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The Right to Be Wrong …Why Should Anyone Be Wrong?

Date

June 5, 2008

AUTHOR(s)

Andrew Matheson


Canada’s securities regulation mosaic, with 13 provincial and territorial regulators and no national regulator, is facing increasing scrutiny. Any serious dialogue on reform must carefully study the relationship between securities commissions and the courts. One area where this merits examination is that of contested takeovers, an area of significant regulatory intervention often overlooked in public discussion.

The prevailing wisdom, according to existing case law, is that securities commissions have expertise in resolving disputes arising from mergers and acquisitions, and therefore an appellate court must give a high degree of deference to a decision of a securities commission in this area.

In Sears Holdings, in August 2006, the Ontario Securities Commission (OSC) thwarted a takeover of Sears Canada by its majority shareholder, Sears Holdings, ostensibly in order to protect minority rights. On appeal in September 2006, the Divisional Court applied well-established law holding that the OSC is entitled to strong curial deference when interpreting the Securities Act and when fashioning a remedy. This approach, which holds that the standard of review is one of reasonableness in the event of the exercise of a statutory right of appeal from a decision of the OSC to the courts, leaves no room for rigorous review on appeal. In dismissing the appeal from the OSC regarding the contested takeover of Sears Canada, the Divisional Court held that the standard of review of reasonableness encompasses "the right to be wrong." The court could not revisit the correctness of the result, which allowed sophisticated hedge funds to manoeuvre into a blocking position and kill the only offer for the company’s largely illiquid stock.

Cases like Sears Holdings bring into focus the following questions:

  • Does the deferential standard of appellate review adequately account for the will of the legislature in granting a right of appeal?
  • Are securities commissions better qualified than specialized courts, such as Toronto’s Commercial List, in resolving disputes arising from mergers and acquisitions? If not, why does a judge’s decision face greater scrutiny on appeal than a securities commission’s decision?
  • Is it justice for a tribunal’s "wrong" decision to be given deference and allowed to stand?

The answers to these question point towards a radical rethinking. Perhaps a securities commission should only be entitled to deference when it exercises expertise that would satisfy the test for admission of expert evidence.

Change is unlikely to come through judicial precedent because the principle of deference to securities commissions is well-entrenched in decisions up to the Supreme Court of Canada.

However, creative legislative solutions could be made available. In October 2006, the Task Force to Modernize Securities Legislation in Canada, chaired by Tom Allen and established by the Investment Dealers Association of Canada, recommended a Capital Markets Court. Such a court would be a natural candidate for jurisdiction over contested mergers and acquisitions, as well as quasi-criminal prosecutions regarding capital markets offences.

Ideally, a Capital Markets Court would comprise specially selected judges trained in, and with direct experience in, capital markets issues, such as the judges of the Commercial List in Ontario and their equivalents in certain other provinces, who have both commercial and criminal experience. Alternatively, a Capital Markets Court could be part of the Provincial Court, but several suitable Superior Court judges could be cross-appointed to the Provincial Court to sit on the Capital Markets Court. Another option would be to allow a judge to be appointed part-time to the OSC or other applicable securities regulator for hearing purposes on either a permanent or ad hoc basis, with the judge being the chair of the panel. Yet a further possibility to explore would be a version of the French commercial courts, which have both a commercially oriented judge and a lay expert on the hearing panel.

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