OCA to Address Secondary Market Claims Against Foreign-Listed Issuers
The Ontario Court of Appeal recently announced that it will hear arguments in Abdula v. Canadian Solar. The appeal raises the thorny question of when issuers listed solely on foreign exchanges may be sued for secondary market misrepresentations under the Ontario Securities Act. This marks the first time that the issue will be considered by a Canadian appellate court.
The plaintiff in Abdula was an Ontario investor who commenced a putative class action against the defendant issuer ("Canadian Solar") and two of its officer/directors, alleging misrepresentations in its press releases, audited financial statements, annual report and prospectus supplements. In addition to claiming for common law negligent misrepresentation and oppression under the Canada Business Corporations Act ("CBCA"), the plaintiff sought leave to commence an action for secondary market misrepresentations under Part XXIII.1 of the Securities Act. The defendants responded by bringing a motion to dismiss the negligent misrepresentation and statutory secondary market claims, based on the Ontario court's alleged lack of jurisdiction given the foreign elements involved. That motion gave rise to the decision now under appeal.
There were several factors which pointed away from Ontario as the natural forum for the dispute:
- 1) Canadian Solar's shares traded exclusively on the NASDAQ;
- 2) Canadian Solar was governed by the federal
- rather than Ontario corporations law;
- 3) Canadian Solar's principal place of business was in China;
- 4) the majority of Canadian Solar's manufacturing operations occurred in China;
- 5) the majority of Canadian Solar's senior executives resided in China, including the two director/officer defendants;
- 6) the impugned press releases were filed with the United States Securities and Exchange Commission ("SEC");
- 7) the impugned press releases were followed by conference calls in which the director/officer defendants participated from China;
- 8) the impugned annual report was filed with the SEC; and
- 9) the impugned prospectus supplement was filed with the SEC.
However, several factors also suggested a connection to Ontario:
- 1) while Canadian Solar was governed by the
- , it was originally incorporated under the Ontario
Business Corporations Act;
- 2) Canadian Solar had an office in Ontario, described as its "principal executive offices";
- 3) Canadian Solar held its annual meeting in Ontario in 2009;
- 4) Canadian Solar received its impugned audited financial statements at the Ontario annual meeting;
- 5) the impugned press releases indicated they were issued in Ontario;
- 6) the plaintiff purchased his shares from a computer in Ontario; and
- 7) the plaintiff received confirmation notices of his share purchases by a broker with an office in Ontario.
The defendants' motion was dismissed on August 29, 2011 in reasons delivered by Taylor J.
Prior to discussing Canadian Solar's status as a defendant under the Securities Act, Taylor J. addressed whether the Ontario courts possessed jurisdiction over the negligent misrepresentation claim. Interestingly, he found that such jurisdiction existed merely by virtue of the fact that Canadian Solar had a "presence" in Ontario, since it carried on business and had other "significant connections" there (e.g., its executive office). As a result, Taylor J. found it unnecessary to consider whether there was a "real and substantial connection" between Ontario, the plaintiff's claim and the defendants, as directed by the Ontario Court of Appeal in Van Breda.
With respect to the Securities Act claim, Taylor J. focused upon whether Canadian Solar fell within the definition of "responsible issuer" in s. 138.1 of the Act, which was a pre-requisite to the statutory secondary market claim against it. Pursuant to s. 138.1, a "responsible issuer" is defined as follows:
"“responsible issuer” means,
(a) a reporting issuer, or
(b) any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded;"
Since it was clear that Canadian Solar was not a "reporting issuer" within the meaning of subsection (a) of this definition, the matter turned upon whether it possessed a "real and substantial connection to Ontario" within the meaning of subsection (b). The defendants argued that this was not possible, since Canadian Solar's securities traded solely on a foreign exchange.
