Deemed Reliance in the U.S. Supreme Court
On June 23, 2014, the United States Supreme Court issued its much-anticipated decision in Halliburton Co. v. Erica P. John Fund (“Halliburton”), as issuers and investors in the U.S. (and Canada) wanted to see if the landscape for securities class actions in both countries would be fundamentally changed. The U.S. Supreme Court made only an uneventful change in U.S. law, and so our Courts are not likely to see a sudden shift of class actions against cross-listed companies to Canada. The U.S. Supreme court specifically held that defendants in securities class actions could rebut the presumption of investor reliance on public and material misrepresentations prior to class certification, by mounting evidence that the alleged misrepresentations did not, in fact, affect the issuer’s share price.
U.S. public issuers (along with Canadian plaintiffs’ lawyers, as discussed below) had hoped that the pro-business majority of Supreme Court would have gone even further by abandoning the presumption of reliance and instead requiring plaintiffs to prove actual reliance on the alleged misrepresentations. The presumption of reliance was established in Basic v. Levinson, 485 US 224 (1998) (“Basic”). In Basic, the U.S. Supreme Court articulated a “fraud on the market” theory, a presumption that share prices are a function of all material and public information about the issuer. Since Basic, plaintiffs in securities fraud and misrepresentation class actions have used that presumption to establish reliance by all investors on material misrepresentations. In other words, in U.S. securities class actions, Basic meant that plaintiffs did not have to prove reliance, easing the road to certification.
In Canada, provincial legislatures followed suit by ensconcing the deemed reliance principle of Basic in legislation, to allow investors to advance misrepresentation class actions without requiring any investors to prove individual reliance.
Instead of abandoning Basic, Halliburton provides defendants with an opportunity to demonstrate that the alleged misrepresentation did not affect the share price. This enables U.S. public issuers and their executives, as defendants, to mount an evidentiary challenge prior to certification. It is expected that in some instances this will make it more difficult for investors to gain certification in securities class actions in the United States.
Had Halliburton overturned Basic, it would have had a more profound impact on cross-border issuers and class counsel alike. First, since it would have made securities class actions almost impossible to mount in the United States, the focus of class counsel both in the U.S. and Canada would have shifted to the advantages of suing cross-listed companies here. Indeed, many predicted that the alliance between Canadian and U.S. plaintiffs’ counsel would have grown even stronger, as U.S. plaintiffs’ counsel would have worked with Canadian class counsel to “pick” cases for certification in Canada. Second, companies deciding where to register – Canada, U.S., or both – would have considered the new securities litigation landscape in the United States, and concluded that the U.S. is more issuer-friendly.
In the end, Halliburton did not abandon Basic. The impact of Halliburton on Canadian class action practice will therefore likely be small. In the appropriate case, defendants in Canada may try to mount a Halliburton-style argument against common law certification (which will be difficult, in any system), and in defending motions for leave to proceed under the securities Acts, but there will be no dramatic movement of cases away from the United States.
Basic v. Levinson Canada certification class action deemed reliance fraud on the market Halliburton misrepresentation securities class action Supreme Court U.S.