In an active year in securities class actions, Canadian courts have provided new guidance and clarity in a number of important areas. Below we briefly review a number of significant decisions in Canadian securities class actions from the past year.

The Balancing Act Between Class Actions and Insolvency Proceedings

The Quebec Superior Court in Arrangement relatif à Xebec Adsorption Inc. refused to lift the stay of proceedings issued under the Companies Creditor Arrangement Act (CCAA) in respect of the debtor company, Xebec, to allow a class action to be advanced. The decision reinforces that since class proceedings are only a procedural mechanism, they ought to be treated no differently than other types of litigation in insolvency proceedings.

Two shareholders instituted a class action against Xebec's underwriters and five of its directors, pursuant to the Quebec Civil Code and Quebec Securities Act. The shareholders claimed that Xebec misrepresented its revenue forecast which, after a correction was announced, caused the share price to plummet.

The Quebec Court affirmed that stays should only be lifted in circumstances where "to do so is consistent with the goals of the stay". The "overriding consideration" is the impact of proceedings on the CCAA process and whether the proceedings would seriously impair the debtor's ability to focus on negotiating an arrangement.

In applying these principles, the Quebec Court rejected the shareholders' request, which demonstrates that class action proceedings are no different than other types of litigation insofar as limiting the scope or lifting stays of proceedings pursuant to the CCAA. Xebec's efforts were better served focusing on the restructuring. This would benefit creditors, shareholders and other stakeholders, which was more valuable, at that time, than proceeding with the class action.

Understanding the Potential Scope of a "Material Change"

In a pair of cases, Markowich v. Lundin Mining Corporation and Peters v. SNC-Lavalin, the Court of Appeal for Ontario endorsed a broad interpretation of the concept of a "material change" in securities law.

In Markowich v. Lundin Mining Corporation, the issue was whether a significant rock -slide at an open-pit mine constituted a "material change" in the company's "business, operations, or capital." Following the rock-slide, there was some interruption in mining operations. A month after the incident, Lundin issued a press release advising of the rock-slide and, separately, providing updated production and data. Following the press release, Lundin's share price declined by 16 percent.

The plaintiff, on behalf of the putative class, advanced a claim under s. 138.3 of the Ontario Securities Act, alleging a misrepresentation in Lundin's public disclosure documents. The plaintiff argued that Lundin had breached s. 75 of the Securities Act, which requires a company to disclose any "material change" in its "business, operations or capital" within ten days of the relevant event.

At first instance, the motion judge concluded that while the rock-slide was "material", it did not constitute a "change" in Lundin's "business, operations, or capital." On the motion judge's interpretation of the Securities Act, a material change required that the event at issue result in a "different position, course or direction to a company's business, operations or capital." The motion judge found that the rock-slide was not a material change because there was no evidence that the rock-slide posed any threat to the company's economic viability, interrupted the company's ability to carry out its mining operations at large, or changed the fundamental nature of its business. The motion judge also relied on evidence suggesting that rock-slides were a relatively common occurrence in open-pit mines. On this basis, the motion judge denied leave to assert a secondary market misrepresentation claim under s. 138.3 of the Securities Act.

The Court of Appeal allowed the appeal. It held that the motion judge had adopted an unduly restrictive interpretation of the term "material change" for the purpose of a motion for leave under s. 138.3 of the Securities Act, which requires only that the applicant put forward a "plausible interpretation" of the statute.

Properly interpreted, the test to determine whether an event is a "material change" encompasses two distinct elements: (a) whether there was a "change" in the issuer's "business, operations or capital"; and (b) whether the change was "material."

The motion judge's interpretation improperly conflated these two components. The assessment of whether a "change" has occurred does not focus on the magnitude or materiality of the change. It requires a qualitative assessment, focusing on whether the change was "external to the company as opposed to whether the change was in the business, operations or capital of the company."

The Court of Appeal grounded its interpretation in the different standards in the Securities Act applying to the disclosure of a "material change" (which must be disclosed "forthwith") and a "material fact" (which need not be disclosed immediately). The principal policy objective underpinning the distinction is to relieve issuers of the burden of continually updating the market on external factors outside of the company's control. As a result, a change external to the issuer that may affect the issuer's share price but that does not result in the change in the business, operations or capital of an issuer cannot qualify as a material change.

The Court of Appeal concluded that the term "material change" must be interpreted broadly, particularly in the context of a leave application under s. 138.3 of the Securities Act. There was at least a plausible basis to conclude that the plaintiff would ultimately succeed in establishing that the rock-slide was a "change" in the company's operations, as there was evidence that mining operations were interrupted for a period of time.

The Court of Appeal expanded on this interpretation in the companion case Peters v. SNC-Lavalin, which was released at the same time as Markowich. The issue in that case was whether a September 2018 phone call in which the Public Prosecution Service of Canada ("PPSC") advised that it would not invite SNC-Lavalin to negotiate a remediation agreement in connection with a pending prosecution was a "material change" for the purpose of the Securities Act.

The motion judge held that the September 2018 phone call was not a "change" in the company's "business, operations or capital." SNC-Lavalin had previously disclosed that it faced prosecution (with potentially catastrophic consequences). While SNC-Lavalin hoped to negotiate a remediation agreement, there was no guarantee that this could be achieved, nor had SNC-Lavalin suggested it was certain.

