Can you be sued in a securities class action when the correction causes no price decline?  

The Ontario Superior Court’s securities class action leave decision in Longair v. Akumin Inc. et al. addressed a rare issue: what happens if a public correction does not cause a price drop in the secondary market? The decision, which is being appealed to the Divisional Court, provides a useful review of principles concerning public corrections in the class action context and has important implications for reporting issuers filing corrective disclosures.

Background

In June 2021, Akumin Inc. (“Akumin”) announced an agreement to acquire Alliance HealthCare Services Inc. (“Alliance”) for $820 million USD. If completed, this transaction would transform Akumin’s business and roughly triple its size. It was expected to close in Q3 2021.  

In August 2021, Akumin announced that its Q2 2021 financial statements would be delayed to allow further analysis of potential credit losses in prior years. Akumin’s share price dropped by around 25%.^[1]

Between October and November 2021, Akumin publicly disclosed that its potential credit losses were expected to negatively impact its accounts receivable by about $25-30 million, that there would be a downward adjustment to property and equipment of about $19 million, and that its financial statements for FY 2019, FY 2020, and Q1, 2021 would be restated. Akumin’s share price did not materially decrease even though information that was materially misstated for accounting purposes was corrected.^[2] Instead, it remained about the same or even increased.^[3]

Was there a correction?

A putative global class action was commenced against Akumin, certain of its directors and officers, and its auditor in Ontario. The plaintiff alleged that there were material misrepresentations in Akumin’s public disclosure documents and financial statements and sought leave^[4] to commence a secondary market class action under s. 138.1 of the Ontario Securities Act (“Securities Act”). The provision gives a right of action to a person who acquires or disposes of an issuer’s security between the date of release of a document containing a misrepresentation and the date the document is publicly corrected, regardless of whether the person relied on the misrepresentation.

This article focuses on the court’s analysis of whether Akumin publicly corrected any prior misrepresentation for the purposes of the Securities Act.

In opposing leave, Akumin argued that its share drop in August 2021 was attributable to the risk of the Alliance transaction failing and the delay of its financial statements, not to a correction of any prior misrepresentation.^[5] Further, since the disclosures after August 2021 did not cause Akumin’s share price to drop, they were not “corrective” of a prior misrepresentation. Akumin relied on an Ontario Court of Appeal precedent to argue that a disclosure unaccompanied by a statistically significant share price decline cannot be a public correction for the purpose of s. 138.8 of the Securities Act.^[6]

The motion judge disagreed. 

The Court’s analysis of public correction under the Securities Act

The overarching question is “whether the alleged public correction was reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement.”^[7] There must be a “sufficient linkage or connection” between the public correction and the alleged misrepresentation. “A mere coincidence in subject matter will not suffice”.^[8] This approach incentivizes fair and accurate disclosure by public issuers:

“[p]ermitting an issuer to escape liability by making vague or general disclosures (“something has happened and we are looking into it”) is inconsistent with that core purpose. It would undermine confidence in the securities market and deprive shareholders of compensation.”[9]

Akumin relied heavily on the principle from Badesha v. Cronos Group Inc. that “whether a correction is material is not a matter of semantics, but rather requires an understanding of how a specific correction would be understood in an efficient market and also requires a statistical analysis of the effect of the correction.”^[10] (Emphasis added).

The motion judge held that “Akumin’s approach muddles the materiality of the representation with the materiality of the correction”^[11] and—unusually—held that the Court of Appeal in Cronos erred “in referring to the materiality of the public correction”. The Court noted that while a public correction is important, it is the misrepresentation that does the “heavy lifting”.^[12] The misrepresentation “is the wrong at issue and it forms part of the context in which the public correction operates and would be understood by the market”. Also:^[13]

“… it is obvious that the impact of the public correction on share price is a factor that can assist the judge in determining whether the representation that is corrected in the public correction is material, but it is the materiality of the misrepresentation at issue, not the materiality of the public correction. In my view, the distinction is important. If the public correction has to be material — a conclusion not supported by the plain wording of the statute — then the court is encouraged to parse each partial correction in a way that disconnects the circumstances around each public correction from the others. That is how Akumin has approached this motion. It argues that there is no public correction followed by a statistically significant share price decline. There is either a correction or a statistically significant share price decline. In my view, this siloed approach does not support the legislative goal of incentivizing fair and accurate disclosure by issuers. Rather, it incentivizes issuers to do exactly what Strathy C.J.O. rejected in Baldwin: disclose that “something has happened and we are looking into it” in the hopes of provoking the expected share price decline, and leaving the clear public correction until later, hoping to minimize or avoid a share price decline following the corrective disclosure. …Another impact of the approach Akumin urges me to take is that it, in effect, elevates the importance of the public correction, inconsistent with the Court of Appeal’s finding in Baldwin that misrepresentation does the heavy lifting, and that at the leave stage, the role of public correction is modest”[14]

Relying on this reasoning, the motion judge concluded that there was a reasonable possibility that Akumin’s corrections between October and November 2021 were public corrections for the purposes of the Securities Act. The motion judge relied in part on the plaintiff’s theory that Akumin’s general August 2021 disclosure (which caused a 25%~ share price decline) had caused the market to “price in” the subsequent negative disclosures. So, the fact that the share price did not move in response to those disclosures did not mean that the information corrected was not “material”.^[15]  Moreover, the Court reasoned that the plaintiff’s theory was supported by the fact that Akumin’s share price never went above the August 2021 levels, even though the Alliance transaction closed in September 2021.

Takeaways

There is uncertainty about whether the motion judge’s reasoning will stand. The same uncertainty applies to how a court will calculate damages for secondary market liability. Section 138.5 of the Securities Act stipulates a fixed formula for damages: the difference between the price paid per share and the issuer’s average share price 10 days after the public correction. But if there is no price decline after a public correction (as occurred in Akumin), how will damages be calculated? The Divisional Court has granted leave to appeal. Its decision could also be appealed to the Court of Appeal.

In the interim, issuers should take a cautious approach when filing corrective disclosure. Courts will not look favourably on a general disclosure that “something has happened and we are looking into it”, even if it was not undertaken in the hopes of provoking a share price decline in advance of the particularized public correction.

^[1] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 97.

^[2] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 12.

^[3] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 89.

^[4] Section 138.8(1) of the OSA requires that the court grant leave to a plaintiff to commence a secondary market liability proceeding. Leave will be granted when (i) the action is brought in good faith; (ii) there is misrepresentation; (iii) the misrepresentation is material; and (iv) the misrepresentation has been publicly corrected.

^[5] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 100.

^[6] Badesha v. Cronos Group Inc., 2022 ONCA 663 at para 66.

^[7] Baldwin v. Imperials Metals Corporation, 2021 ONCA 838 at para 47.

^[8] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 58.

^[9] Baldwin v. Imperials Metals Corporation, 2021 ONCA 838 at para 57.

^[10] Badesha v. Cronos Group Inc., 2022 ONCA 663 at para 66.

^[11] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 63

^[12] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 56.

^[13] Baldwin v. Imperials Metals Corporation, 2021 ONCA 838 at paras 50-51.

^[14] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at paras 65, 66, 68.

^[15] Longair v. Akumin Inc. et al., 2024 ONSC 3675 at para 112.