Recent case law indicates Canada is not a forum for global class actions that some ex-pected after it created a statutory cause of action
In the financial pages, Canada, the polite neighbor to the north, is better known for its stock market frauds than for the size of its shareholder class-action awards.
Justices across the country have kept the door firmly shut against the type of award that could threaten a company’s stability.
With corporations freed of the fear of ruinous financial penalties, many are fighting shareholder class actions for a lot longer — with predictable results.
“Most secondary market class actions settle only after a number of years of litigation,” says Paul Morrison of McCarthy Tétrault LLP in Toronto, who does corporate defense work. “And the amounts for which they are settling are really not that big.”
The result? “There aren’t as many as people thought there would be when the legislation first came into force.”
A trio of recent decisions suggests the basic paradigm is not likely to shift anytime soon.
The first decision deals with the subject of which international shareholders are eligible to have their case heard before a Canadian court.
In the world post-Morrison v. National Australia Bank, some plaintiffs’ counsel had been looking to Canada as a forum for global class actions in cases in which shares were bought on multiple exchanges.
Kaynes v. BP, PLC, brought in Ontario, would appear to dampen those hopes. In terms of influence, Ontario – as home to the Toronto Stock Exchange – is the jurisdiction closest to the Southern District of New York.
The class action was filed alleging BP made misstatements following its devastating 2010 oil spill in the Gulf of Mexico. It was brought on behalf of Ontario investors who held securities in the British energy giant.
A similar suit was filed in federal court in Texas.
An Ontario court took jurisdiction even though BP is a British company, the accident was in the US, and the vast majority of Ontario class members had bought their shares on the New York or London exchanges (the Toronto Stock Exchange had dropped the listing in 2008 due to low trading volumes).
The Ontario Court of Appeal stayed claims by those investors who purchased on a foreign exchange on grounds of comity and forum non conveniens, whittling the class down to a tiny fraction.
The court held that Canada should adhere to the prevailing international standard tying jurisdiction to the place where the securities were traded, to provide “order and fairness.”
“It would surely come as no surprise to purchasers who used foreign exchanges that they should look to the foreign court to litigate their claims,” the court wrote, saying to do otherwise would be “both opportunistic and a classic example of the ‘tail wagging the dog.’”
The respect for comity that permeates the decision is something plaintiffs’ counsel should take note of, Morrison says.
“What it amounts to is that any particular person’s claim should be adjudicated in the jurisdiction where that person bought the securities. It shrinks the potential plaintiffs’ class, consistent with the Morrison case, and represents a narrowing of the jurisdiction that the justices feel Canadian courts should assume in these securities cases — recognizing that the US courts have similarly narrowed theirs as well.”
Kaynes is sharply at odds with Silver v. Imax Corporation and Abdula v. Canadian Solar Inc., earlier cases in which Ontario had assumed jurisdiction over claims arising from transactions on foreign exchanges.
“It’s an important decision,” says Clarke Hunter, a senior partner at Norton Rose Fulbright Canada LLP in Calgary. “It marks a retreat from what started to look like an expansive view of the assertion of jurisdiction over these types of cases.
“There is alignment with Morrison in the sense the Ontario court is now saying, like an American court would, that we shouldn’t adjudicate disputes that arise out of transactions that take place somewhere else.”
But Michael Spencer, counsel at Kim Orr Barristers P.C. in Toronto and also of counsel and a former senior partner at Milberg LLP in New York,
calls the decision “troubling and also inexplicable.
“It makes one wonder whether the Canadian justices have ever bought a security listed on multiple international exchanges,” he says. “The purchaser often doesn’t know, and typically doesn’t exercise control over which exchange is used to effect the transaction. Even the broker may not know.”
As securities markets become increasingly globalized, he says, the identity of the exchange on which a particular purchase was executed “begins to look like the least significant of the many factors that should govern investors’ expectations.”
Spencer, one of the principal trial counsel in the massive In re Vivendi Universal, S.A. securities litigation, says he’s surprised the Ontario appeal court showed so little apparent regard for Canadian shareholders in Kaynes.
“The Ontario Securities Act was designed to protect Canadians, so I expected the Court of Appeal decision to reflect that. The court’s idea that US or English courts should adjudicate disputes under the Ontario Act — that’s quite naïve. The instinct for protecting Canadian investors is almost completely absent from the Court of Appeal’s analysis.
“Mr. Kaynes was seeking to represent a class of Canadians. The court dismissed them as a ‘dog’s tail.’”
Sometimes it’s difficult to imagine Canada did not even have shareholder class actions until the very last day of 2005, when Ontario amended its Securities Act to create a statutory cause of action for misrepresentation and failure to make timely disclosure. The remaining provinces and territories followed suit over the next three years.
While the wordings in the various statutes differ, they have one thing in common: All were drafted with an eye to avoiding the US experience of strike suits.
The tactic was to make the courts a gatekeeper, introducing a leave requirement that bars plaintiffs from starting an action without first obtaining approval.
The leave test is twofold: Plaintiffs must demonstrate the action is being brought in good faith, and that it has “a reasonable possibility” of success at trial.
