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A PANORAMIC VIEW OF SECURITIES CLASS ACTION SUITS IN CANADA
International companies cross-listed in Canada and their American lawyers need to start thinking of Canada as more than just an occasional foreign outpost for litigation (and a great place to visit). A recent escalation in securities class actions in Canada presents new risks for such companies regarding their secondary market disclosure, and in-house and outside counsel need to educate themselves about that issue specifically, as well as about the risks and procedures of Canadian class action litigation in general.1
This article considers that trend in securities class actions within a broader discussion of some of the essential features and the systemic limitations of Canadian class action procedure.
SECURITIES CLASS ACTIONS IN CANADA: CONTEXT
American counsel will find the Canadian approach to public issuer disclosure familiar: the Supreme Court of Canada has made it clear that “disclosure lies at the heart of an effective securities regime,”2 which must maintain a balance between the needs of investors and the burden on public issuers.3 One forum regulating that balance is the court system, through lawsuits challenging the scope, timing and/or accuracy of public issuer disclosure.
A recent series of decisions regarding a new form of statutory securities class actions has provided new and significant leverage to investors. These decisions, along with the procedural deficiencies of Canada's class action system, present significant challenges to public issuers listed in Canada.
CANADA'S CLASS ACTION FRAMEWORK
Simply put, the Canadian court system is fractured: different investors can simultaneously file a claim in any or all of Canada's 12 provinces and territories that have class action legislation.4
Most Canadian class actions are commenced in Ontario for a proposed national opt-out class, or in British Columbia for a proposed national opt-in class, or in Québec for a provincial or a national class. In some instances, cases are started in all locations (and/or other jurisdictions) by local firms acting in concert, or in competition.
In the United States, a Multi-District Litigation (MDL) panel will bundle together similar cases commenced in the Federal Court in multiple locations and assign them to one judge, who will then appoint one or more lead plaintiff's counsel to proceed with the single matter.
The Canadian system is dismayingly less functional for defendants. Canada is a federal state, with a division of powers between the federal and provincial levels of government. Although there is a Federal Court, its limitations are such that the vast majority of all commercial cases, including securities class actions, fall to be determined in the provincial Superior Courts.5 Indeed, based on the constitutional division of powers, the power to administer the civil justice system falls to the provinces, and each province's trial courts therefore have an existence autonomous from their counterparts.
Nine of the 10 provinces and all three of Canada's territories follow a common law system. Québec's legal system, however, is based on a civil code. Therefore, many basic principles of contract and civil liability in Québec will be foreign to American clients and their counsel. Matters are further complicated by the reality that most cases in Québec are litigated in French. Even in cases where much of the evidence is in English, arguments will often be made and decisions usually rendered in French. Class actions law and procedural rules are different in many respects from what most American clients expect.