Taylor J. ultimately rejected this argument, and found that Canadian Solar was a "responsible issuer" under the Securities Act. In arriving at this decision, he reviewed much of the legislative history surrounding Part XXIII.1 of the Securities Act, and observed that there was no specific reference suggesting an intent to restrict the definition of "responsible issuer" to issuers listed on domestic exchanges. In addition, Taylor J. relied upon the decision of van Rensburg J. in Imax, where a global class action was certified against an Ontario-based issuer on behalf of non-resident class members who purchased shares on the NASDAQ. Finally, he dismissed the defendants' reliance upon the Supreme Court of Canada's ruling in Unifund, which had found that legislation may be constitutionally inapplicable to non-resident defendants given the territorial restrictions on provincial legislative power. According to Taylor J.:
"The thrust of the defendants' submission is that Canadian Solar’s disclosure obligations arise only in New York State as result of its shares only being traded on the NASDAQ. However, a company which chooses to be incorporated in Canada, have its principal office in Ontario and carry on business in Ontario must also expect to be required comply with Canadian and Ontario laws. The disclosure obligation on a company whose shares are publicly traded is not restricted to filings with a stock exchange. The disclosure obligations apply to any material misrepresentation. Therefore, it should come as no surprise to Canadian Solar that it is potentially subject to the Ontario Securities Act for misrepresentations that it makes in its public disclosure in Ontario."
The Ontario Court of Appeal's ruling in Abdula will be of great significance in the burgeoning field of Canadian securities class actions. If Taylor J.'s decision is upheld, and foreign-listed issuers are found susceptible to secondary market claims under the Securities Act, there could be a marked increase in Ontario class action filings against foreign issuers. This is particularly so given the United States Supreme Court's decision to restrict securities class actions against foreign issuers in Morrison.
That said, even if Abdula is affirmed on appeal, there will still be several questions that remain. For one, the motion in Abdula was brought prior to certification and prior even to the delivery of a statement of defence. Accordingly, it concerns only a claim by an Ontario resident, and is based on limited facts. It is possible that, despite the ruling in Abdula, a similar claim against a foreign-listed issuer would be rejected, particularly where it is asserted by or on behalf of a foreign claimant.
Additionally, and more significantly, it is unclear whether the defendants in Abdula brought a constitutional challenge to the territorial applicability of the Securities Act, or whether they will pursue such a challenge on appeal. As a matter of statutory interpretation alone, it is possible the Court will conclude that issuers listed solely on foreign exchanges can possess the "real and substantial connection" to Ontario necessary to qualify as "responsible issuers" under Part XXIII.1. However, that conclusion will not resolve whether such a connection to Ontario is "sufficient" to allow for the application of Part XXIII.1 to foreign-listed issuers under s. 92 of the Constitution Act, 1867, as the Supreme Court of Canada required in Unifund. This constitutional question must be asked regardless of whether the legislative intent is for Part XXIII.1 to apply to foreign-listed issuers. Unfortunately, it is a question that remains unlikely to be resolved any time soon.
Finally, it will be interesting to see whether Taylor J.'s assertion of jurisdiction over the negligent misrepresentation claim also survives on appeal. Despite finding that the issuer in Abdula had a "presence" in Ontario, Taylor J. made no finding that the issuer was actually resident there. According to Van Breda (para. 64), judges should consider whether a real and substantial connection exists in any case involving "parties who have not submitted or agreed to the jurisdiction and who do not reside within the jurisdiction". If Taylor J. is correct to hold that "presence" short of residence eliminates the need for a real and substantial connection, it would represent a significant refinement of Van Breda. In particular, it would permit Ontario courts to assert jurisdiction over non-resident defendants based solely on the connection between Ontario and the defendants themselves, without regard to the further connection between Ontario and the underlying claim that is a crucial part of the Van Breda analysis. This issue is likely to receive further clarification when the Supreme Court of Canada releases its pending judgment in Van Breda.
Case Name: Abdula v. Canadian Solar
Citation Below: 2011 ONSC 5105
Date Appeal to be Heard: February 13, 2011
Canadian Business Corporations Act class action foreign-listed issuers jurisdiction over negligent misrepresentation claim Ontario Court of Appeal Ontario Securities Act secondary market misrepresentations