIII.1, and the legislative history of the secondary market misrepresentation provisions.

In addressing concerns about the extra-jurisdictional application of provincial law to companies whose shares do not trade over Canadian exchanges, Hoy J. cited the strong connections between Canadian Solar and Ontario. She held that “[t]erritorial limits of provincial authority are respected by applying Ontario law to Canadian Solar in these circumstances. Canadian Solar ... is a [Canada Business Corporations Act] corporation with its registered office, its principal executive office and business operations in Ontario”. She further cited the fact that “at least some of [the secondary market disclosures alleged to contain misrepresentations] emanated from Ontario”.

The Court’s decision makes it clear that non-reporting issuers whose shares do not trade anywhere in Canada may nevertheless find themselves subject to Ontario’s liability regime for misrepresentations made in the secondary market, provided however that the issuer has a “real and substantial connection” to Ontario. Although the Court of Appeal made it clear that the factual determination as to whether Canadian Solar had a real and substantial connection to Ontario was not before it, it agreed with the motion judge’s determination that such a connection existed. The particular factors that connected Canadian Solar to Ontario were clearly considered to be significant by the motion judge. What remains to be determined in future cases is the extent of the connections that other foreign issuers will be required to have with the province before they will be considered “responsible issuers” for the purposes of Part XXIII.1 and whether those connections must relate in some way to the subject-matter of the claims advanced. It is possible that the much-anticipated decision of the Supreme Court of Canada in Van Breda v. Village Resorts, which could rearticulate the test for jurisdiction in Canada, may influence such further decisions.

A copy of the decision can be found here.

For more information, please contact Andrea Laing, Mary Paterson or Kevin O’Brien