The question of success at trial has left the courts grappling with whether they should be reviewing the evidence before granting leave to proceed.
Earlier rulings were split.
In Round v. MacDonald, Dettwiler and Associates Ltd., a BC chambers judge said a proper analysis requires both sides to file affidavits laying out the material facts on which they intend to rely. In Green v. Canadian Imperial Bank of Commerce, an Ontario judge cautioned against making the threshold too high, saying the requirement is intended to weed out strike suits, not “deprive bona fide litigants, with a difficult but not impossible case, from having their day in court.”
In Ironworkers v. Manulife Financial, however, a different Ontario judge complained the threshold had become so low that the leave test was nothing more than a “speed bump.”
That was a complaint that largely resonated with the defense Bar, so all eyes were on the Supreme Court of Canada when the issue landed before the top justices in Theratechnologies Inc. v. 121851 Canada Inc. out of Québec.
In handing down guidance on the leave test, the Supreme Court said the threshold is more than a “speed bump” — and is actually higher than the threshold for certification.
The leave test requires “sufficient evidence” and a “reasoned consideration of the evidence,” the justices said. But they also cautioned it should not be treated as a mini-trial.
Michael Eizenga, Chair of the class actions practice at Bennett Jones LLP in Toronto, says it’s a very significant decision “that will encourage defendants to make sure that they put the plaintiffs through the paces of meeting that threshold.”
An Ontario court dismissed a motion for leave within weeks of Theratechnologies being handed down, citing the Supreme Court’s teachings in the case.
“What’s interesting to me is the judge said he had felt bound by other case law to make it an extremely low threshold, and now in the first case he gets [after] the Supreme Court’s decision in Theratechnologies he displayed a much more rigorous approach,” Eizenga says.
“So to the extent some Americans may have considered that Canada was a place where it was extremely easy to start secondary-market misrepresentation class actions, that has clearly been modified.”
The decision should be seen as “a very positive development” for listed and interlisted companies, says Marie Audren, regional leader of the Class Action Group at Borden Ladner Gervais LLP in Montréal.
“We can expect that in the future, Canadian courts will apply a rigorous test before giving the go-ahead for these types of class actions. It is more than a mere formality.
“Clearly, the Supreme Court sent a message that they don’t want US-style strike suits migrating north.”
A quick check of the numbers suggests cross-border shareholder class actions have not exactly been flooding Canadian courts. In 2014, just 10 secondary-market class actions were filed in Canada, according to a study released by NERA Economic Consulting, which keeps class-action databases.
Of those, only three involve companies that were interlisted on the Toronto and New York stock exchanges and had parallel class actions in the US.
Will there be fewer secondary market securities class actions next year because of Theratechnologies?
“It’s hard to say,” says Audren. “But certainly we won’t see a major increase.”
The third decision that is promising to shape Canadian securities class actions in years to come has to do with costs.
In 1146845 Ontario v. Pillar to Post, the Ontario Superior Court declined to waive or reduce costs against the plaintiffs in their unsuccessful defense of a motion to stay the action.
The court stayed the suit, brought by three franchisees who successfully argued in favor of the arbitration provision in the franchise agreement. The defendants asked for partial costs of $120,000.
The plaintiffs asked that costs be waived, or greatly reduced, due to the novel nature of the issues raised in the underlying case.
In a decision highlighting the Ontario courts’ reticence to reduce costs awards against unsuccessful litigants – even in the developing field of class actions – the judge said no because, ultimately, the case was said to be “commercially or financially motivated litigation.
“In normal litigation, it is relatively rare that the court will invoke its discretion to eliminate or reduce an unsuccessful litigant’s exposure to costs because the party was litigating a novel point or was litigating in the public interest,” the decision says. “This follows because in the overwhelming majority of cases, the prime motivation of the parties will not be altruistic.
“Class actions are no different. Although class actions are by design intended to be in the public interest and although they often raise novel issues, it remains the case that it will be relatively rare that the court’s discretion to negate or diminish a costs award will be exercised.”
Ward Branch, of Branch MacMaster LLP in Vancouver, says while some provinces such as BC have a no-cost regime, Ontario – which accounts for nearly 80 per cent of securities class actions filed – maintains a loser-pays regime that clearly favors large companies over plaintiffs.
“When I do plaintiffs’ cases in Ontario, it’s really difficult to explain to someone why they should be a representative plaintiff when they could be dinged $200,000 in costs and their individual claim’s only worth $20,” he says. “I always say you’d have to be an idiot to be a representative plaintiff in Ontario unless you can get some protection.”
That usually comes in the form of an indemnity from the law firm mounting the case. Each case can cost a plaintiff’s firm millions of dollars to carry, and they also face the possibility of a crushing cost award.
The Law Commission of Ontario has been asked to review the Class Proceedings Act and one of the specific areas they’re looking at is whether the province should move to a no-cost regime.
Branch says unlike in the United States, where there is enough work to allow firms to do only plaintiff class actions, “in Canada it’s hard to find enough cases to feed yourself over the course of the year.“That’s why in Canada, you can’t find a firm that just does plaintiff class actions, every firm does a little bit of something else. If these three cases say one thing, it’s that this is not an area in which you want to dabble.”