COMPETING CASES ACROSS CANADA
In the absence of an MDL system, it is possible for a Canadian defendant to face multiple class actions simultaneously filed by various firms in different provinces (with different legal regimes) in respect of the same or similar complaints. As discussed below, the options for defendants to narrow the range of competing cases are limited.6
1. Competing provincial actions
In any one province, only one purported class action can proceed on the same cause of action. If multiple actions are commenced within that province, the firms must decide which action will proceed and have the court issue an order to stay all other actions.7 Otherwise, counsel must have a case management judge appointed and argue a “carriage motion,” whereby the firms criticize each other's claim and litigation plan (all for the education of defence counsel), and have the judge decide which case will proceed. While unusual, these motions are increasing in frequency.8
2. Competing national actions
On a national basis, cases can be commenced in multiple provinces. (In one notorious instance, 17 actions were issued in nine provinces in 2007 concerning the same tainted pet food issue.) Ideally, all of the plaintiffs' firms will work together with the defendant to choose one action to proceed in only one province (thereby preserving the resources of all), with the other actions suspended informally or stayed by consent court order.9
However, if one firm decides to pursue cases in two provinces, or if competing firms cannot agree, a defendant could end up facing active actions in multiple provinces, each with its own case management judge, procedural rules and timetable and, in the case of Québec, its own system of law.10 If cases proceed in more than one province, two or more provincial courts could certify competing national classes. Furthermore, national classes can operate differently from province to province (e.g., on an opt-in basis, as is the case in Ontario, where a national class is permitted, subject to persons opting out, or on an opt-out basis, as is the case in British Columbia, where residents are bound to an opt-out class,11 while Canadians not residing in British Columbia may opt in).12
To emphasize the potential discordance for defendants, it is not even certain that a settlement in one province, approved by the Court for a national class, automatically has a preclusive effect on a competing action in another province.13
3. Competing international actions
Competing international actions pose an even more complex problem for defendants. When class actions are brought about on both sides of the border for the same facts, the differences between the two legal systems produce ongoing management issues in terms of procedure. For example, the inevitable immediate motion to dismiss in US class actions has no automatic counterpart in Canada, and the scope of depositions in the American system is quite different from that of the more restrained Canadian system.14
The complications for cross-border defendants have intensified as a result of decisions in the Ontario case of Silver v. IMAX Corp. (IMAX).15 The cross-listed defendant was sued in 2006 in both the Southern District of New York and in Ontario regarding allegedly misleading public disclosure. The actions proposed competing global classes of affected investors, regardless of residency and the stock exchange on which they purchased their shares (the TSX or NASDAQ).
The US plaintiffs were eventually required, after Morrison v. National Australia Bank Ltd.,16 to exclude from their purported class all purchasers on a foreign exchange.17 In the Canadian action, however, the plaintiffs went to the Ontario judge with the proposed global class definition and succeeded,18 thereby creating the possibility, for cross-listed companies, of facing disclosure class actions in which NASDAQ purchasers are simultaneously members of two classes in two countries.19
SECURITIES CLASS ACTIONS IN CANADA: AN EVOLUTION
The post-IMAX reality in Canada is a marked departure from the past, when disclosure litigation was rare, by either individual or class action. Legislative intervention has changed that situation.
Prior to 1993, investors across Canada considering litigation against a public issuer for negligent misrepresentation in its secondary market disclosure were almost universally restricted to a personal lawsuit — a prohibitively expensive option for an individual (or for a plaintiff's counsel pursuing the case on a contingency basis).20
In 1993, class action legislation was introduced in Ontario and gradually across the other common law jurisdictions.21 However, the introduction of legislation allowing groups to litigate disclosure issues in Canada did not have any meaningful impact. The major impediment to success was the requirement, at common law, that each Canadian investor prove that he or she personally received and relied upon the alleged misrepresentation of the company to his or her detriment. It was difficult for a proposed representative plaintiff to establish a “common issue” across a class of shareholders as to their individual reliance, particularly after an Ontario court, in a leading securities class action, specifically rejected the “fraud on the market” theory available to investors as representative plaintiffs in US class actions.22
In 2005, further to complaints from investor advocacy groups, Ontario passed Bill 198 to amend its Securities Act (“OSA”) to create a statutory cause of action for secondary market disclosure, with the stated intention of improving access to justice for investors with complaints regarding disclosure.23 Legislatures across Canada followed by amending their respective Securities Acts so as to provide investors with this new statutory enforcement tool.24 The principal feature of the new cause of action across the country was the elimination of the requirement for a class member to prove individual reliance.
The statutes included some counterweights to that significant advantage for investors. In keeping with the intention to encourage issuer compliance, rather than fund complete recovery for a class of former shareholders at the expense of current shareholders,25 the liability of the issuer was limited to 5 per cent of its market capitalization, and a modest cap was also established for recovery from individual officers and directors (in the absence of proof of their actual knowledge of the misrepresentation).
