In his April 27, 2016 judgment in LBP Holdings v Allied Nevada Gold Corp., Justice Belobaba of the Ontario Superior Court of Justice refused to add the defendant issuing company’s underwriters as defendants to primary and secondary market misrepresentation claims under the Ontario Securities Act (“OSA”) in a putative class proceeding.

Justice Belobaba’s decision confirmed the test for adding parties as defendants to proposed class proceedings and clarifies the scope of certain OSA actions with regards to underwriters.

The Putative Class Proceeding

In May 2013, the defendant gold mining company effected a cross-border $150 million (U.S.D.) public offering. The proposed defendants were the underwriters on the offering. The plaintiff commenced the putative class action when the share price dropped following several alleged “corrective disclosures”.

The defendant company subsequently filed for protection under American bankruptcy law. The plaintiff then served a motion seeking to add the underwriters as defendants to the proposed class action. In the plaintiff’s proposed amended claim, the causes of action asserted against the underwriters are:

  • Statutory claims under Part XXIII (primary market misrepresentation claim) and Part XXIII.1 (secondary market misrepresentation claim) of the OSA; and
  • Claims in negligence simpliciter, negligent misrepresentation, and unjust enrichment

The Decision

Justice Belobaba noted that plaintiffs will generally be granted leave to add new defendants unless the proposed defendant can demonstrate either (1) non-compensable prejudice, or (2) that the claims being advanced are untenable at law.

Noting that the underwriters’ claim for indemnification of legal costs was not “extinguished” in the bankruptcy proceeding, and that they may still be able to seek compensation under the defendant company’s insurance policy, Justice Belobaba found that non-compensable prejudice was not established by the underwriters.

The test for determining whether the claims advanced are not legally tenable, in order to oppose amending the pleadings under Rule 26.01 of the Rules, is whether it is “plain and obvious” that the claim discloses no reasonable cause of action (i.e. the same test that applies under a motion to strike under Rule 21 and on a certification motion under s. 5(1)(a) of the Class Proceedings Act, 1992).

Justice Belobaba found that, since section 138(b) under Part XXIII of the OSA requires shareholders to bring primary market misrepresentation claims within 180 days of when they first had knowledge of the facts giving rise to the claim, the primary market claim against the underwriter was time-barred and thus untenable.

The secondary market misrepresentation claim under Part XXIII.1 of the OSA was also found to be untenable, as Justice Belobaba held that underwriters are not “experts” for the purposes of Part XXIII.1. A claim pursuant to Part XXIII.1 can only be brought against the enumerated categories of defendants listed in section 138.3(1). The plaintiff asserted that underwriters fit within the definition of “expert” in that section. Justice Belobaba held that the OSA made clear the “experts” and “underwriters” are separate and distinct categories under both part Part XXIII and Part XXIII.1. Among other things, he noted that underwriters are not “professionals” in an equivalent sense to the non-exhaustive categories of experts included in the OSA definition (which includes accountants, auditors, engineers and lawyers), all of whom are “regulated or licensed or otherwise held to certain defined standards of conduct and skill”.

Regarding the remaining claims, Justice Belobaba found the unjust enrichment claim to be legally untenable, as the underwriting agreement – a valid contractual obligation – formed a juristic reason for the underwriters’ receipt of fees from the issuer, and that absent a derivative action, the plaintiff could not assert a claim in unjust enrichment for fees paid to the underwriter by the issuing company. Justice Belobaba granted leave to add the underwriters as defendants to the common law claims for negligence and negligent misrepresentation, although he assumed “that this is not a preferred alternative for the plaintiff”.

Key Takeaways

The decision in LBP v. Allied provides a practical application of the test for granting leave to add new defendants to a putative class proceeding. It also confirmed that, with respect to claims under the OSA, an underwriters’ certificate “can trigger statutory liability under Part XXIII but not under Part XXIII.1”, and that “s. 130 [of Part XXIII] of the OSA provides a “complete code” for underwriter liability.”