The Ontario Court of Appeal has confirmed an important decision limiting the exposure of investment banks to secondary market misrepresentation class actions. In Goldsmith v. National Bank of Canada, the Court refused to extend the meaning of the term “promoter” in Part XXIII.1 of the Ontario Securities Act to cover conventional banking and advisory services. “Something more” is required before an action lies against an issuer’s bankers for secondary market disclosure.

Background

Poseidon Concepts Corp. collapsed in 2013 after briefly operating as a publically traded energy services company. In Poseidon’s wake sprung thirteen proposed class actions alleging misrepresentations in Poseidon’s financial statements and disclosure documents. Ms Goldsmith sought leave under Part XXIII.1 to sue National Bank for its role in the reorganization and public offering of Poseidon. She alleged that National Bank was liable for secondary market  disclosure as a “promoter” of Poseidon that “knowingly influenced” the release of two misleading documents.

Under Part XXIII.1 of the Securities Act, an action for secondary market disclosure lies against an “influential person” – which includes a “promoter” – who “knowingly influenced” the issuer to release a document containing a misrepresentation. A “promoter” is someone who “takes the initiative in founding, organizing or substantially reorganizing the business of an issuer.” The court must grant leave before anyone may commence an action against a “promoter” under Part XXIII.1.

The motions court denied Ms Goldcorp leave to sue National Bank on the basis that conventional banking and advisory services do not a “promoter” make. It was not sufficient that National Bank provided essential loans for the reorganization of Poseidon or that its wholly owned subsidiary acted as financial advisor and underwriter of the public offering. These banking activities did not amount to taking “the initiative in founding, organizing, or substantially reorganizing” Poseidon.

For more on the motions court decision, see our post of June 16, 2015.

Robust Standard For Leave Under Part XXIII.1

The Court of Appeal emphasized the “robust[ness]” of the test for granting leave to commence an action under Part XXIII.1. Following the Supreme Court of Canada’s recent decisions in Theratechnologies Inc. v. 121851 Canada Inc. and Canadian Imperial Bank of Commerce v. Green, the Court of Appeal held that the general standard for interlocutory factual review was “inappropriately low” in this context. Rather, the threshold for granting leave under Part XXIII.1 is “more stringent” to meet the “objective of screening out unmeritorious claims at an early stage.”

The Court of Appeal defined a two-part burden on the claimant to obtain leave under Part XXIII.1:

  • First, the claimant must offer “a plausible interpretation of the applicable legislative provisions” supporting the theory of liability.
  • Second, the claimant must offer “credible evidence sufficient to convince the court that there is a reasonable possibility that the action will be resolved at trial in the claimant’s favour.”

For more on the standard for leave to commence a proposed secondary market class action, see our post of April 17, 2015 regarding the Supreme Court’s decision in Theratechnologies.

“Something More” Than Conventional Banking And Advisory Services

The Court of Appeal held that Ms Green failed to meet either part of her two-part burden to obtain leave to sue National Bank. She offered neither a credible interpretation of the term “promoter” nor credible evidence to hold National Bank liable for secondary market disclosure as a promoter.

The Court of Appeal’s approach is significant for other capital market participants, particularly investment banks and other advisors to public companies. To come within the definition of “promoter,” a person must take a leading role in the organization or reorganization of the company. This means that the person must be active and autonomous and have meaningful control. Merely providing advice, regardless of how important, to the company’s decision-makers is not sufficient.

As the Court of Appeal put it, “something more” than advice and banking services is required for a capital market participant such as National Bank to qualify as a “promoter.” To get over the leave stage, there must be credible evidence of this “something more” to support liability as a promoter.