LBP Holdings v. Hycroft Mining

A look at the significance of <i>LBP Holdings v. Hycroft Mining</i> to underwriters
A proposed class action was brought on behalf of investors against Hycroft Mining Corporation (formerly Allied Nevada Gold Corp.) and two of its executives for primary market misrepresentation under s. 130 of Ontario’s Securities Act, alleging misrepresentations in a prospectus for a secondary public offering. The plaintiff originally brought the same statutory claim, in addition to common law claims, against the underwriters, who sold the shares in the offering. During the course of the motion for certification, the plaintiff abandoned its statutory claim against the underwriters and sought to certify only common law claims for negligence and negligent misrepresentation.

The Hycroft defendants consented to certification prior to the motion being heard. The basis of the plaintiff’s negligent misrepresentation claim against the underwriters was that the underwriters’ certificate, attached to the prospectus, was a misrepresentation because the prospectus did not contain full, plain and true disclosure. In respect of negligence, the plaintiff alleged the underwriters owed class members duties to properly price the shares and to perform due diligence to ensure comprehensive disclosure of material facts in the prospectus, and that those duties arose from the underwriting agreement between Hycroft and the underwriters.

The Ontario Superior Court of Justice refused to certify the class proceeding against the underwriters. The court held that the “cause of action” criterion (that a claim must disclose a reasonable cause of action) was satisfied for the negligent misrepresentation claim but not for the negligence claim. 
The court also held that a class proceeding is not the preferable procedure for either cause of action.

Justice Paul M. Perell accepted the following arguments made by the underwriters: (1) the negligence claim was subsumed within the negligent misrepresentation claim and was included by the plaintiff to avoid having to prove that each class member relied on the alleged misrepresentations in buying shares in the offering (reliance being an element of negligent misrepresentation claims that is not commonly certified); (2) the cause of action for the negligence claim does not survive a duty of care analysis because the underwriters did not owe the duties to the investors alleged by the plaintiff (i) to properly price the shares; and (ii) to perform due diligence to ensure comprehensive disclosure of material facts; and (3) a class proceeding was not the preferable procedure to pursue either the negligent misrepresentation or negligence claims against the underwriters.

Because this was the first reported Canadian decision on the issue of whether underwriters owe investors a duty of care in negligence, and that such a duty would be new to Canadian negligence law, Justice Perell performed the analysis laid down by the Supreme Court of Canada to determine whether the underwriters owed potential shareholders a duty of care. 

Justice Perell found that, on the facts of the case, an underwriter would not anticipate that purchasers would be relying on it to act as a “gatekeeper” separate and apart from its duties of care under s. 130 of the Ontario Securities Act and its common law duties with respect to misrepresentations in the prospectus. Even assuming the underwriters had a duty for negligence independent of their duty of care with respect to representations, Justice Perell also found that policy factors negated imposing liability as a result of a breach of duty. The negligent misrepresentation claim survived the cause of action analysis but failed the preferable procedure analysis.

This was the first known Canadian certification motion against underwriters seeking certification of only common law causes of action (as distinct from causes of action for prospectus misrepresentation under the Securities Acts). Justice Perell carefully applied the prevailing certification law in Canada under AIC Limited v. Fischer, 2013 SCC 69, and found that both common law claims failed the preferable procedure analysis. Justice Perell held that the elements of reliance, causation, and damages are matters that raise highly individual issues. A cost-benefit analysis indicated that little benefit was added by subjecting the individual claims to the procedure of a class action. 

This decision stands in contrast to the apparent judicial trend and willingness to certify securities class actions involving reliance-based claims.

This is also the first known Canadian case (class action or otherwise) in Canada in which underwriters were sued for only common law damages (in negligence and negligent misrepresentation), and the first decision regarding whether underwriters owe a common law duty of care to investors, which would be a new duty and important development in Canadian negligence law. 

Further, this is the first Canadian certification case against underwriters for only common law causes of action, which therefore tested the limits of the court’s increasing willingness to certify cases despite individual issues that have traditionally been resistant to certification.
The decision is thus a critically important precedent for underwriters, the law of negligence and the development of the law regarding certification of causes of action that include individual issues.

John A. Fabello, Gillian B. Dingle and Alexandra Shelley of Torys LLP (with assistance from Nic Wall, Glen Johnson and Aaron Emes) represented Cormark Securities Inc. and Dundee Securities Ltd. as the underwriters.

Andrew Morganti and Hadi Davarinia of
Morganti Legal, P.C. represented LBP Holdings Ltd.

Wendy Berman, Lara Jackson and John M. Picone of Cassels Brock & Blackwell LLP represented Hycroft Mining Corporation, Scott A. Caldwell and Robert M. Buchan.