Justice George Strathy released Reasons for Decision denying leave to proceed with a claim under Part XXIII.1 of the Securities Act, and denying class certification, in Gould v. Western Coal Corporation, 2012 ONSC 5184, on September 14, 2012. The decision contains guidance on a number of issues, including the test for leave under Part XXIII.1, the due diligence defence, expert evidence, conspiracy and oppression.
The claim arose out of Western Coal Corporation's 2007 Second Quarter Financial Statements, which were released on November 15, 2007, for the period ending September 30, 2007. Western Coal, a British Columbia corporation whose shares traded on the TSX, was involved in the exploration, acquisition and development of coal mining properties in British Columbia. In late 2007, Western Coal had commenced coal mining operations but had not yet achieved full production. It had also defaulted on debt ratio covenants under its principal lending facility with a syndicate led by BNP Paribas. The defaults had arisen due to a number of factors which included fixed coal contracts, the deterioration of the US dollar (the currency used to pay for Western's coal) against the Canadian dollar (the currency used to pay Western's expenses), production challenges and the deterioration of capital markets. These defaults led BNP to exact increasingly stringent financing terms from Western. The BNP facility was secured by the assets of Western Coal's principal mine.
Western Coal and its major shareholder, Cambrian, attempted to secure new sources of financing and also to renegotiate the terms of the financing with BNP to alleviate the challenges Western Coal faced under the BNP facility through the fall of 2007. These efforts were unsuccessful.
When Western Coal released its 2007 Q2 results on November 15, Western Coal faced a commitment to pay BNP $15 million by November 30. Western Coal did not have the funds to make this payment. As a result, it was at risk of BNP acting on security if the payment was not made. In these circumstances, Western Coal's auditor required the Company to state in the notes to its financial statements that while it had been successful in raising money in the past and was optimistic it would be able to raise the needed $15 million, there was “substantial doubt about the ability of the Company to meet its obligations as they come due.” Western Coal followed the advice of its auditor and released its 2007 Q2 financial statements with going concern language prepared by the auditor. The announcement was followed by a precipitous decline in Western Coal's share price.
After the 2007 Q2 results were released, Western Coal engaged in an intensive effort to raise the funds required to meet its November 30 commitment to BNP. On November 22, Western Coal announced that it had reached an agreement to raise $30 to 40 million. According to Western, Audley European Opportunities Master Fund Limited had agreed to purchase $30 million of convertible debentures. An additional $10 million of convertible debentures were available to be offered through a private placement. The Audley financing included a requirement that an outstanding loan made by Cambrian to Western Coal in the amount of $5 million be amended so that it would not be due on the closing of the proposed financing. It also required Western Coal to negotiate terms to acquire a mining property known as Falls Mountain from Cambrian on terms that would be subject to approval by Western's shareholders.
The Audley financing closed on December 3 and the private placement on December 7, 2007. Western's share price increased in the period following these closings.
Wayne Gould held convertible debentures of Western Coal, and sold them on November 15, 2007, at a substantial loss after the release of Western Coal's 2007 Q2 results. After learning of the Audley financing and the fact that certain directors of Western Coal had purchased shares of the company between the release of the 2007 Q2 results on November 15 and the announcement of the Audley financing on November 22, 2007, Mr. Gould commenced a claim for securities misrepresentation under the Ontario Securities Act, conspiracy and oppression against Western Coal, its largest shareholder Cambrian, Audley, and Western Coal's individual directors. The claim alleged that Western Coal had intentionally misrepresented its financial condition in order to depress its share price and enable Audley and various insiders of Western Coal to acquire shares in the Company at a deflated price. It also alleged that the terms of the financing including the terms for amending the Cambrian loan and the acquisition of Falls Mountain were oppressive.
The plaintiff moved for leave to proceed with his claim under the Securities Act, and for class certification of misrepresentation, conspiracy and oppression claims. The Court's decision denying leave and certification is the first case under Part XXIII.1 of the Securities Act to deny leave on the merits of the claim.
The Court did not accept the plaintiff's argument that it was inappropriate to consider the extensive evidence adduced by the defendants on the leave motion. Given the seriousness of the allegations made by the plaintiff, the defendants were entitled to deliver evidence answering the allegations.
The Court also commented on the plaintiff's expert reports offered by a forensic accountant. The Court decided to give little or no weight to the report because they (1) offered opinions outside their proven expertise (2) purported to “weigh evidence, evaluate the credibility of witnesses and make findings of fact” based on speculation and in the face of contrary evidence; and (3) “engaged in blatant advocacy, making exaggerated, inflammatory and pejorative comments and innuendos, which were argument rather than evidence.” The Court concluded there was no reasonable possibility that the plaintiff could prove a misrepresentation in Western Coal's 2007 Q2 financial statements. The Court found that the Company disclosed both positive and negative factors in a manner that accorded with Generally Accepted Accounting Principles and followed the advice of its auditor. All reasonable efforts had been made to obtain financing, and after release of the financial statements the Company continued to search for the necessary financing from a number of different sources. The Audley financing was the product of a competitive process, and was not pre-arranged as alleged by the plaintiff. The plaintiff's case was “based purely on ‘speculation or suspicion rather than evidence',” the defendants had conducted a reasonable investigation, and leave was therefore denied.
Having found that Western Coal had not misrepresented its financial statements, the Court also concluded that the related claim for conspiracy was not suitable for a class proceeding. The conspiracy claim could not be certified because (1) the plaintiff had pleaded neither an intention to harm the plaintiff nor sufficient particulars of unlawful means used in furtherance of the alleged conspiracy; and (2) given the Court's finding with respect to the misrepresentation allegation, there was also no factual basis for the existence of common issues arising from the conspiracy claim. The oppression claim was not certified because the Court found that the British Columbia Business Corporations Act gives exclusive jurisdiction over claims of oppression by British Columbia companies to the courts of British Columbia.
The plaintiff is appealing the decision.
The plaintiff was represented by James Orr, Michael Spencer, Megan McPhee and Ahmad Erfan of Kim Orr Barristers P.C.
Western Coal Corporation and Cambrian Mining Plc were represented by Benjamin Zarnett and David Conklin of Goodmans LLP.
The Audley defendants were represented by Matthew Milne-Smith of Davies Ward Phillips & Vineberg LLP.
Robert Chase, John Brodie and John Hogg were represented by David O'Connor and Sean Grayson of Roy Elliott O'Connor LLP.
Charles Pitcher was represented by David Di Paolo and Nicole Westlake of Borden Ladner Gervais LLP.
John Byrne and John Conlon were represented by Joseph Groia and Kellie Seaman of Groia & Company.