Heightened Litigation Exposure for Canadian Public Issuers and Executives
For Canada’s public corporations and their executives, a litigation threat long on the horizon has now arrived in force with the Ontario Superior Court’s recent decision in Silver v. IMAX.
Shareholder advocates have always lamented the fact that alleged corporate misrepresentations in the secondary market have rarely sparked a meaningful lawsuit: individual losses can be uneconomic to pursue, and courts were reluctant to certify class actions because plaintiffs could not meet the common law requirement that every investor would need to have received, interpreted and relied upon the same alleged corporate misstatement in the same way.
In late 2005, the Ontario government responded with Bill 198, which created statutory causes of action to the Securities Act for corporate misrepresentations and made them accessible for shareholder classes by making companies (and their officers and directors) potentially liable to every investor who had purchased shares during the misrepresentation period, whether the investor had relied upon it to purchase, or not. Every other province has since passed similar legislation.
A rush of litigation was predicted, but few cases have actually been started, perhaps due to the uncertainty created for investors by the statutory requirement that any plaintiff shareholder must pass a specified test to obtain leave from a judge before issuing such a claim.
That uncertainty has now been addressed (at least until an appeal is heard) by the Silver decision. The investor plaintiffs issued a lawsuit against the defendant company and its executives with common law allegations that certain press releases and an annual report publicly misrepresented the financial results of the company. The investors then asked a judge to grant them leave to amend their claim to add the statutory misrepresentation causes of action, and to certify the entire lawsuit, as amended, as a class action. The judge granted those Orders.
Although the Silver decision is currently under appeal, its significant features, if allowed to stand, favour — and so may encourage — investors (and their lawyers) in multiple respects. Significantly, the ruling not only set a low (investor-friendly) standard for the leave test, but also significantly weakened the common law reliance barrier that had made the statutory amendments necessary.
As to the common law issues, the decision is of note to Canadian corporations because:
- The court allowed the investors to proceed with a legal argument that the trial judge can assume that every investor’s share price was increased by the alleged misstatement, so that every investor can recover damages without proving individual reliance.
- The court agreed to certify the lawsuit as a class proceeding on behalf of a global class of all IMAX investors during the relevant period.
Further, the court interpreted the leave test in a manner very favourable to shareholders:
- Before the motion was heard, the plaintiff investors were allowed wide access to the defendant’s internal corporate documents, to assist them in assembling their evidentiary record to justify leave.
- The court found that the plaintiffs needed to meet only a very low evidentiary threshold of support for the proposed statutory causes of action to be allowed to proceed.
- Conversely, the court found that the legal and evidentiary standard to be met by companies and their executives in arguing that the statutory defences were so strong that leave should not be granted, is very high.
The motions judge broke new ground in all of these aspects of the decision, each of which is adverse to the interests of Canadian public corporations and their executives.
The defendant company, officers and directors are challenging the decision on appeal.
They argue that: (i) the court erred in its rulings on the respective evidentiary and legal obligations of the investors and corporate actors on the statutory leave motion; (ii) it is essential under Canadian law that all investors must prove material reliance at common law; and (iii) Ontario courts should not seek to accommodate global classes of investors.
McCarthy Tétrault Notes
While further decisions are to come in this case, and in upcoming cases under the Ontario Securities Act, Canadian corporations should in the meantime consider reviewing their corporate governance practices associated with public filings and press releases, and their insurance coverage for their officers and directors in that respect.