Furthermore, the statutes included an unusual provision by which investors must obtain leave from a judge to commence their action, by filing sufficient evidence to show a “reasonable possibility” of success at trial26 — a novel merits threshold in Canada. The proposed defendants can also file evidence at the “leave to proceed” motion to contest the allegation of a misrepresentation, and to invoke one or more of the statutory defences, such as proof that they conducted “a reasonable investigation” and had “no reasonable grounds to believe” that the published company statement contained a misrepresentation.27
Although these features suggest an attempt to balance the litigation rights of investors and public issuers, Canadian courts' early interpretations of the leave to proceed test did not achieve that goal.
SECURITIES LITIGATION — OUT OF BALANCE IN 2011
Typically, a Canadian investor will issue a claim alleging misrepresentation at common law by a public issuer in its public disclosure, with the stated intention of bringing on a motion for leave to proceed with the statutory misrepresentation cause of action as well, and to then certify the amended claim as a class action. To date, there have only been a handful of decided “leave to proceed” motions across Canada, and decisions in 2011 in the first two such actions (IMAX and Dobbie v. Arctic Glacier) highly favoured “the needs of the investor,” over public issuers.28
More specifically, the defendants in each case argued that the Court was to perform a “gatekeeper” role, by rigorously screening the evidentiary merits and pleading coherence of the proposed new statutory cause of action. However, the IMAX decision (which was followed, without developing the legal analysis, in the second case, Arctic Glacier) was strongly pro-investor in setting a low evidentiary threshold for the proposed plaintiff, in putting the onus on the defendants to prove the statutory defences, in its forgiving treatment of the pleading of the causes of action, and in its rulings on several common law issues as well. Significantly, the courts in each case also allowed the plaintiff investor to plead an important deviation from the Canadian common law on the individual reliance component of the tort of negligent misrepresentation. (The plaintiffs pleaded that, at trial, reliance could be “deemed” for every individual investor because a misrepresentation by a public issuer in an “efficient market” is actually absorbed into the share price, such that every investor purchasing shares is doing so with reliance upon all information in the marketplace.)29
Those two decisions strongly favored investor protection, with concomitant potential adverse repercussions for long-term shareholders in public companies, and for the capital markets at large.
Not surprisingly, perhaps, Canada is becoming an increasingly popular venue for securities class actions.30 More actions are being filed, and this trend shows every sign of sustaining itself. A recent study released by National Economic Research Associates, Inc. (NERA) showed that 15 securities class actions were filed in Canada in 2011 (the most ever in a calendar year), and that there were 45 active cases at the end of that year, which is more than four times the number of pending cases at the end of 2000 and twice the number of active cases as at the end of 2007.31
That upward trend is likely a direct result of the legislative changes described above, the entrepreneurial activity of a few plaintiffs' counsel firms and, one would surmise, the investor-friendly tone and substance of the IMAX and Arctic Glacier decisions.
SECURITIES LITIGATION: A REBALANCING IN 2012?
Three recent developments should provide some encouragement to the defence bar:
- Sharbern Holding, as interpreted in Arctic Glacier, which emphasized the requirement that an individual investor prove reliance at common law;
- Sharma v. Timminco, which enforced the statutory limitation period; and
- Western Coal, in which a leave to proceed motion was defeated.
First, public issuer defendants gained some ground in 2011 when the Supreme Court of Canada (“SCC”) addressed the common law test for materiality in disclosure to investors for the first time in Sharbern.32 The SCC arguably emphasized the importance of a balanced approach in assessing the volume and detail of disclosure by public issuers. It observed, for example, that an obligation to publish too much information is a burden for the company and has the potential to “bury investors in an avalanche of trivial information.”33
This “Goldilocks” message — not too little disclosure, and not too much disclosure – is meaningful. It weakens the momentum of plaintiffs at common law and renews focus on achieving a balance between investors and public issuers in the Courts.