Importantly, following the September 2018 phone call, SNC-Lavalin continued to be invited by the PPSC to provide submissions on why a remediation agreement was appropriate in the circumstances. It still remained possible for SNC-Lavalin to negotiate a remediation agreement. As a result, while a change in "business risk" could constitute a "change" in a company's "business, operations and capital", the September 2018 phone call did not change SNC-Lavalin's business risk. It continued to face the threat of criminal prosecution, and its ability to negotiate a remediation agreement remained uncertain. Notably, when the PPSC formally advised that a remediation agreement would not be negotiated one month later, SNC-Lavalin immediately issues a press-release disclosing the development.

In affirming this result, the Court of Appeal endorsed the motion judge's broad interpretation of what could constitute a "change" in the "business, operations and capital" of an issuer. It affirmed that the meaning of "change" is "fact specific" and that there is no single "bright-line test." Depending on the circumstances, a "change" in a company's "business, operations or capital" could embrace the development of new products; developments affecting the company's resources, technology, products or market; developments affecting significant contract or litigation; and other developments connected to the business and affairs of the issuer that would be reasonably expected to significantly impact the market price or value of a security. The only substantive limit on the concept of a "change" is the requirement that the change must be in the "business, operations or capital" of the issuer, as opposed to an external development.

Common Law Claims May Be Suitable for Class Actions

Canadian courts have frequently refused to certify common law misrepresentation claims, as such claims require individual class members to prove reliance on the alleged misrepresentation, and that the misrepresentation in fact caused them to suffer a loss. These individual issues risk "overwhelming the common issues." As a result, Canadian courts have generally only been willing to certify certain aspects of common law misrepresentation claims where statutory misrepresentation claims under applicable securities legislation (which do not require a class member to prove reliance) have also been certified.

This approach was recently affirmed in Poirier v. Silver Wheaton Corp. et al, where the Court dismissed the plaintiff's motion to certify both common law and statutory claims under the Securities Act. In declining to certify the common law misrepresentation and negligence claims, the Court found "a class action [was] not the preferable procedure to resolve the common law claims" because the claims would require individualized inquiries into reliance, causation and damages.

However, the British Columbia Court of Appeal recently came to a different conclusion in 0116064 BC Ltd. v. Alio Gold Inc, in respect of common law misrepresentation claims brought in connection with a corporate acquisition completed by way of plan of arrangement.

The appellant was a shareholder in a company called Rye Patch Gold Corp. The defendant, Alio Gold, acquired all of the outstanding shares of Rye Patch (including the plaintiff's shares) in exchange for shares in Alio Gold by way of a plan of arrangement. The plan of arrangement was approved by the British Columbia Supreme Court, following a shareholders' vote.

The plaintiff commenced a putative class action, alleging that Alio Gold had overstated its production forecasts in the information circular prepared in connection with the transaction, alleging that the Rye Patch shareholders had not received fair value for their shares.

The motion judge declined to certify the common law misrepresentation claims as a class proceeding, finding the individual issues of reliance, causation and damages would overwhelm any common issues.

On appeal, the appellant argued that where the alleged misrepresentation and loss arises out of a transaction "imposed upon all shareholders" as a result of a plan of arrangement, reliance and causation do not create individual issues in the same way that they may in other circumstances.

The British Columbia Court of Appeal agreed. It distinguished the case from a "typical" common law misrepresentation claim because the case concerned "essentially one transaction"—the exchange of shares with Alio Gold under the plan of arrangement. In this context, establishing reliance on the alleged misrepresentations did not require individualized inquiries: the shareholders that had voted in favor of the transaction could be presumed to have relied on the information circular prepared by Alio Gold; the shareholders that had not voted in favor of the transaction were nonetheless also required to exchange their shares for shares of Alio Gold under the terms of the arrangement.

Evolving Regulatory Schemes Do Not Ground Liability for Past Conduct

When a regulator decides to prohibit a particular practice, that does not mean the regulated entity is liable for the practice prior to prohibition.

This common sense proposition animates the decision in Frayce v. BMO Investorline [Frayce], where the Ontario Superior Court of Justice refused to certify a class proceeding brought by aggrieved investors to address the controversial practice of "trailing commissions" paid by mutual fund managers to discount brokers.

After some 20 years of industry debate, in June 2022, a prohibition on mutual funds paying trailing commissions to discount brokers came into force. The plaintiffs brought a motion for certification of their class action, arguing that the practice was illegal before the formal prohibition, such that the defendants should be held liable for their pre-prohibition conduct.

The Court, however, found that the plaintiffs did not satisfy the requirement for "some evidence of illegality" as they had not identified any statutory or legal basis for their pre-prohibition claims. Nor could the plaintiffs have found a retrospective cause of action based on a change in the regulatory scheme: the fact that a regulator has decided to prohibit specific conduct does not render the conduct illegal pre-prohibition.

Looking Forward

In 2023, we expect to see an expansion of securities class action proceedings into new areas—including crypto assets.

Canadian securities regulators have recently issued enhanced guidance on their proposed approach to the regulation of crypto assets. This new guidance—coupled with increased investment in crypto assets by retail and institutional investors, and the collapse of the cryptocurrency trading platform FTX—will likely result in a proliferation of securities law related claims. Already in 2023, three of the eight new securities class actions filings in Canada related to crypto assets.

In this context, the Court's caution in Frayce will remain a critical point: an evolving regulatory scheme will not operate to create liability for past conduct. A plaintiff must ground their case in the regulatory regime existing at the time of the impugned conduct.

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