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Underwriters not Gatekeepers in Secondary Market Liability Regime

Published: 04/28/2016

By Wendy Berman, Lara Jackson

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.

  • The statutory secondary market claims were untenable as underwriters are not “experts” (and do not otherwise fall within the statutorily prescribed list of potential defendants).  The interpretation of “expert” when read harmoniously and contextually with the entire statutory scheme does not include underwriters.  Underwriters have distinguishing characteristics and are not professionals in the ordinary sense as they are not self-regulating or self-licensing, and the statutory scheme creates a “complete code” for underwriter liability in terms of primary market liability only with the legislative purpose of ensuring the exercise of reasonable diligence in respect of prospectus disclosure.
  • The statutory primary market claims were untenable as time-barred.  The statutory limitation period for such claims is 180 days after knowledge of the facts giving rise to the complaint and no later than three years after the transaction.  In this case, as the proposed claim commenced in July 2014 asserts that corrective disclosure was made in July and August 2013, the court found that the 180 day limitation period started to run at the latest in July 2014 and expired in January 2015 and accordingly the motion for leave to add the underwriters filed in May 2015 was out of time.2  The plaintiff failed to adduce any evidence to justify the delay in seeking to add underwriters and to rebut the presumption of non-compensable prejudice.
  • The unjust enrichment claims for underwriting fees were legally untenable as there was no reasonable prospect of demonstrating “no juristic reason” for the enrichment and in any event absent a derivative action (which was not brought by the plaintiff) only the company could assert such a cause of action.

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.

1  LBP Holdings v. Allied Nevada Gold Corp., 2016 ONSC 1629.
2  The Court rejected a “somewhat novel argument” that Allied Nevada Gold Corp.’s March 2015 U.S. Chapter 11 filing saved the plaintiffs’ claims against the underwriters related to the company’s cash flow and solvency arising from statements in a prospectus almost two years early. The Court found that the bankruptcy did not render prior statements misleading and was irrelevant on the plaintiff’s own pleading.