In a much anticipated decision, the Supreme Court released its rulings in three Ontario securities class actions on December 4, 2015: Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60 (“Green”). This trilogy of secondary market class actions has been discussed extensively in previous postings on this blog (see this blog’s discussion of the Ontario Court of Appeal decisions, in the Top Ten Appeals to Watch in 2015 and in the SCC Monitor after the appeals were argued at the Supreme Court).
In Green, the Supreme Court made three important determinations:
- First, the Court unanimously confirmed that the merits test for leave to proceed is to be construed as a “robust deterrent screening mechanism” in Ontario, which requires real scrutiny of the merits of a claim. The Court adopted the analysis it recently applied under Quebec’s analogous statute in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18.
- Second, by a 4-3 majority, the Court reversed course on the limitation period applicable to statutory secondary market misrepresentation claims in Ontario. Overruling the Ontario Court of Appeal (which had overruled its own prior decision), the Court held that the limitation period for such claims does not stop running until the Superior Court grants leave to proceed under Ontario’s Securities Act. However, the impact of this determination is limited given recent amendments to Ontario’s Securities Act which prescribe a different limitation period going forward.
- Third, the Court unanimously rejected a U.S.-style “fraud on the market” theory that individual investors’ reliance on a misrepresentation could be inferred on a common basis. The Court nonetheless upheld certification of aspects of common law misrepresentation claims related to a defendant’s conduct.
The Merits Test
In sharp contrast to the limitations issue discussed below, the Supreme Court’s comments on the merits component of the leave to proceed test will affect all statutory secondary market class actions going forward across Canada and were unanimous.
Under Part XXIII.1 of Ontario’s Securities Act, aggrieved investors may bring statutory actions for secondary market misrepresentation against issuers, their directors and officers (and others) without the need to establish individual reliance on the alleged misrepresentation, which is required for common law negligent misrepresentation (s. 138.3). However, an investor must first obtain leave from the Superior Court of Justice to proceed with the statutory cause of action by showing that the action is brought in good faith and has a reasonable possibility of success on the merits (s. 138.8). The second part of the test was in issue in the CIBC appeal.
The Supreme Court confirmed that its analysis in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18, applied under Ontario’s Securities Act (see our earlier post on Theratechnologies). Instead of a “low threshold,” Theratechnologies characterized the leave test as a “robust deterrent screening mechanism” which requires the investor to show a “plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim”.
The Court’s decision to apply a leave test with teeth can be considered an endorsement of the approach taken by Ontario’s Superior Court of Justice in three recent decisions where leave to proceed was denied.
Despite its strong statement on the leave test, the Supreme Court did not directly analyze the merits of leave in the CIBC appeal. Instead, both of the principal opinions of the Court simply concluded that the plaintiff’s evidence and arguments met the applicable standard, even though Strathy J. had applied a less stringent test, and the defendants in the CIBC case had relied upon certain of the statutory defences in the Securities Act. As a consequence, the scope of these defences and the manner in which a court is to assess evidence of such defences are issues to be determined another day.
The Decision on Limitations: Back to the Future
The focus of the Supreme Court’s decision in Green was the limitations issue. However, the practical implications of the Supreme Court’s decision on the limitation period are, well, limited. In the wake of the Ontario Court of Appeal’s decision in February 2014, Ontario’s legislature reversed that Court’s decision by amendment to the Securities Act, which tolled the limitation period once an investor filed a Notice of Motion with the court seeking leave to proceed under Part XXIII.1. The Supreme Court’s decision therefore applies only to those claims commenced before the legislative amendment.
Nevertheless, the Court’s analysis of the leave question highlights the competing policies at the heart of the statutory secondary market liability regime. These principles will continue to animate the case law relating to this regime.
In addition to the leave requirement, Part XXIII.1 creates another screening mechanism to limit the risk of unmeritorious strike suits proceeding against issuers: s. 138.14 requires investors to bring their claims within three years after the date of the misrepresentation. The issue before the Supreme Court was the interaction between the three-year leave requirement in Part XXIII.1 and the limitation period tolling provision of Ontario’s Class Proceedings Act (CPA). Section 28 of the CPA suspends the running of a limitation once a cause of action has been “asserted”. In a two-year period, the Ontario Court of Appeal had reversed itself on the question of whether a cause of action was “asserted” only after leave was granted or at the time a Claim was commenced: the 2012 decision in Timminco said the former, while a five-judge panel in Green said the latter.
The Supreme Court divided on the limitations question. Justice Côté (with McLachlin C.J. and Rothstein J. concurring) agreed with the Ontario Court of Appeal’s approach in Timminco, while Karakatsanis J. (with Moldaver and Gascon JJ. concurring) agreed with that court’s decision in Green. The tiebreaker fell to Justice Cromwell, who wrote separate reasons. On this issue, he joined with Justice Côté.
In addition to closely parsing the words of s. 138.14 of the Securities Act and s. 28 of the CPA, both Justice Côté and Justice Karakatsanis looked to the purposes of the statutory right of action for secondary market misrepresentation in Part XXIII.1 to determine which interpretation of those sections should be adopted. Unsurprisingly, they emphasized different statutory purposes.
