Ontario's statutory regime for secondary market liability came into effect in 2006 as a result of amendments to theSecurities Act (Ontario) (the OSA), creating a statutory cause of action for deficient market disclosure. Part XXIII.1 of the OSA creates a statutory cause of action against reporting issuers, their officers and directors, and related parties for misrepresentations made in secondary market disclosures.
The case law for this secondary market liability is followed closely by both plaintiffs and defendants counsel, as each decision continues to mold this statutory regime. In Bayens v Kinross Gold Corporation, the Court of Appeal expanded upon its analysis in Green v Canadian Imperial Bank of Commerce and in so doing, provided further clarity on a couple of critical issues related to misrepresentation claims in securities class actions.
The Test for Leave
The most frequent issue arising in securities class actions is the threshold for leave. Prior to bringing an action under Part XXIII.1, the plaintiffs must obtain leave of the court pursuant to a two-part statutory test: (1) the action must be brought in good faith, and (2) the plaintiffs must have a reasonable possibility of success at trial. The first part of the test is generally easily satisfied; the threshold for the second part of the test has been the subject of much debate.
In Green, the Court of Appeal established that the test to be applied for leave was tantamount to the test to be applied under section 5(1)(a) of the CPA on a certification motion. The Court acknowledged that the evidentiary record was very different when applying the two tests (there is no evidence before the Court on a 5(1)(a) analysis), but still held that the similar language of both tests was designed to weed out hopeless claims and only allow those to go forward that have some chance of success.
In Kinross, the Court expanded on how the same test could be applied in two "entirely different contexts". The Court explained that on a leave motion, the reasonable possibility of success standard is brought to bear on an evidentiary record consisting of affidavit evidence and the transcripts of any cross-examinations on the affidavits filed. Accordingly, the court is not required to accept the credibility of the evidence filed by the plaintiffs. This is contrasted with the standard under section 5(1)(a) of the CPA where no evidentiary record is filed and the facts pleaded are assumed to be true giving rise to what the Court referred to as a "deemed evidentiary record". The Court concluded that the reasonable possibility of success requirement of the leave test is a "relatively low threshold, merits-based test." The determination of whether a plaintiff's statutory action will have a reasonable possibility of success at trial requires some critical evaluation of the merits of the action, based on all the evidence proffered by the parties on the leave motion.
Kinross provides a good example of how applying the same test in two entirely different contexts can lead to different results. When the facts as pleaded were assumed to be true (and assuming certain needed amendments to the pleadings were made), section 5(1)(a) of the CPA was satisfied, but when the expert evidence put forth by the plaintiffs was evaluated, the judge of first instance determined that there was no reasonable possibility that the claim could succeed at trial and refused leave. The Court of Appeal held that this sort of evaluation of the plaintiffs' evidence was the proper role of a judge on a leave motion and upheld the motion judge's refusal to grant leave.
One of the articulated reasons for the Legislature instituting the statutory cause of action for secondary market misrepresentations was the purported inability of plaintiffs to successfully pursue a common law cause of action in negligent misrepresentation, largely as a result of the requirement to prove individual reliance. The issue of whether common law negligent misrepresentation claims are appropriate for certification on a class basis has invariably been an issue in these cases.
In Green, the Ontario Court of Appeal held that while individual reliance is not an appropriate issue for certification, that there were common issues within the negligent misrepresentation claims that would significantly advance the litigation and ought to be certified. Moreover, the Court of Appeal stated that in certain circumstances (although not those presently in front of the court), inferred group reliance could potentially be certified as a common issue.
In Kinross, the Court clearly found that the issue of reliance for the common law negligent misrepresentation claim was not a common issue. The Court clarified its decision in Green emphasizing that such reliance-based claims were particularly unsuitable for resolution in a class proceeding. The court ultimately held that if the class action were certified, the resulting proceeding would involve a vast number of individual trials on the critical issues of reliance, causation and damage, thus undermining two of the key goals of a class action: judicial economy and access to justice.
In determining that a class action was not the preferable procedure (a requirement for certification), the Court also held that in the unique circumstances where: 1) statutory misrepresentation claims and common law misrepresentations claims, based on the same evidentiary foundation, are combined; and 2) the former claims have been found to have no reasonable possibility of success under a statutory mechanism that is directed at access to justice; it is appropriate to consider the outcome of the leave motion for the statutory claims in the preferability inquiry regarding the common law claims.
Based on the above, the Court concluded that a class proceeding was not the preferable procedure for stand-alone negligent misrepresentation cases. The court distinguished this finding from its holding in Green given that in Kinross, unlike in Green, there was no other cause of action that ought to be certified upon which the common law negligent misrepresentation claims could effectively piggy-back. The decision in Kinross appears to stand for the proposition that common law misrepresentation claims should not be certified independent of complementary statutory claims.
The decision in Kinross further clarifies the threshold for granting leave and the appropriateness of certifying common law negligent misrepresentation claims. Following the Court of Appeal's decision in Green, some had thought that the apparent blurring of the leave and certification tests, and the manner in which they were likely to be applied, made it practically difficult to oppose leave. The manner in which the court explained the tests in Kinross, and the manner in which they were applied by the Court of Appeal, holds out promise that courts will take a hard look at statutory claims and weed out those with less apparent merit. It should also be noted that leave to appeal the Green decision has been granted by the Supreme Court of Canada meaning that the Court of Appeal may not have the final word on these issues.