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Ontario Court of Appeal clarifies Securities Act leave test for secondary market claims


Introduction

Part XXIII.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5 (“Securities Act”) enables aggrieved shareholders to bring a statutory action for secondary market misrepresentation against issuers, and their directors and officers, without having to prove reliance on an individual basis. As a winnowing mechanism to ensure that unmeritorious claims do not proceed under this simplified means of establishing liability, s. 138.8 of the Securities Act also requires that a plaintiff obtain leave of the Court in order to proceed with a statutory misrepresentation claim. Specifically, the Court must be satisfied that “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.” Although this legislative provision is now over a decade old, the jurisprudence is still relatively under-developed, and there has been considerable uncertainty with regard to the appropriate application of this “reasonable possibility” test for leave. The Ontario Court of Appeal's recent decision in Green v. Canadian Imperial Bank of Commerce, 2014 CarswellOnt 1143 (Ont. C.A.); additional reasons 2014 CarswellOnt 5625 (Ont. C.A.); leave to appeal allowed 2014 CarswellOnt 10791(S.C.C.); leave to appeal allowed 2014 CarswellOnt 10793 (S.C.C.); leave to appeal allowed 2014 CarswellOnt 10797 (S.C.C.) and its companion cases (“Green”, leave to appeal granted by the Supreme Court of Canada) was intended to resolve the confusion over the Securities Act leave test.

On November 19, 2013, the Monitor reported on Musicians' Pension Fund of Canada (Trustee of) v. Kinross Gold Corp., 2013 CarswellOnt 15676 (Ont. S.C.J.); affirmed 2014 CarswellOnt 17766 (Ont. C.A.) (“Bayens”), in which Justice Perell denied leave and certification of a proposed securities class action involving allegations of misrepresentations made by the defendants in their public disclosure documents (see Issue 2013-24—Special Focus—“Ontario Court denies leave and certification in Bayens v. Kinross Gold Corp”). The plaintiffs appealed Justice Perell's decision in Bayens to the Ontario Court of Appeal on several grounds, including that Justice Perell had misapplied the leave test from Green, and that he had misapprehended the effect of the leave decision on the common law claims for misrepresentation. The Court of Appeal panel, consisting of Justices Hoy, Cronk and Pepall, upheld the result and the majority of Justice Perell's reasoning with regard to the application for leave, but did not adopt his reasoning with regard to the effect of the denial of leave on the certification analysis for the common law misrepresentation claims. Justice Cronk's reasons also restated and clarified the leave test established in Green.

Background

As previously reported, the plaintiffs commenced a proposed securities class action on March 12, 2012, seeking $5 billion in damages from Kinross Gold Corporation (“Kinross”) and four individuals who acted as officers or directors of Kinross, for alleged misrepresentations by the defendants in their public disclosures. The claim was brought on behalf of those who purchased Kinross shares between May 3, 2011 and January 16, 2012.

The proposed class action advanced statutory claims for misrepresentation pursuant to ss. 138.3(1) and (2) of the Securities Act and failure to make timely disclosure pursuant to s. 138.3(4) of the Securities Act, as well as a common law claim for negligent misrepresentation. The plaintiffs' claims rested on three core allegations, namely that:

1. in May 2011, Kinross failed to report a write down of its goodwill associated with two West African gold mines (the Tasiast mine in Mauritania and the Chirano mine in Ghana) (the “Goodwill Misrepresentation”);

2. that Kinross failed to disclose that its drilling program for the Tasiast mine had revealed high amounts of low- grade ore; and

3. that Kinross misrepresented that the expansion project for the Tasiast mine remained on schedule (the “Expansion Misrepresentation”).

The certification and leave motions were heard together before Justice Perell on October 22–24, 2013. In his decision, released November 5, 2013, Justice Perell denied leave for the statutory claims and denied certification for the common law misrepresentation claims.

Of particular interest in Justice Perell's decision were rulings related to:

1. the evidentiary threshold that the plaintiffs were required to meet in order to satisfy the leave requirement for
advancing a claim under Part XXIII.1 of the Securities Act;

2. the reformulation of the leave test by phrasing the “reasonable possibility of success” requirement under s. 138.8(1)(b) of the Securities Act in the negative; and

3. bootstrapping the certification test onto the leave test by determining what impact denial of leave for statutory claims would have on the “some basis in fact” test for certifying common law misrepresentation claims.

