Yesterday, the Supreme Court of Canada refused to hear an appeal from an Ontario Court of Appeal decision permitting a secondary market liability securities class action to proceed in Ontario against a defendant whose shares are traded only in the United States.
As usual, the Supreme Court gave no reasons for its decision not to hear the appeal. In the result, the reasons of the Ontario Court of Appeal now stand as the final expression of the law in Ontario with persuasive effect throughout the rest of Canada.
The case involves a proposed class action against Canadian Solar Inc. and its officers and directors. The representative plaintiff alleges that the company overstated its financial results in press releases, financial statements and an annual report. Section 138.3 of the Securities Act (Ontario) permits investors to recover damages from a “responsible issuer” for any misrepresentation in a “document” without requiring the investor to prove that he or she relied on the misrepresentation.
Canadian Solar argued that it is not a “responsible issuer” within the meaning of the Securities Act because it has not filed a prospectus in Ontario, and its shares don’t trade on any stock exchange in Canada. Canadian Solar therefore sought to have the claim under section 138.3 of the Securities Act dismissed on the grounds that these sections do not apply to a company whose shares do not trade in Canada.
The Ontario Court of Appeal rejected Canadian Solar’s arguments and allowed the claim to proceed. In so doing, the Court held that the term “responsible issuer” in the Securities Act is not restricted to issuers whose shares are publicly traded in Canada, but specifically envisages issuers whose shares are traded exclusively abroad, as long as that issuer has a “real and substantial connection” to Ontario. It also held that a “document” includes any public statement by an issuer, even if it is not filed with Ontario securities regulators.
Since Canadian Solar carries on business in Ontario (although most of its business activity occurs in China) it was held to have a “real and substantial connection” with the province. The Court concluded that the claim under the statutory cause of action in the Securities Act could proceed.
On its face, this decision extends the reach of Ontario securities law (and the risk of “no-reliance” liability for misrepresentation in publicly-released documents) to all publicly-traded companies that carry on business in Ontario, regardless of where their shares are actually traded, or who is their primary securities regulator. Coupled with last year’s decision in Silver v. Imax, in which the Ontario court certified a global investor class, it substantially increases the exposure of foreign issuers to class proceedings in Ontario.
This ruling is also consistent with a number of recent decisions in which the Canadian courts have assumed jurisdiction over class proceedings involving price fixing and other economic torts committed by foreign defendants, where damage is alleged to have been suffered in Canada. It appears therefore that Canadian courts are growing increasingly comfortable with the idea of bringing foreign defendants to judgment seat.
Fortunately, there do remain some procedural safeguards in the Ontario securities regime. It is not yet the Wild West. These safeguards include a requirement to obtain leave of the court within three years in order to proceed with a statutory secondary-market disclosure claim, and a cap on potential damages.
Nevertheless, foreign issuers doing business in Ontario need to be aware of the growing reach of Ontario securities law and to keep this in mind when assessing their public disclosure to investors.