Ontario Court of Appeal Provides Guidance for Securities Class Actions Limitation Periods

The Court of Appeal for Ontario released its decision in Sharma v. Timminco Limited, confirming that plaintiffs seeking to commence actions under Ontario's Securities Act for misrepresentations by public companies in their secondary market disclosures must obtain judicial leave within three years of the misrepresentation.

In May 2009, the plaintiff commenced a putative class action for damages in excess of $500 million on behalf of a class of persons who acquired Timminco securities between March 17, 2008 and November 11, 2008. The Statement of Claim asserts claims for negligence and negligent misrepresentation and simply “mentions” that the plaintiff intends to deliver a notice of motion seeking an Order permitting the plaintiff to “assert” secondary market claims pursuant to s. 138.3 of Part XXIII.1 of the Ontario Securities Act. Pursuant to s. 138.8 of the Securities Act, “no action may be commenced under s. 138.3 without leave of the court.” Section 138.14 of the Securities Act provides that an action under s. 138.3 must be commenced within three years of the misrepresentation.

Facing the potential expiry of the three-year limitation period and having not brought a leave motion to commence an action under s. 138.8, in March of 2011 the representative plaintiff commenced a motion for a declaration that the limitation period in s.138.14 was suspended by s. 28(1) of the Class Proceedings Act (CPA) upon issuance of the Statement of Claim. Section 28(1) of the CPA provides for the suspension of a limitation period applicable to a cause of action asserted in a class proceeding for a proposed class of plaintiffs.

On March 31, 2011, Justice Paul Perell granted the plaintiff's motion and declared that the limitation period in s. 138.14 of the Securities Act was suspended pursuant to s. 28(1) of the CPA, effective as of the date of the issuance of the Statement of Claim on May 14, 2009.

In so finding, Justice Perell held that as long as “a statement of claim in a proposed class action mentions a proposed cause of action provided for under Part XXIII.1 of the Securities Act” (emphasis added) and an intention to bring a leave motion, s. 28 of the CPA becomes operative and suspends the limitation period in s. 138.14 of the Securities Act, regardless of whether leave of the court to commence the action has been obtained. The Timminco defendants, along with the other defendants, appealed the decision of Justice Perell.

The Court of Appeal for Ontario allowed the defendants' appeal and dismissed the plaintiff's motion for an order declaring that the limitation period in s. 138.14 of the Securities Act is suspended.

The Court of Appeal found that s. 28 of the CPA does not operate to suspend the limitation period applicable to the statutory cause of action for misrepresentation provided by s. 138.3 of the Securities Act merely because the representative plaintiff has mentioned that he or she intends to bring a motion for leave to assert a secondary market claim under Part XXIII.1 of the Securities Act. The Court of Appeal concluded that “the grammatical and ordinary meaning of the s. 28(1) suspension provision is that without leave being granted the cause of action cannot be said to be asserted in a class proceeding.” In other words, the representative plaintiff must succeed on the leave motion under s. 138.3 before s. 28(1) of the CPA is engaged.

The Court of Appeal found that such an interpretation was consistent with both s. 28(1) of the CPA and s. 138.14 of the Securities Act. The purpose of s. 28(1) of the CPA is to protect class members from the operation of limitation periods without the need to pursue individual actions in order to avoid being out of time until it has been determined whether they can get access to justice through the class proceeding.

The Court of Appeal held that since the plaintiff's class proceeding gives class members no possibility of access to justice for their s. 138.3 causes of action where leave has not been granted, the purpose of s. 28(1) of the CPA does not require that the limitation period applicable to these causes of action be suspended.

In fact, the Court of Appeal found that a contrary interpretation would reflect a purpose that cannot have been intended by the legislature as it would suspend the applicable limitation period for the s. 138.3 cause of action for class members but a similar suspension would not be available for an individual plaintiff suing in an individual capacity.

The Court of Appeal also found that its interpretation was consistent with the purpose of s. 138.14 of the Securities Act which was designed to ensure that secondary market claims proceed with dispatch, requiring leave motions to be brought expeditiously.

In summary, the Court of Appeal has made it clear to class action representative plaintiffs and their counsel that the leave order must be obtained within three years.

The plaintiff's counsel is seeking leave to appeal to the Supreme Court of Canada.

Timminco Limited and certain of its directors and officers were represented by Alan D'Silva, Patrick O'Kelly, Mark Walli, Dan Murdoch and Lesley Mercer of Stikeman Elliott LLP.

The defendant John Walsh, a former director, was represented by Robert Staley, Derek Bell, and Michael Paris of Bennett Jones LLP.

The defendants Photon Consulting LLC, Rogol Energy Consulting LLC and Michael Rogol were represented by Paul Le Vay, Brendan van Niejenhuis and Fredrick Schumann of Stockwoods LLP.

The plaintiff was represented by Michael Spencer, Won Kim and Victoria Paris of Kim Orr Barristers P.C.