With regard to the first issue, Justice Perell noted that the leave test is not a mere “road bump” and that, since it is a merits-based test, the Court is able to make appropriate findings of fact and assessments of credibility. In order to give effect to this test, Justice Perell held that the Court's weighing of evidence was justified, especially since affidavit evidence and cross-examinations were available to parties. Justice Perell qualified this ruling by explaining that the weighing of evidence on a leave motion should necessarily take into account whether possible evidence not yet available to the plaintiff could come to light after discoveries, which could have an effect on the Court's determination of the issues under scrutiny.

Regarding the second issue, Justice Perell phrased the “reasonable possibility of success” argument in the negative, with the effect of shifting the crux of the inquiry from the positive obligation of the plaintiff to meet the burden of a “reasonable possibility of success”, to focusing on seven different ways in which leave could be defeated. For example, using Justice Perell's reformulated test, leave will not be granted if “the defendant disproves the truth of the facts of the plaintiff's claim”.

Finally, regarding the third issue, Justice Perell found that, if leave is not granted for the statutory claim, then it necessarily follows that common law misrepresentation claims based on the same facts and allegations would also fail to satisfy the class definition, common issues and preferable procedure criteria for certification, and that a proposed common law securities misrepresentation class action claim divorced of a statutory misrepresentation claim under the Securities Act would not meet the preferable procedure criterion.

In the end, Justice Perell only allowed the common law misrepresentation claim of the plaintiff to advance as a single claim (not a class proceeding).

Court of Appeal

The plaintiffs appealed Justice Perell's decision on three grounds:

1. that Justice Perell erred in finding that there was no reasonable possibility that a claim based on the Goodwill Misrepresentation could succeed at trial;

2. that a claim based on the Expansion Misrepresentation should have been considered despite not having been plead; and,

3. that certification of the common law claims for misrepresentation should not have been denied on the basis that leave for the statutory misrepresentation claims was not granted.

Leave motion rulings

The Court upheld Justice Perell's interpretation and application of the holding from Green. Although the “reasonable possibility” standard is the same legal test as the “discloses a cause of action” standard from s. 5(1)(a) of the Class Proceedings Act, 1992, S.O. 1992, c. 6, they are applied in different ways due to the differing evidentiary contexts of the leave and certification motions. The Court found no issue with Justice Perell's reasoning that the existence of a written evidentiary record in a leave motion necessarily leads to a higher evidentiary standard than at a certification motion when the Court simply assumes the truth of the facts as pleaded. The Court also noted approvingly Justice Perell's observation that, because a leave motion involves only a written evidentiary record, it would still “not [be] desirable to decide reasonably arguable issuesof fact or of mixed fact and law” [emphasis added].

The Court also dismissed the plaintiffs' argument that the motions judge improperly undertook a trial-like weighing of technical evidence with regard to the Goodwill Misrepresentation. It ruled, instead, that it was reasonable, in light of the nature of the evidence, for Justice Perell to find that no new or forthcoming evidence might shed more light on the issue of Kinross' 2011 drilling program. Since the issues related to the Goodwill Misrepresentation were not reasonably arguable, Justice Perell's ruling that the evidence proffered by the plaintiff at the leave motion had not met the “reasonable possibility of success” requirement was not disturbed. The Court of Appeal was not, however, in support of Justice Perell's negative re-framing of the “reasonable possibility” requirement, observing that it was simply not a helpful analysis.

Justice Perell's decision to dispose of the plaintiffs' Expansion Misrepresentation claim was also upheld. The Court noted that it is settled law that issues in a civil action must be decided within the boundaries of the pleadings. The Expansion Misrepresentation claim was never pleaded, nor did the plaintiffs seek leave to amend their pleadings before the leave motion or the appeal. Instead, the claim was only advanced in the plaintiffs' factum on the leave motion and was therefore not properly brought.

As such, the Court of Appeal refused to reverse Justice Perell's decision to deny leave for the statutory misrepresentation claims advanced by the plaintiffs.

Certification motion rulings

The Court of Appeal upheld Justice Perell's refusal to certify but characterized his approach to the certification analysis as an error in principle. Whereas Justice Perell ruled that failure to meet the leave test under the Securities Act automatically indicates that there can be no basis in fact to satisfy the class definition, common issues and preferable procedure certification criteria, the Court of Appeal—having already ruled that the evidentiary contexts of the leave test and the certification test are different—held that failure to meet the leave test should only be seen as a relevant factor with regard to preferability of procedure and does not necessarily mean a case cannot be certified.

