In Abdula v Canadian Solar Inc.1, the Ontario Court of Appeal held that a publicly traded company that does business or has offices in Ontario can potentially be subject to a lawsuit by retail investors even if its shares are not traded on any exchange in Ontario or Canada. In effect, the Court of Appeal has held that Ontario's Securities Act (the "OSA") applies extra-territorially.
The defendant, Canadian Solar Inc. ("CSI"), is a corporation governed by the Canada Business Corporations Act. Its registered office is in Toronto, and its principal executive office is in Kitchener, Ontario. CSI's principal place of business is in the People's Republic of China. Its shares are traded on the NASDAQ but are not traded on any Canadian stock exchange.
The proposed representative plaintiff, Mr. Abdula, is a resident of Ontario who purchased shares of CSI through his online discount brokerage, BMO, using his home computer. Mr. Abdula brought this case in order to certify a class action proceeding on behalf of the more than 1000 Ontarians who purchased shares of CSI, on the grounds of alleged misrepresentations contained in press releases, financial statements, and an annual report released or presented by CSI in Ontario and made in the course of investor conference calls.
The Court of Appeal case focussed solely on the narrow issue of whether CSI was a "responsible issuer" within the meaning of the OSA, and thus could be subject to a lawsuit from retail investors under Part XXIII.1 of the OSA, the provisions related to secondary market liability.
Introduced in 2005, a "responsible issuer" is defined in the OSA as a reporting issuer, or "any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded".
While the OSA has always given purchasers in the primary market a remedy against "reporting issuers" for a misrepresentation, it was expanded in 2005 to give purchasers in the secondary market a remedy against "responsible issuers" as well. Part XXIII.1 of the OSA now gives a secondary market purchaser of a responsible issuer's shares a right of action against the responsible issuer for a misrepresentation.
The Court of Appeal rejected CSI's argument that it is not a "responsible issuer" within the meaning of the OSA because its shares did not trade on a Canadian stock exchange. While the motions judge's finding that CSI had a real and substantial connection to Ontario was not appealed, CSI did argue that the phrase "publicly traded" had to mean "publicly traded in Canada", which the shares of CSI are not. Failure to read the definition this way, CSI argued, would give the OSA an extra-territorial application that the legislature never intended it to have.
CSI argued that because all the other provinces and territories in Canada had enacted similar legislation governing civil liability for secondary market disclosure, there was "integration" amongst the securities regimes of the various provinces and territories. By contrast, because there was no comparable legislation in the United States (where CSI was traded), the civil liability for secondary market disclosure regimes of the US and Ontario were not sufficiently "integrated", and CSI could not be a responsible issuer within the meaning of the OSA.
In interpreting the definition of "responsible issuer" the Court of Appeal used the Supreme Court of Canada's "preferred approach" to statutory interpretation, which states that "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament". Applying this approach, the Court of Appeal held that if the legislature had wanted to include the words "in Canada", they would have included the words "in Canada".
The Court also looked at the legislative history and noted that, while the possibility of restricting the definition to entities traded on a Canadian exchange had been considered, that option had been rejected; in the Court's opinion, deliberately so. Lastly, the Court also noted that, by contrast, the Yukon Securities Act did choose to restrict its definition territorially, by adding the words "publicly traded in Yukon": a counter-example of what the Ontario legislature could have done, but chose not to do.
Leave to appeal to the Supreme Court was denied. This decision is likely to be seen as persuasive in Canada's other provinces, which all have similar legislation.
Publicly traded companies should be aware of this decision and its potential ramifications. Because of this decision, public companies that carry on business in Ontario or have offices in Ontario could possibly be exposed to law suits in Ontario courts from Ontario retail investors, even if that company does not trade on a Canadian exchange.