Canadian courts continue to critically examine and limit the ability to expand the pool of potential defendants in securities class actions to include other capital market gatekeepers. A recent decision1 of the Ontario Superior Court denied a motion to add underwriters to a proposed securities class action for both statutory primary and secondary market claims on the basis that the primary market claim was time-barred and underwriters are not “experts” under the secondary market liability regime.
On balance this decision is a positive one for capital market participants as it may curb the current appetite of plaintiffs to include third parties as potential additional sources of recovery and reduce the complexities and costs associated with multiple defendants. Public companies and their officers and directors are often faced with difficult strategic and financial considerations relating to the addition of third party advisors as parties to securities class actions, including potential indemnity arrangements, joint defence arrangements and increased costs.
Key Facts and Key Findings
Background. The plaintiff commenced a proposed primary and secondary market liability class action in July 2014 against Allied Nevada Gold Corporation (and certain individual officers and directors), a dual-listed gold resource company, asserting statutory and common law misrepresentation claims regarding financial and operational disclosure contained in certain public documents and statements which were also incorporated by reference in a prospectus for a bought deal financing where Dundee Securities Limited and Cormark Securities Inc. acted as underwriters. The claim alleges that corrective disclosure was made in July and August 2013 relating to certain operational and financial information.
The plaintiff filed motions seeking leave to commence the action and to certify the action as a class action in November 2014 and filed a motion seeking to add the underwriters the underwriters in May 2015, some 10 months following the commencement of the proposed class action and two months after the company filed for bankruptcy protection in the US.
Test for Leave to Add Additional Defendants. The Court confirmed that plaintiffs will be granted leave to add a new defendant unless the proposed defendant can demonstrate that the claims being advanced are untenable at law or show non-compensable prejudice.
Claims Untenable as Underwriters not Proper Defendants to a Statutory Secondary Market Liability Claim and Primary Market Claim Time-barred. The Court found that the statutory primary and secondary market claims and the unjust enrichment claims were untenable and dismissed the motion to add the underwriters in respect of these claims.
No Non-compensable Prejudice. The implications of the intervening bankruptcy protection proceedings for the issuer did not clearly extinguish the underwriters’ claims for indemnification of defence costs (as there remained a possibility that the underwriters may be able to seek payment of such claims under the issuer’s insurance policies) and accordingly the Court held that the underwriters had failed to establish non-compensable prejudice. Had the claims been found tenable at law, the amendments would have been allowed.
The Court granted leave to add the underwriters in respect of the common law misrepresentation claims, as this was not contested.
Cassels Brock is counsel to Allied Nevada Gold Corporation and the individual defendants in this action.