Further, the Court noted that Justice Perell's decision was released prior to the Supreme Court of Canada rendering its decision in Fischer v. IG Investment Management Ltd., 2013 CarswellOnt 17258, 2013 CarswellOnt 17259 (S.C.C.) (“Fischer”). In Fischer, the Supreme Court reiterated that the preferability inquiry is to be conducted through the lens of the three principal goals of class actions (namely, judicial economy, behavior modification and access to justice), and that both substantive and procedural aspects of access to justice must be assessed in determining whether a class action is the preferable procedure. Fischer also provided Courts with a rubric of specific questions for the preferability analysis. Thus, the Court decided that Justice Perell was not only incorrect in his approach to certification, but that his preferability analysis was itself fundamentally flawed.

Conducting its own preferability analysis, the Court noted that the reliance which is a critical component of common law negligent misrepresentation is a claimant-specific issue requiring individualized evaluation and fact-finding. Due to this, and the fact that aggregate damages could not be used to assess the extent of damages until such a time that liability had been found against each plaintiff, certification of the common law misrepresentation claims would result in an inefficient and unmanageable class action. Taking those considerations, as well as the failure to meet the leave test, into consideration, the Court found that a class action was not the preferable procedure and declined to certify the case.

Commentary

Merits-based assessment for leave

The Court's leave decision in Bayens is primarily a confirmation of the leave test established in Green. Given the unusual factual situation, however, Bayens should be read narrowly and may be of limited precedential value.

In this particular case, the plaintiffs' evidence on the motion suffered from what Justice Perell described as “mutually exclusive mechanical and analytical errors, each of which caused the plaintiffs' argument to implode”. These errors led Justice Perell to conclude that there was no possibility for the plaintiffs to adduce further evidence at a later stage in the action which might shed further light on the Goodwill Misrepresentation claim, and that there was therefore no reasonable possibility of success for that claim. Justice Perell's findings meant that in essence, the plaintiffs' case was so contradictory that it obviated the need for either the motion judge or Court of Appeal to deal with the thornier issue of how to apply the merits-based test at such an early stage of the proceeding. A Court dealing with a more logically consistent case, facing the possibility that a more robust evidentiary record may be developed through discovery, may find little guidance in Bayens regarding how to account for “reasonably arguable issues of fact or of mixed fact and law” in assessing whether to grant leave.

This decision in Bayens also does nothing to resolve the fundamental problem previously identified with the new leave test (see Issue2013-24—Special Focus—“Ontario Court denies leave and certification in Bayens v. Kinross Gold Corp”), which is that plaintiffs are expected to engage in a merits-based leave motion without any access to discovery, leaving it open to defendants to shield the very sources of evidence which the plaintiff may require to meet this higher evidentiary burden. If the merits-based leave test is truly to function as a “relatively low threshold”, it will be necessary for the Court of Appeal to fashion a clearer road map for how to weigh and assess evidence in a way that fairly acknowledges the limitations on plaintiffs at the leave stage.

Framing the “reasonable possibility of success”

The Court of Appeal's rejection of the framing of the “reasonable possibility of success” requirement in the negative is a welcome qualification to Justice Perell's decision. Rather than being a simple restatement of the same test, the negative reframing introduced a substantively new element of defendants being able to disprove the authenticity of plaintiffs' claims. The ability to disprove would raise a host of question regarding the appropriate standard of “disproof”, how the ability to disprove interacts with plaintiffs' burden of proof, and so on. This uncertainty is especially dangerous considering that it could exacerbate the already unfair knowledge imbalance, since defendants would be under no obligation to disclose all relevant evidence in their exclusive possession and/or control, and on top of that could cherry pick evidence specifically to disprove the truth of the facts of plaintiffs' claims.

Granting of leave is not a necessary condition for certification of common law misrepresentation claims

The Court of Appeal's decision that the granting of leave is not a necessary condition for certification of common law misrepresentation claims is also important. Establishing a higher evidentiary threshold on leave motions is only sustainable if it is made clear that this higher standard will not be superimposed onto the “some basis in fact” test required for certification. Moreover, this decision accords with Fischer, which requires that Courts undergo a principled and rigorous analysis on preferability which involves many factors. With common law securities misrepresentation claims potentially being snuffed out when statutory leave is not granted, it becomes even more important for the Courts to respect the “relatively low threshold” of the leave test.

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