As detailed repeatedly in this space, the Canadian court system has issued a number of decisions which have altered the practice of bringing – or defending against – a securities class action for secondary market misrepresentation. In its recent decision in Mask v. Silvercorp Metals, Inc. (“Mask”), the Court of Appeals for Ontario further clarified the evidentiary standard to be applied on a motion for leave and certification of a proposed class action. Its decidedly defendant-friendly decision is relevant to any entity which finds itself defending against such a claim in Ontario.
At issue in Mask was a proposed class action claim against defendant Silvercorp Metals, Inc. (“Silvercorp”), a Canadian company which operates mining properties in China. In 2010 and 2011, Silvercorp periodically released public reports about a mining project in China. Those releases contained technical reports prepared by BK Exploration Associates (“BK”), which provided estimates of the silver, lead, and zinc resources and reserves at the mining project. On September 2 and September 13, 2011, anonymous internet postings questioned Silvercorp’s accounting and alleged that it overstated the quantity and quality of its mineral resources and reserves. This caused Silvercorp’s share price to plummet by 30 percent, and forced Silvercorp to issue a press release refuting the anonymous allegations.
The Trial Court Denies Leave to Bring a Class Action
In 2014, the plaintiff shareholder brought suit against Silvercorp, alleging statutory and common law claims for misrepresentation, failure to make timely disclosure, and negligence in publishing the 2010 and 2011 reports. The plaintiff moved for leave to bring a class action. As required by Section 138.8(1) of the Ontario Securities Act, the plaintiff produced evidence purporting to show that a) the action was brought in good faith, and b) there was a reasonable possibility that the action would be resolved at trial in favor of the plaintiff. Specifically, the plaintiff produced expert evidence from a professional geologist named Mohan Srivastava, in the form of a report from June 12, 2013, which criticized the quality of BK’s report and pointed out differences between predictions and actual production.
The defendant, in response, produced uncontroverted evidence to the contrary. Silvercorp produced as evidence subsequent reports prepared by its own expert, Patrick Stephenson. Mr. Stephenson’s report provided detailed evidence showing that there was, in fact, “no material discrepancy” between the predictions and production. His report made clear that Silvercorp had not made any material misrepresentation, and that it had simply been the victim of the anonymous posters who had shorted its shares in order to make a profit when the price fell. Notably, Mr. Srivastava’s subsequently filed report – prepared and presented on behalf of the plaintiff – did not address Mr. Stephenson’s evidence.
Faced with this evidence, the motion judge found that the plaintiff’s secondary market misrepresentation claim was “so weak or has been so successfully rebutted by the defendants that it has no reasonable possibility of success.” The claim was summarily dismissed.
The Appeals Court Affirms
On appeal, the plaintiff argued that the motion judge misapplied the test for leave. In support, the plaintiff cited Theratechnologies Inc. v. 121851 Canada Inc., where the Supreme Court of Canada held that a plaintiff must only show “a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim.” The plaintiff’s position was that once he presented some credible evidence in support of his claim, the test was satisfied and leave should be granted without considering the evidence submitted by the defendant.
The Court disagreed. In doing so, it noted that the reason Section 138.8(1) was enacted was to prevent unmeritorious claims from going forward. As such, the statute requires “a reasoned consideration of the evidence to ensure that the action has some merit.” That purpose would be completely defeated if the court could only “reasonably consider” the self-serving evidence presented by a prospective class representative, particularly where, as here, the defendant’s proffered evidence shows that the claim lacks merit. Thus, the Court was correct in not only allowing, but requiring a motion judge to consider all evidence in determining whether the bar for leave is met.
This decision is particularly noteworthy to parties facing claims of secondary market misrepresentation in Canada. Canadian courts have repeatedly reinforced their desire to weed out meritless claims as early as possible. As Mask reinforces, a party defending against such a claim can – and should – take full advantage of that position by presenting evidence in its favor immediately.