The British Columbia Court of Appeal may soon consider the test for a purchaser or vendor in the “secondary market” to obtain leave to commence an action for misrepresentation under Part 16.1 the BC Securities Act. Leave to appeal has been filed by the plaintiff in Round v. MacDonald, Dettwiler and Associates Ltd. This will be the first time any court of appeal in Canada will have the opportunity to consider the issue.
Civil liability for secondary market disclosure is a recent development in Canadian securities law. Part 16.1 of the BC Securities Act, which came into force in 2008 following the introduction of virtually identical provisions in other Canadian jurisdictions, enables the purchaser or vendor of shares in the “secondary market” (i.e. the market after the shares have been issued and are trading publicly) to bring an action in respect of misrepresentations and omissions made by persons associated with the reporting issuer. A critical aspect of the legislation is that the person bringing the action does not need to prove reliance on the misrepresentation or omission.
To address the risk of unmeritorious litigation the various provincial legislatures included a screening mechanism: a plaintiff must seek and obtain leave of the court before a secondary market liability claim can be commenced. To obtain leave, the intended plaintiff must satisfy the court: (a) that the action is being brought in good faith; and (b) that there is a reasonable possibility the action will be resolved in favour of the plaintiff.
Round involved an application by the intended plaintiff, Ms. Round, to obtain leave. Ms. Round alleged that between October 2007 and May 2008, the intended defendant, and its officers and directors, misrepresented material facts about a proposed sale of one of its primary assets. At issue was the second part of the test: whether there was a reasonable possibility of success.
Ms. Round argued that the second part of the test should involve a de minimis threshold. In other words, Ms. Round argued she could satisfy the second part of the test by merely showing that the proposed action was not an abuse of process or purely speculative, and by offering some evidence of wrong-doing in support. The intended defendants, on the other hand, argued the proposed action must have real, demonstrated merit on the basis of the evidence of both sides.
Harris J. denied leave on the basis that Ms. Round’s action had no prospect of success. The Court reached that conclusion for two reasons. First, the alleged wrongdoing occurred before Part 16.1 came into force, and there was no basis to give the statute retroactive effect. Second, Ms. Round had not acquired the subject shares on the secondary market, but instead directly from the company’s treasury through an employee share purchase plan, and therefore was not entitled to rely on Part 16.1.
Although the Court’s conclusion on the prospect of success made it unnecessary to consider the proper test for leave, Harris J. provided some commentary “[g]iven the extensive submissions” made on the issue.
With respect to the test for leave, Harris J. stated as follows (at paras. 73 and 76):
First, the leave application involves a review of evidence. Each side is required to provide evidence of material facts upon which each intends to rely. Secondly, the analysis must involve a weighing and balancing of the evidence of each side. It is not sufficient for the court simply to rely on material filed by the plaintiff. Thirdly, the test involves an assessment of the merits of the proposed action on the evidence. The court must analyze the evidence to decide whether it is satisfied that the "reasonable possibility" test is satisfied. Fourthly, weighing and testing the evidence to determine whether there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff is different from the test involved in certification of class actions or the test for summary judgment. …
Establishing a reasonable possibility of success at trial involves more than merely raising a triable issue or articulating a cause of action. Equally, it does not require a plaintiff to demonstrate that it is more likely than not that he or she will succeed trial. But it is clear, in my view, that the test is intended to do more than screen out clearly frivolous, scandalous or vexatious actions. An action may have some merit, and not be frivolous, scandalous or vexatious, without rising to the level of demonstrating that the plaintiff has a reasonable possibility of success.
Ontario courts’ interpretation of the test
Harris J.’s interpretation of the test appears to be more stringent than the interpretations in Silver v. Imax Corp. (leave to Ont. Div. Ct. refused), and Dobbie v. Arctic Glacier Income Fund, (leave to appeal granted), although not on this issue, the only other Canadian cases to consider the comparable leave provisions in other provincial statutes thus far.
The Ontario courts have set what has been described as a low threshold for leave, in essence requiring that a plaintiff simply show more than a de minimis chance of success at trial. In Imax, van Rensburg J. held that Ontario’s “reasonable possibility” of success test requires a consideration of whether there was more than a de minimis possibility that: (i) the plaintiff will succeed in proving the elements of the cause of action; and (ii) the defendants will not succeed in proving the elements of available defences.
Van Rensburg J. explicitly stated that the test “sets a relatively low threshold for a plaintiff seeking leave to proceed” and explained that the assessment ought to be based on a realistic consideration of the evidence at hand and the reasonable inferences to be drawn from the same. The suggestion appears to be that leave ought to be granted provided there is some evidence that a case is not purely speculative or an abuse of process: Imax at para. 330. In Dobbie, Tausendfreund J. appears to have applied the Court’s reasoning in Imax.
The courts in Ontario and British Columbia have expressed philosophical differences in their approaches to the test. In Round, Harris J. rejected the suggestion that “the test should be given a liberal interpretation favouring a party seeking leave” as well as the idea that “the secondary market liability provisions should be seen as remedial legislation” (at paras. 71-72). By contrast, in Imax, van Rensburg described the statutory cause of action as “remedial legislation” and held that the test should be interpreted “so as to permit access to the courts by shareholders with legitimate claims” (at para. 294).
As a practical matter, the British Columbia Court of Appeal may sidestep the issue of the test for leave altogether, in light of the other bases relied on by Harris J. for refusing to grant leave in the circumstances of the case. This said, if the British Columbia Court of Appeal decides to consider the test for leave, it will be the first appellate court in Canada to have done so. Should the Court of Appeal seize this opportunity to chart new ground, it will be interesting to see whether it finds inspiration in Ontario’s low threshold test or prefers the more stringent approach suggested by Harris J.
Round v. MacDonald, Dettwiler and Associates Ltd., 2011 BCSC 1416
Supreme Court of British Columbia Court File No.: 10-4687
Date of Decision: October 28, 2011