More specifically, the SCC emphasized that, at common law, “actual reliance” is a necessary element for proof of negligent representation, and noted that the plaintiff had failed to adduce evidence of actual reliance upon the alleged misrepresentation and had instead relied upon a statutory deemed reliance provision. The SCC stated:
[The trial judge's] failure to differentiate between the common law and statutory claims in her reasons conveys the impression that the statutory deeming provision can establish common law reliance, removing the need for further trials. This approach would be problematic. I do not think a plaintiff may dip into a statutory cause of action for a helpful element in order to establish the “actual reliance” required to maintain a common law claim for negligent misrepresentation.34
The defendant in Arctic Glacier cited Sharbern in its motion seeking leave to appeal from the decision allowing the plaintiff investor in that case to plead the “efficient market theory” as an alternative to individual reliance. The leave to appeal judge agreed with the public issuer defendant that the decision was potentially deficient, based on the statements in Sharbern, and granted leave to appeal on that point. The judge also granted leave to appeal on the fundamental question of whether reporting issuers owe any disclosure duty of care to secondary market investors at all. That decision, while not tempering the lax treatment of the statutory threshold, did throw into some doubt the viability of common law claims for negligent misrepresentation as appropriate for class actions, and thus raised significant issues for future secondary market securities class litigation.
Second, in Sharma v. Timminco,35 the Court of Appeal for Ontario (ONCA) significantly increased the immediate cost and time commitment required of investors to proceed with a leave to proceed motion, by taking a strict reading of the limitation period for secondary market actions under the Securities Act. The decision rejected a reading of the statute, in conjunction with the Ontario Class Proceedings Act, which would have created a lenient timeline for investors, and instead enforced the three-year time limit in the OSA. Other investor plaintiffs immediately attempted to undermine the Timminco decision in two other Ontario cases by asking their case management judges to exercise an inherent jurisdiction power to grant relief from the literal reading of the statute. That argument was rejected in one case,36 but accepted, on different facts, in two other decisions.37 (The entire issue will be re-argued at the ONCA in 2013)
Third, in Gould v. Western Coal Corp., the defendants defeated, for the first time, a leave to proceed motion on a substantive basis.38 The defendants filed extensive fact and expert evidence to refute the allegation that they (the issuer, its major shareholder, a lender, and some of its executives) had used disclosure to prompt a drop in the company share price so as to allow certain of the defendants to increase their shareholdings at a depressed value before releasing new information, which buoyed the share price again. Although the motions judge specifically endorsed the low threshold of proof set out in IMAX, he still concluded that the plaintiffs had “no reasonable possibility” of proving that the subject statement was a misrepresentation and further concluded that even if there had been a misrepresentation, the defendants had made out the statutory defence that they had conducted a “reasonable investigation” and “had no reasonable grounds to believe” that the financial statements contained a misrepresentation.
The recent increase in the number and complexity of securities class actions in Canada presents new and serious risks for international companies cross-listed in Canada. The scale of these risks is magnified by some of the features of Canadian class actions, including the absence of a legislative mechanism to manage multi-district litigation, thus creating the possibility that companies may face class actions in multiple Canadian jurisdictions. As for substantive law, the Canadian Courts are still seeking a balance between the rights of investors and public issuers in disclosure class actions. International companies would be wise to take note.
- In 2012, it was widely publicized in Ontario that a senior partner at Milberg LLP had obtained his licence to practice law in Ontario specifically to take advantage of the perceived favourable legal framework in Canada for securities class actions. If US plaintiffs' counsel are interested in Canada for that reason, their future targets should be too.
- Kerr v. Danier, 2007 SCC 44, at p. 5 [Danier].
- Danier, supra note 2, at para. 5.
- As discussed in McCarthy Tétrault's Defending Class Actions in Canada (Toronto: CCH Canadian Ltd, 2011), at p. 130 “there are increasingly serious problems of co-ordination and overlap where parallel, competing class actions arising out of the same dispute are filed in several jurisdictions.”
- The Canadian Federal Court system would be unfamiliar to US litigators. Its jurisdiction is limited and generally concentrates on matters involving the federal government, as well as certain matters governed by federal statues, such as admiralty, First Nations, intellectual property and immigration.
