The Court of Appeal for Ontario has recently confirmed that the Securities Act provides a circumscribed route for class actions alleging secondary market misrepresentations. In Rooney v ArcelorMittal SA, Justice Hourigan, on behalf of the Court, held that security holders who sell shares in the secondary market in the face of a takeover bid cannot bring a claim pursuant to the statutory cause of action for misrepresentations in a takeover bid circular. Instead, such security holders must bring their claims pursuant to the statutory cause of action for misrepresentations in the secondary market in Part XXIII.1. The decision in Rooney confirms that plaintiffs cannot avoid restrictions placed on secondary market class actions by piggybacking a secondary market claim onto a primary market claim.
In Rooney, the plaintiffs commenced a class action based on alleged misrepresentations in a takeover bid circular pursuant to s. 131(1) of the Securities Act. The proposed class included not only security holders who had sold their shares directly to the bidders, but also those who had traded them in the secondary market.
The plaintiffs sought to rely on the statutory cause of action provided for in s. 131(1) for their secondary market claims, rather than the separate statutory cause of action for secondary market misrepresentation provided for in s. 138.3. Relying on the broad language of s. 131, which says that any “security holder” can sue for damages if they receive a takeover bid circular containing a misrepresentation, the plaintiffs argued that secondary market participants had a right of action pursuant to that provision, notwithstanding the specific provision in s. 138.3.
Court of appeal decision
Justice Hourigan rejected the plaintiffs’ position and held that secondary market participants cannot bring an action pursuant to s. 131(1). In doing so, Justice Hourigan held that the plaintiffs’ interpretation was inconsistent with the statutory context, the purpose of s. 131(1), and the scheme of the Securities Act.
Most notably, Justice Hourigan explained that the plaintiffs’ interpretation conflicted with the overall scheme governing class actions alleging secondary market misrepresentations. That scheme includes protections for defendants, including the leave requirement (to prevent opportunist ‘strike suits’) and liability caps. The plaintiffs’ attempt to use s. 131(1) in this case, which does not contain the same protections, was simply “an impermissible attempt to avoid the restrictions placed on the operation of the statutory cause of action found in Part XXIII.1.”
Courts in Ontario given effect to some of the protections provided to defendants in secondary market class actions by, for instance, applying a robust two-part test before granting leave for any action, emphasizing the importance of defence evidence in rejecting leave applications, and letting defendants rely on statutory defences at an early stage of the proceedings. Rooney usefully clarifies that plaintiffs cannot circumvent those safeguards by piggybacking a secondary market claim onto a primary market claim under Part XXIII of the Securities Act.