Justice Côté focused on the objective of eliminating unmeritorious strike suits against issuers “as early as possible”:
The leave requirement for actions under Part XXIII.1 OSA was developed by the CSA and reported in CSA Notice 53-302. This requirement arose out of a concern for the potential of U.S.-style “strike suits” in Canada. Strike suits are meritless actions launched in order to coerce targeted defendants into unjust settlements…
… The overriding policy concern was for long-term shareholders, who are unfairly affected by the volatility of share prices that results from spurious claims. In setting out the nature and the components of [the screening] mechanism, the CSA stressed the importance of screening out unmeritorious actions as early as possible in the litigation process …
In contrast, Justice Karakatsanis highlighted the access to justice and judicial economy impetus for the secondary market provisions:
[This] interpretation of s. 28 furthers the CPA’s goals of judicial economy and access to justice. It guarantees the class members’ access to the courts by maintaining one of the main benefits of the class action: the suspension of the limitation period for all class members. Section 28 protects potential class members, including the representative plaintiff, from the running of their individual limitation periods during the collective pursuit of their claims through the class proceeding vehicle. This protection ceases and the individual limitation periods resume running on the occurrence of any of the six events set out in s. 28(1) that end that collective pursuit. Effective protection of potential class members during the collective pursuit of their claims necessarily entails protecting the rights that those class members seek to pursue in a class proceeding as opposed to in individual actions…
In the result, the earlier approach in Timminco carried the day. The CPA only suspends the limitation period once a judge grants leave to proceed under s. 138.3 of the Securities Act. Because none of investors in the three cases before the Supreme Court had been granted leave in time, the ruling should have terminated all three actions. However, Justice Côté applied the doctrine of nunc pro tunc – Latin for “now for then”, under which a court may essentially back-date a decision where no statute prevents it and doing so is in the interests of justice – to allow the investors to continue with their claims against CIBC and IMAX. She refused to apply the doctrine in favour of the investors in Celestica, because the plaintiff in that case had not filed a motion for leave before the expiry of the limitation period. The Court also refused to apply any other doctrine which would overcome the expiry of the limitation period.
Fraud on the Market Rejected but Common Law Misrepresentation Not Dead
In the CIBC case, the defendants had argued that no aspect of a common law misrepresentation claim should be certified because, in their submission, the Part XXIII.1 statutory misrepresentation regime were “preferable” to common law claims. The Court unanimously rejected this argument. It held that the common law claims relating to the defendant’s conduct could proceed. However, the Court did not discuss – and therefore did not overrule – the Ontario Court of Appeal’s decision that, contrary to the investors’ argument, reliance could not be inferred on a class-wide basis as a common issue, based on a theory that an efficient market incorporates all publicly available material into the price of a security (that is, the theory of “fraud on the market”); instead, individual investors would be required to establish actual reliance on the misrepresentation after a successful common issues trial.
Because the Supreme Court only addressed the common law misrepresentation claim in connection with an action in which the statutory claims were allowed to proceed (Green v. CIBC), the Court left undisturbed the Ontario Court of Appeal’s decision in an unrelated appeal which established that common law misrepresentation claims cannot satisfy the preferability requirement where leave has been refused for the statutory misrepresentation claims (discussed in a blog post here).
On the issue of the merits test for leave to proceed, the Supreme Court has effectively endorsed the emerging line of Ontario case law which emphasizes that judges should apply real scrutiny to the evidence investors present to show a reasonable prospect of success as an essential part of the secondary market regime. There can now be no serious dispute that the test in Ontario is far more stringent than a pleadings standard.
On the limitations issue, the amendments to Ontario’s Securities Act in the spring of 2014 to some extent render academic the Supreme Court’s decision. Nevertheless, the policy rationales Justice Côté and Justice Karakatsanis emphasized in their respective judgments will undoubtedly find their way into arguments about other aspects of the statutory secondary market liability regime. Indeed, the Supreme Court’s division on the limitation period question highlights the tensions between those policy rationales that courts have been grappling with since the statutory right of action was introduced in late 2005. Moreover, the Court’s divided opinion on the applicability of nunc pro tunc may lead to further litigation on the scope of that doctrine in Ontario limitations law.
Finally, the Supreme Court’s decision gave both issuers and investors something on the issue of common law misrepresentation. For issuers, the decision may finally close the door on inferred reliance through “fraud on the market” for common law misrepresentation claims. On the other hand, investors received the highest court’s blessing for advancing defendant-focused aspects of common law misrepresentation claims. It remains to be seen whether and how this ruling might impact arguments in future cases relating to plaintiffs’ attempts to commence common law causes of action alongside statutory causes of action where the statute does not, like Ontario’s Securities Act, expressly preserve common law remedies.
CIBC v. Green, 2015 SCC 60
Docket: 35807, 35811, 35813
Date of Decision: December 4, 2015