- Partial solutions to this problem are in process. The Uniform Law Conference of Canada Task Force on National Class Actions published a series of recommendations for uniform legislation in 2008 that have since been adopted by two Canadian provinces, providing judges with a range of alternatives in determining whether or not to stay a motion for certification. However, the model legislation operates on the basis that each provincial superior court will still make an independent determination and therefore provides no assurances of consistency among provinces.
- The Canadian Bar Association Task Force on Class Actions and the judiciary have passed the Canadian Judicial Protocol for the Management of Multi-Jurisdictional Class Actions, which provides for the creation of a notification list of all counsel involved in class actions concerning the same or similar subject matter, as well as for the approval and administration of national settlements through multijurisdictional class settlement approval orders.
- According to the rule in Québec, the first plaintiff to file a claim automatically earns the right to proceed at least as far as the certification (or “authorization”) hearing. This rule occasionally creates a rush to file that often results in claims copied almost verbatim from those filed in US courts.
- A.D. Lascaris, E. Maxwell and Serge Kalloghlian, Carriage Motions in Securities Class Action: Restoring the Primacy of the ‘Primary Consideration', online: www.siskinds.com
- In the pet food instance, only two provinces required carriage motions, Ontario and British Columbia: Joel v. Menu Foods Genpar Limited, 2007 BCSC 1482; and Whiting v. Menu Foods Operating Limited Partnership,  O.J. No. 3996 (S.C.J.). The multitude of actions thereafter were essentially managed and subsequently settled through the cooperation of the groups of plaintiffs' and defence counsel.
- In Québec, for example, a defendant has no automatic right to examine the plaintiff prior to the certification (or authorization) hearing, or to file any evidence of its own. Therefore, a case in Québec may well proceed faster to an authorization hearing than its counterpart in a common law province.
- BC Class Proceedings Act, R.S.B.C. 1996, c.50, s.16(2).
- The former model is taking precedence, as Alberta and Saskatchewan have recently changed over, leaving only British Columbia, New Brunswick and Newfoundland and Labrador as opt-in provinces: McCarthy Tétrault, Defending Class Actions in Canada (Toronto: CCH Canadian Ltd, 2011) at p.8.
- Canada Post Corp. v. Lépine,  1 S.C.R. 549.
- Certainly other aspects of Canadian class actions law and practice will be more familiar. Canadian class action legislation was originally modeled on Rule 23 of the United States Federal Rules of Civil Procedure, and although there are differences, the certification process, for example, would be familiar to a US practitioner. Numerous articles compare the process in the two countries, including J. Melnitzer, “Art of the Case: Lexpert outlines key elements in recent class action jurisprudence”, Lexpert® magazine, September 2012 at p. 60; H. Borlack, Canadian Class Actions: A Plaintiff's Paradise?, Canadian Litigation Counsel, online: http://www.clcnow.ca.
- Silver v. IMAX Corp. (2009), 66 B.L.R. (4th) 222 (Ont. S.C.J.); leave to appeal ref'd (2011), 105 O.R. (3d) 212 (S.C.J.).
- Morrison v. National Australia Bank Ltd., 2010 130 S.Ct. 2869.
- In re IMAX Securities Litigation (2010) 272 F.R.D. 138 at p.6.
- IMAX, supra note 15 at pp. 313-328 (Ont. S.C.J.)
- It would be theoretically possible, in Canada, for global classes to be certified in securities class actions in more than one province, each overlapping with a national class in a United States action.
- Although class actions were introduced in Canada in 1979 through Québec legislation modeled on US Rule 23 F.R.C.P., Québec remained the only jurisdiction with class actions legislation for a number of years.
- See McCarthy Tétrault, Defending Class Actions in Canada (Toronto: CCH Canadian Ltd, 2011) at 4. In order of enactment: Ontario in 1993; British Columbia in 1995; Saskatchewan and Newfoundland and Labrador in 2002; Manitoba in 2003; Alberta in 2004; New Brunswick in 2007; and Nova Scotia in 2008.
