Extract taken from 'The Securities Ligation Review – edition 5'

Private enforcement

i Forms of action

Retail investors with a claim not exceeding C$350,000 may submit, at no cost, a written complaint to the Ombudsman for Banking Services and Investments (OBSI). The OBSI follows an informal process in accordance with its terms of reference to reach a non-binding recommendation for restitution. Quebec's provincial regulator, the AMF, provides a mediation service to all clients of registered dealers and advisers. With the exception of Quebec, registrant, investment fund managers and all market registrants are required to participate in the OBSI process. In addition, IIROC and MFDA members also have mandatory requirements with respect to reporting complaints to them and with respect to the handling of such complaints. IIROC members must also submit to binding arbitration for any claims of C$500,000 or less at the investor's option, though this option is rarely used as, unlike the OBSI, arbitration costs are incurred.

ii Procedure

Retail investors can also initiate a claim in the civil court system, as individuals or as part of a class action, to seek damages.

Class proceedings legislation exists in most provinces. The legislation is procedural and provides requirements for such matters as the certification of a class, notice, settlement, legal fees and opt-in or opt-out provisions. The test for certification generally requires that a cause of action is disclosed by an identifiable class of two or more persons that raises common issues, and renders a class action the preferable procedure through the appropriate representative plaintiff. A class action may still be certified if:

  1. damages require individual assessments;
  2. different remedies are sought for different class members; or
  3. common issues are not shared by all class members.
iii Settlements

Settlements of class actions are subject to court approval. The test for approval of a settlement of a class proceeding is whether the settlement is fair and reasonable and in the best interests of the class. On a motion for approval of a settlement of a class proceeding, the court must consider whether:

  1. there are any indicators of collusion or conflicts of interest in the settlement or the process leading to the settlement that might call into question its fairness; and
  2. the compromise embodied by the settlement falls within the range of reasonableness in the particular circumstances of the case.

In Ontario, the court has found the same test to be applicable under the class proceedings legislation of that province, as in Section 138.1 of the Ontario Securities Act, RSO 1990, c. Section 5 (OSA) discussed below.

Securities class actions – deemed reliance

There are various 'deemed reliance' provisions in the OSA that render misrepresentation susceptible to class actions in Ontario. Liability arises with respect to these misrepresentations without regard to whether the purchaser relied on the misrepresentation. Part XXIII of the OSA imposes civil liability for misrepresentation in the primary market. There is liability for misrepresentation in an (amended) prospectus, takeover bid circular, director's or officer's circular and issuer bid circular. A right of action for misrepresentation, without reliance, lies against such individuals as the issuer, underwriters, directors and others who consented to the disclosure or signed the prospectus.

Among the defences available is that of a 'reasonable investigation'. A reasonable investigation provides reasonable grounds for a belief that there was no misrepresentation. It is, in turn, subject to a standard of reasonableness required of a prudent person in the circumstances. Damages recoverable cannot exceed the price at which the securities were offered. For underwriters, damages cannot exceed the total public offering price represented by the portion of the distribution underwritten.

Part XXIII.I of the OSA imposes civil liability for secondary market disclosure without regard to reliance by the purchaser. A right of action for misrepresentation, without reliance, lies against the issuer, officers and directors, 'influential persons' and experts, if the misrepresentation is contained in their opinion and they consented in writing to its reliance. A right of action also exists for public oral statements and for failure to make timely disclosure of a material change. Considerations for the assessment of damages are set out in the OSA.

Multiple misrepresentations or multiple instances of failure to make timely disclosure of a material change that have a common subject may be treated as a single misrepresentation or failure in the discretion of the court. Again, among the several defences available is that of a reasonable investigation with the factors for consideration by the court set out in the OSA.

An action for misrepresentation in the secondary market requires leave of the court, which is granted where the action is brought in good faith and there is a reasonable possibility that the action will be resolved in favour of the plaintiff. The OSA sets out a procedure for affidavit materials, filing and notice requirements.

A limitation period applies. No action shall be commenced later than the earlier of three years from the date the misrepresentation in the document or public oral statement is made or six months after the issuance of a press release announcing that leave has been granted.

Other actions against the corporation

Pursuant to the Canada Business Corporations Act, RSC 1985, c. C-44 (CBCA) and similar legislation in other provinces, a 'complainant', generally defined as a shareholder, officer, director or 'any other person who, in the discretion of the Court is a proper person', may bring a derivative action to pursue a claim on behalf of a corporation. A derivative action requires leave of the court, which must be satisfied the complainant is acting in good faith and the action is in the interest of the corporation. A complainant may also seek an oppression remedy, which does not require leave and which is a broad remedy that may extend to many types of 'unfair conduct'. The court will consider whether there is evidence to support the breach of reasonable expectation asserted by the relevant interest of the stakeholder. Complainants may seek both remedies.