The Supreme Court of Canada has released its long-awaited decision in Green v CIBC 2015 SCC 60, a case considering a trio of related securities class action appeals from the Ontario Court of Appeal.
The decision addressed three issues: (1) the limitation period applicable to class action claims for secondary market misrepresentation under Part XXIII.1 of the Ontario Securities Act; (2) the threshold a plaintiff is required to meet to obtain leave to commence a claim under Part XXIII.1; and (3) whether a plaintiff can advance both a common law and statutory claim for secondary market misrepresentation in the same class proceeding.
While the majority of the decision focused on the limitations issue, recent amendments to the Ontario Securities Act have made the outcome of the Court’s decision in that respect largely irrelevant for future securities class actions1. However, the Supreme Court’s unanimous findings with respect to the test for leave to commence a statutory misrepresentation claim, and the advancement of common law misrepresentation claims, are significant and provide helpful guidance for securities class actions going forward.
1. The Standard for Leave
Part XXIII.1 of the OSA provides a statutory mechanism for investors to bring class actions against public issuers for misrepresentations or omissions in secondary market public disclosure. In order to ensure that unmeritorious claims are not advanced, the statute includes a screening mechanism which requires a plaintiff to obtain leave from the court prior to commencing an action by demonstrating that: (1) the claim is being brought in good faith, and (2) there is a reasonable possibility that the plaintiff will succeed at trial.
In interpreting the leave test, the Supreme Court unanimously confirmed that the “reasonable possibility” requirement is more than just a procedural formality and instead requires the plaintiff to advance both a “plausible analysis of the applicable legislation provisions” and “some credible evidence in support of the claim.” In making this finding, the Supreme Court adopted its reasoning in the recent case of Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18, (previously reported on here) and rejected the lower threshold for leave articulated by the Ontario Court of Appeal.
The Supreme Court’s decision on the leave test is a positive development for public companies as it requires plaintiffs to meet a higher evidentiary burden to obtain leave before they will be permitted to commence a statutory secondary market misrepresentation claim.
2. Common Law and Statutory Claims
Secondary market class actions often include both statutory claims and common law negligent misrepresentation claims. Unlike the statutory claim, reliance is not presumed and must be proved in respect of the common law claim. The issue of whether both a statutory and common law claim for misrepresentation can be certified as part of the same class proceeding has resulted in a number of conflicting decisions in recent years.
In this case, the defendants argued that the common law claim should not be certified as part of the class proceeding on the basis that (1) the “reliance” element could only be established on an individual basis and was therefore not a common issue of the class members, and (2) given the mechanism established under the Ontario Securities Act for statutory claims, a class proceeding was not the preferable procedure for bringing a common law misrepresentation claim and therefore did not meet the test for certifying a class proceeding under the Class Proceedings Act.
The Supreme Court confirmed that the “reliance” element of the common law misrepresentation claim cannot be presumed, thereby rejecting the “fraud on the market” theory, and upheld the Court of Appeal’s determination that the reliance element could not be certified as a common issue. The Supreme Court however confirmed that the other elements of a common law misrepresentation claim, including those that related to the conduct and intent of the defendants, could be certified as common issues and proceed as part of the class action.
With respect to the preferable procedure, the Supreme Court rejected the defendant’s argument that a class action was not the preferable procedure for common law claims. In making this finding, the Supreme Court relied on a provision in the Ontario Securities Act providing that the statutory mechanism was meant to be “in addition to” other rights of potential plaintiffs. The Supreme Court further noted that the preferability analysis under the Class Proceedings Act, requires a court to assess whether a class proceeding is a preferable procedure to advance a claim and not whether the plaintiffs have brought the preferred cause of action.
The Supreme Court’s decision on this issue continues the recent trend of positive developments in Canadian securities class actions for public companies and their directors and officers. Although the Supreme Court confirmed that both statutory and common law misrepresentation claims can proceed together in a class action, plaintiffs will in most circumstances be required to prove reliance and damages through costly individual trials. The combination of the heavier evidentiary burden to obtain leave and costly individual trials for portions of the common law claims, creates significant economic disincentives for class action plaintiffs and greater incentive for critical pre-screening assessments by plaintiffs class counsel.