On Dec. 4, 2015, the Supreme Court of Canada released its much-anticipated decision in three securities class actions involving CIBC, IMAX and Celestica.1
The SCC made three significant rulings in its decision:
- The robust merits-based test for leave to assert a statutory secondary market misrepresentation claim set out by the SCC in Theratechnologies2 applies in Ontario.
- For the purposes of a common law misrepresentation claim, the inferred reliance theory that posited that reliance could be determined on a class-wide basis has been effectively shut down in typical securities class actions.
- For cases that are governed by the former limitation period under the Securities Act,leave to commence a statutory secondary market misrepresentation claim must be obtained before the limitation period expires.
The Test for Leave – Just as “Robust” in Ontario as in Québec
The Securities Act (Ontario) requires plaintiffs to obtain leave of the court, based on an evidentiary record, before they can assert a statutory claim for misrepresentation on behalf of secondary market purchasers. To obtain leave, a plaintiff must satisfy the court that the claim is brought in good faith and that it has a reasonable possibility of success at trial.
Until recently, the test for leave had been interpreted as setting a relatively low bar. However, in April 2015, the SCC applied the leave test under the Securities Act (Québec) inTheratechnologies. The SCC made a number of comments in that case that significantly raised the bar for obtaining leave. In particular, the SCC held that the leave test is more than a “speed bump” and that it is intended to be a robust deterrent to prevent meritless cases from proceeding. The SCC instructed motion judges to engage in a “reasoned consideration of the evidence to ensure that the action has some merit.” The SCC held that plaintiffs must present both “a plausible analysis of the applicable legislative provisions” and “some credible evidence” in support of the claim.
In its decision in the CIBC case, the SCC unanimously confirmed that its articulation of the leave test in Theratechnologies applies equally in Ontario. The SCC reiterated that the plaintiff must prove that there is a “reasonable or realistic chance that the action will succeed.”
The robust test for leave established in Theratechnologies has proven to be a formidable hurdle based on the results of several leave decisions released in Ontario since Theratechnologies. So far, three contested leave motions have been dismissed3, one contested leave motion was granted in part against the issuer but dismissed against the individual defendants,4 and only one contested leave motion has been granted.5
Common Law Misrepresentation: Reliance and Damages Cannot Be Certified
In CIBC, the plaintiff sought to certify common law misrepresentation as a cause of action and seven common issues relating to that cause of action, including reliance based on the inferred reliance theory and damages. The motion judge refused to certify common law misrepresentation as a cause of action and specifically rejected the “fraud on the market” and “efficient market theory” as means of avoiding the need for every individual plaintiff to prove actual reliance on the misrepresentation.
The Ontario Court of Appeal upheld the motion judge’s decision not to certify common issues regarding reliance or damages, but certified five other common issues associated with the common law misrepresentation claim relating to the defendant’s conduct and intent.
In a unanimous decision on this point, the SCC did not interfere with the Court of Appeal’s decision, thereby allowing the common law misrepresentation claim to proceed but limiting the common issues to the five certified by the Court of Appeal. Most importantly, the SCC did not interfere with the Court of Appeal’s decision not to certify the common issues regarding reliance and damages. By so doing, it is now clear that actual reliance must be proven by each individual plaintiff and cannot be inferred on a class-wide basis in typical securities class actions.
Limitation Period for Leave to Assert Statutory Misrepresentation Claim
Section 138.14(1) of the Securities Act provides that leave to commence a statutory claim for misrepresentation on behalf of secondary market purchasers must be obtained from the court within three years of the alleged misrepresentation.
Section 138.14(2) of the Securities Act provides that the limitation period in s. 138.14(1) is suspended once the plaintiff files its notice of motion seeking leave with the court. However, subsection (2) was only added to the Securities Act in July 2014, after the lower court decisions in these appeals were released and following the Court of Appeal’s decision in CIBC.6
The decision that brought the limitation period into the spotlight was the Ontario Court of Appeal’s decision in Timminco7 in which the Ontario Court of Appeal held that the limitation period for obtaining leave required that the plaintiffs actually obtain leave within that period and, until leave was granted, the limitation period continued to run for all class members. Two years later, a panel of five judges of the Court of Appeal hearing the CIBC case overturned the Court of Appeal decision in Timminco and ruled that the limitation period was suspended when the representative plaintiffs pleaded the statutory cause of action, the facts supporting that claim and an intention to seek leave.
The plaintiffs in all three cases relied on s. 28 of the Class Proceedings Act, which operates to suspend the limitation period applicable to a cause of action “asserted” in a class proceeding in favour of proposed class members on the commencement of the proposed class action. The amendment to s.138.14 of the Securities Act did not apply to these appeals and therefore the SCC’s interpretation of the interaction between s. 138.14 and s. 28 of the Class Proceedings Act was critical to the cases under appeal.
Leave Must Be Obtained Prior to the Expiry of the Limitation Period
The SCC held that the statutory secondary market misrepresentation claims against CIBC and IMAX were not barred by the limitation period but that the claim against Celestica was time-barred.
While none of the plaintiffs in any of the three cases obtained leave within the limitation period, the plaintiff in CIBC filed his leave motion and the plaintiff in IMAX filed and fully argued the leave motion within the limitation period. On this basis, the plaintiffs in CIBC and IMAX were granted leave nunc pro tunc (i.e. backdated) such that the order was effective prior to the expiry of the limitation period. The outcome was different in Celestica because the plaintiff in that case had not filed a motion for leave within the limitation period. The majority of the SCC held that the leave motion was therefore out of time and could not be saved by backdating the leave order.
As discussed above, the 2014 amendment to s. 138.14(2) suspends the limitation period once a notice of motion seeking leave is filed with the court. Actions that are not governed by s.138.14(2) must be granted leave to assert the statutory claim within three years of the alleged misrepresentation as the limitation period is not suspended until leave is granted.