Round and Round We Go: BCCA Declines Opportunity to Shape Leave Test in Secondary Market Class Actions
In a decision released this month, the British Columbia Court of Appeal has declined to enter the national fray on the question of how courts should interpret statutory leave requirements adopted throughout Canada in recent securities legislation amendments. These leave requirements impose a preliminary hurdle for plaintiffs seeking to advance statutory secondary market class action claims, requiring them to demonstrate a reasonable possibility of success at trial. Thus far, no appellate court in Canada has yet pronounced on how courts should apply this standard. In Round v. MacDonald, the motions judge suggested that the appropriate standard in British Columbia is higher than the one articulated thus far in Ontario. The appeal of that decision gave the British Columbia Court of Appeal an opportunity to consider that standard, which it declined to do.
As first reported in an earlier blog post on Canadian Appeals Monitor, last year’s motion decision in Round was particularly notable for its more conservative approach to the leave mechanism under British Columbia’s Securities Act than the approach taken in Ontario. Harris J. found that the proposed plaintiff’s claim was doomed for two reasons, neither one of which deal directly with the leave test. First, the Court found that the claim related to an alleged misrepresentation that pre-dated the coming into force of the relevant provisions of the Securities Act. Second, Harris J. found that the proposed plaintiff’s shares had been purchased directly from the company’s treasury through an employee share purchase plan and therefore not on the secondary market for securities.
Given the “extensive submissions” made on the appropriate leave test, however, Harris J. went on to make several significant obiter comments on how it should be interpreted. His approach is notable for its emphasis on the Court’s role in actually considering and weighing competing evidence, suggesting that applicants seeking leave need to carefully craft a record on the motion and be prepared for a detailed response from defendants:
Taken together, several propositions emerge from these sections. 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. (para 73)
Harris J. also suggested that the actual standard of “reasonable possibility of success” involves more than screening out those actions that may be properly characterized as frivolous:
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. (para 76)
The suggested approach in Round certainly seems more rigorous than what Ontario and Quebec courts have articulated in the handful of leave cases decided to date.
The British Columbia Court of Appeal agreed with Harris J. that the proposed plaintiff’s claim need not be considered on its merits because the Securities Act was substantive and could not be applied retroactively. The Court of Appeal also agreed with Harris J.’s determination that shares sold directly through participation in an employee purchase plan did not engage the secondary market liability provisions in the Securities Act. The undisputed evidence on the motion was that the shares were issued expressly for the purpose of employee purchases. Having dismissed the appeal on these two grounds, the Court of Appeal declined to consider the content of the leave test and Harris J.’s obiter comments.
Although many observers were hoping that the Court of Appeal would address Harris J.’s characterization of the leave test, the Round decision remains an important one in setting the tone for claims under B.C.’s Securities Act.
First, the Court of Appeal confirmed that the leave test requires the proposed plaintiff to meet the requirement as it relates to his or her particular claim. Unlike is often the case on class action certification motions, both in British Columbia and elsewhere, proposed representative plaintiffs will not be allowed to be substituted in favour of another person who have a cause of action when the proposed representative plaintiff does not. In Round itself, this was significant given that although Ms Round had not purchased her shares on the secondary market, other possible plaintiffs in British Columbia likely would have.
Second, the Court of Appeal confirmed that the motions judge was correct to find that the “no costs” regime for class actions did not apply to the leave motion. In British Columbia, s. 37 of the Class Proceedings Act deprives the Supreme Court and the Court of Appeal of their ability to order costs against parties on certification absent “exceptional circumstances”. The Court of Appeal in Round agreed with Harris J.’s conclusion that the Court could order costs because no certification hearing ever took place. Applying the general rule that costs follow the event, Harris J. awarded costs against the proposed plaintiff. Naturally, this outcome would seem to create an incentive for proposed plaintiffs seeking leave under the Securities Act to bring such motions alongside a motion to certify a class action under the Class Proceedings Act.
On the question of the statutory leave test itself, the decision of the Round court not to address the issue will only intensify attention on two other Canadian appellate courts which may soon have that opportunity. In January, a three-member panel of the Quebec Court of Appeal will hear the motion for leave to appeal in 121851 Canada Inc. v. Theratechnologies Inc.. That motion was initially heard in August 2012, but was – in an unusual move – deferred to a three-member panel for more fulsome consideration. Should leave to appeal be granted, the Court of Appeal will then have its first opportunity to consider the leave test under Quebec’s securities regime. On the initial motion, Blanchard J. of the Superior Court found that the “filtering mechanism” in Quebec’s legislation did not require a de facto “trial within a trial” at the leave stage, but that the plaintiff was required to do more than satisfy the ordinarily applicable test for a class action under s. 1003(b) of the Code of Civil Procedure. Under that test, the plaintiff only needs to prove that “the facts alleged seem to justify the conclusions sought.” This approach appears to suggest a similar threshold to that seen in Ontario, where the leave provision in s. 138.8(a) of the Ontario Securities Act has been subject to interpretation in four cases, two of which will be reconsidered by the Court of Appeal in 2013. Indeed, Blanchard J. in Theratechnologies noted that the statutory intention of the provincial legislature was to provide greater uniformity across Canadian jurisdictions.
