Investment banks can breathe a little bit easier after National Bank’s recent win in Goldsmith v. National Bank of Canada, where the Court found that providing conventional banking and advisory services will not make a bank a “promoter” for the purposes of Part XXIII.1 of the OntarioSecurities Act and dismissed the claim at the leave stage on the basis that it had no reasonable possibility of success at trial.
The case arose out of the implosion of Poseidon Concepts, the publicly-traded energy services company, in 2013. Goldsmith brought a proposed class proceeding against, among others, National Bank, based on alleged misrepresentations made by Poseidon in its public disclosure. National Bank acted as Poseidon’s financial advisors on its public offering. Under the Act, the bank would only be liable for the company’s misrepresentations if it was found to be an “influential person” who “knowingly influenced the responsible issuer … to release the [impugned] document.” The plaintiff argued that National Bank was a “promoter” as defined in the Act, and thus an “influential person.”
The Court began its analysis by articulating the standard on the leave threshold. Following the Supreme Court of Canada’s recent decision in Theratechnologies the Court affirmed that the leave stage is not a mere “speed bump” on the way to certification, but rather a “robust deterrent screening mechanism” to ensure that “cases without merit are prevented from proceeding.” At the leave stage, the plaintiff must put forward sufficient evidence to persuade the court that there is a reasonable possibility the action will be resolved in its favour at trial.
The Act defines the term “promoter” as:
[A] person or company who, acting alone or in conjunction with one or more other persons, companies or a combination thereof, directly or indirectly, takes the initiative in founding, organizing or substantially reorganizing the business of the issuer.
Considering the evidence put forward by the plaintiffs, the Court had no difficulty in concluding that there was no reasonable possibility that National Bank could satisfy this definition. As the Court explained:
A bank that provides conventional banking services, however important they may be to the borrower is not without more a Promoter. An investment bank that makes presentations, pitches ideas to company executives, provides advisory services for a fee and plays a central or even crucial role in a client’s reorganization is not without more a Promoter. Why? Because lending money or providing financial and corporate advice, even if it is absolutely essential to the success of the project cannot reasonably be described as ‘taking the initiative to found or organize’ the business of the borrower/client.
To establish that a bank or professional advisor is a “promoter”, the plaintiff would need to provide evidence that the bank or professional advisor itself took steps, directly or indirectly, to actually found or organize the business in question – for example, by funding the required incorporations, organizing the board of directors, actively managing the company, or making key business decisions. None of the evidence put forward by the plaintiff suggested that National Bank played this role in connection with Poseidon. Although not party to the motion, the Court also found that National Bank Financial, National Bank’s capital markets subsidiary which acted as lead underwriter on Poseidon’s public offering, was also not a “promoter” for the purposes of Part XXIII.1 of the Securities Act.