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Pendulum swings back in favour of issuers in securities class actions

Nearly a year after a handful of decisions seemingly leaned towards a permissive approach in securities class actions for misrepresentations in public disclosure, the pendulum seems to have swung back after a couple of recent court decisions tilted in favour of issuers.

In a 163-page ruling Justice George Strathy of the Ontario Superior Court this week dismissed a secondary market securities class action against CIBC because the plaintiffs had failed to obtain the required leave to proceed with the action within the three-year period mandated by the Ontario Securities Act (OSA). Justice Strathy pointed out that he would have certified the action and allowed it to proceed to trial if he had not found the limitation period had expired.

The ruling stems from a landmark decision issued by the Ontario Court of Appeal earlier this year. The appeal court ruled that plaintiffs seeking to commence actions under the OSA for misrepresentations by public companies in their secondary market disclosures must obtain judicial leave within three years of the misrepresentation. The ruling in Sharma v. Timminco Limited, 2012 ONCA 107, hailed by defence bar and bemoaned by class action plaintiff lawyers, will likely lead to some proposed claims awaiting a hearing and decision on leave to be statute-barred.

“The decision doesn’t seem to deal with the realities of the problem which is corrective disclosure doesn’t appear immediately after the misrepresentation,” said Kirk Baert, a partner with Koskie Minsky LLP in Toronto, before adding that the ruling appears to be rewarding companies who take longer to correct the misstatements. “It may be years after and in fact may be outside of the three years before the truth ever comes out. At the very least when you file your claim that should stop the time from running because that’s the way it works with every other type of limitation period.”

In the proposed $520 million class action, the proposed representative plaintiff issued a statement of claim on May 2009 but had not obtained leave to proceed with the statutory misrepresentation claim within the three-year limitation period set out in s. 138.14 of Part XXIII.1 of the OSA. The lower court held that section 28 (1) of the Class Proceedings Act (CPA), which provides for the suspension of the limitation period applicable to a cause of action asserted in a class proceeding, applies to “any limitation period applicable to a cause of action.” But in overturning the lower court decision, the Court of Appeal found that s. 138.14 was “clearly designed” to ensure that secondary market claims proceed with dispatch, and the necessary leave motion should be sought expeditiously. “To suspend that limitation period with no guarantee that the s.138.3 cause of action, including the prerequisite leave motion, will be proceeded with expeditiously is inconsistent with that purpose,” wrote Justice S.T. Goudge in a unanimous 12-page judgment.

“This ruling is going to put a lot of pressure to get plaintiffs to get these motions heard and resolved,” remarked Michael Robb, a partner with Siskinds LLP in London. “It is going to put a lot of pressure on courts to hear these motions because the court is going to have to adjudicate these motions in order to preserve limitation periods, and there is nothing a plaintiff can do on his own like a normal case to stop that time from running.”

Common sense prevailed, says Ellen Bessner, a litigation partner with Cassels Brock & Blackwell LLP. Describing it as good news for issuers, Bessner says the ruling provides clear guidance on the conduct of secondary market securities class actions. “As Mr. Justice Goudge points out if you hadn’t sought leave then you don’t have a claim under the OSA, and if you don’t have a claim under the Act you can’t extend the limitation period because there is no claim – it seems like common sense to me.”

Before Part XXIII.1 of the Ontario Securities Act came into force and created civil liability for secondary market disclosure, Canadian investors did not have a viable recourse for misrepresentations  or omissions in public disclosure documents in the secondary market. Unlike in the primary market, where securities are bought from the issuer or its underwriter in an initial distribution through an initial public offering, the secondary market deals with subsequent trades between purchasers and sellers of securities that have already been issued and distributed to the public. The vast majority of trading in the capital markets takes place in the secondary markets. Since the passage of Bill198, comparable legislation has been adopted in most of the other provinces.

But while the Ontario statutory remedy for secondary market liability has been in force since 2005, relatively few class action cases have been heard by the courts and none have gone to trial. In a groundbreaking case rendered on December 2009, Ontario Superior Court Justice Katherine M. van Rensburg certified a class-action law suit against IMAX Corp., a ruling that was upheld after another Ontario Superior Court judge dismissed the motion for leave to appeal. The second securities class action  that was given the green light under the relatively recent investor protection legislation pitted investors against the Arctic Glacier Income Fund. A year ago Justice Wolfram Tausendfreund of the Ontario Superior Court of Justice granted leave under the OSA for the plaintiffs to bring a $165-million action against the Income Fund for misrepresentation in the secondary market, certified common law misrepresentation claims alongside statutory claims, and held that the Ontario-based representative plaintiffs had standing to advance statutory claims on behalf of a global class, which includes members not resident in Canada.

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