- In February 2013, the Court of Appeal agreed to appoint a five member panel to re-consider the Timminco decision during the Green v. CIBC and Sliver v. IMAX appeals Carom v. Bre-X Minerals Ltd. (1998), 41 O.R. (3d) 780 (Gen. Div.) and see (2000), 23 O.S.C.B. 7383: Proposal for a Statutory Civil Remedy for Investors in the Secondary Market (“CSA Notice 53-302”) at pp. 7391-7392.
- Between 1979 and 1998, various studies, commentaries and draft legislation were published addressing the concept of opening litigation possibilities for investors by creating a statutory cause of action for misrepresentations in the secondary market that would eliminate the common law requirement of reliance by each investor. That work eventually formed the basis in Ontario for Bill 198, which became Part XXIII.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5, as of December 31, 2005 [OSA].
- Between December 31, 2005 and October 26th, 2008, all provinces and territories brought into force secondary market civil liability legislation.
- CSA Notice 53-302: 7383. See also pp. 7387, 7391, 7393 and 7423-7424.
- OSA, supra note 23, at s.138.8.
- OSA, supra note 23, at s.138.4(6).
- The 2011 decisions saw leave to appeal denied in IMAX (thereby preserving the Plaintiffs' leave to proceed) and leave to proceed granted in Arctic Glacier. See Silver v. IMAX Corp, supra,note 15; Dobbie v. Arctic Glacier Income Fund (2011), 3 C.P.C (7th) 261 (Ont. S.C.J.), leave to appeal granted in part (2012), 109 O.R. (3rd) 607 (Div. Ct.).
- The fact that the Ontario judges allowed that pleading to stand, thereby opening the door to the elimination of the need to prove individual reliance for common law misrepresentation, while setting a low bar to grant leave to proceed with the statutory cause of action designed to grant investors relief from that requirement at common law, was not without irony.
- “Popular” may not be the word public issuers would use.
- Heys, Bradley A. and Mark L. Berenblut: Trends in Canadian Securities Class Actions: 2011 Update: Pace of Filings Grows, Pace of Settlement Slows, NERA Economic Consulting, 2011, online: http://www.nera.com/nera-files/PUB_Recent_Trends_Canada_2011_0412.pdf.
- Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.,  2 S.C.R. 175 [Sharbern].
- Sharbern, supra note 32, at para. 1.
- Sharbern, supra note 32, at 129.
- Sharma v. Timminco Ltd. (2012), 109 O.R. (3d) 569 (C.A.); leave ref'd  S.C.C.A No. 157.
- Green and Bell v. CIBC,  O.J. No. 3072 (S.C.J.).
- Silver v. Imax Corp.,  O.J. No. 4002 (S.C.J.). and Trustees of the Millenright Regional Council of Ontario Pension Trust Fund v. Celestica Inc., 2012 ONSC 6083 (S.C.J)
- Gould v. Western Coal Corp.,  O.J. No. 4291 (S.C.J.). This is one of three leave to proceed decisions to date in Ontario in 2012. However, in Green v. CIBC, supra note 36, although the Judge would have granted leave to proceed on the evidence, he dismissed the case as statute-barred, and in each of Drywall Acoustic Lathing v. S.N.C-Lavalin Group Inc.,  O.J. No. 4389 (S.C.J.) and Sorenson v. Easyhome  O.J. No. 1373 (S.C.J.), the defendants consented to a leave to proceed and certification Order. (The only decisions outside Ontario to date are in British Columbia, Round v. MacDonald Dettwiler, and Associates Ltd., 2011 BCSC 1416, where leave was denied principally for reasons unrelated to the statutory threshold of proof, and in Québec, 121851 Canada Inc. v. Theratechnologies Inc., 2012 QCCS 699,  J.Q. No. 1529., where leave was granted without significant discussion of the statutory threshold.)