In February, the Ontario Court of Appeal is scheduled to hear an appeal in Green v. Canadian Imperial Bank of Commerce, which will provide it with an opportunity to address the leave test as well as other pressing issues in secondary market class actions, such as the limitations period. On the initial motion, Strathy J. granted leave, finding that the plaintiffs faced a “relatively low threshold” (para 373). The Court noted that the leave requirement:
is meant to screen out cases that, even though possibly brought in good faith, are so weak that they cannot possibly succeed. (para 373)
This standard seems directly at odds with the warnings of Harris J. in Round about the need for plaintiffs to do more than suggest their claims are not frivolous. The decision in Green, however, is not an outlier. In addition to Strathy J. in Green, motion judges in Silver v. IMAX (leave to appeal denied) and Dobbie v. Arctic Glacier Income Fund (leave to appeal granted for some of the defendants) have granted leave to bring a claim for misrepresentation under the Securities Act without setting out a clear standard that applicants for leave should be expected to meet, either in respect of the evidence to be presented or the degree to which the merits should be scrutinized. In IMAX, van Rensburg J. explained that the leave requirement calls for “something more than a de minimis possibility or chance that the plaintiff will succeed at trial” (para 324). However, Ontario courts have struggled to give meaning to the “something more” that is required.
More recently, in Gould, Strathy J. once again had an opportunity to consider whether leave should be granted for a misrepresentation claim under the Securities Act. In that case he denied leave on the basis that there was “no reasonable possibility that the claim…[would] be resolved in favour of the plaintiff” (para 262). He explained that
[t]he test should be applied in such a way as to screen out strike suits while providing access to the courts for shareholders with legitimate claims (para 106).
Strathy J. then examined the context surrounding the alleged misrepresentation, the main accounting principles at issue, the processes leading up to the disclosure, and the expert evidence on both sides of the issue. He accepted some of the crucial evidence put forward by the defendants regarding the preparation of the financial statements and public disclosure and distinguished Green on the basis that, unlike in Green, there was no reasonable possibility that a trial judge would accept the plaintiff’s expert evidence. Strathy J. also noted that the defendant’s expert evidence in Gould accorded “with the facts, with GAAP and with basic common sense” (para 260). Gould has been appealed but no hearing date has been set.
Notably, while Ontario’s early jurisprudence has generally been liberal on the leave test to date, Strathy J.’s decision in Gould suggests that courts should be taking an active gatekeeper role by weighing and considering the entirety of the evidence put forward on the leave motion to determine whether the plaintiff has a reasonable chance of success at trial. It may very well be that Gould suggests an increased level of judicial scrutiny on the merits at the leave stage. The Court of Appeal’s guidance on the issue will hopefully include some clear standards that motion judges will more readily be able to apply.
Interestingly, Strathy J.’s comments in Green suggest that the bench is paying close attention to developments in other Canadian jurisdictions. While noting that Harris J.’s comments on the leave test in Round were obiter, he concluded
The examination of the test by Harris J. was circumscribed and did not include a consideration of either Silver v. Imax (Leave) or Arctic Glacier. That said, I do not disagree at all with the proposition that the “reasonable possibility of success” test sets a higher bar than “frivolous, scandalous or vexatious”. Nor do I disagree with the proposition that a preliminary merits-based assessment must be tempered by a recognition that there has been no discovery and that the analysis is conducted on a paper record with all its attendant limitations. (para 369)
Although Round appears to put forward a more stringent test than that outlined in the early Ontario cases, these comments suggest that there is good reason to believe Round may still influence Ontario law.
Certainly, it seems clear based on the limited guidance provided by early leave decisions that litigants would be pleased to see the Court of Appeal fashion clearer and more precise tools with which to consider the statutory leave requirement.
Court of Appeal Docket No.: CA039489
Date of Decision: November 2, 2012
B.C. Securities Act British Columbia Court of Appeal class action certification filtering mechanism leave application leave test secondary market secondary market class action securities legislation amendments statutory leave requirement