Recent developments suggest that the ongoing success of the Canadian plaintiffs’ bar in obtaining certification of global securities class actions may be illusory. On March 26, 2015, the Supreme Court of Canada denied leave to appeal from the judgement of the Ontario Court of Appeal (“ONCA”) in Kaynes v. BP, Plc, 2014 ONCA 580 (“Kaynes”). As noted by our colleagues Michael Rosenberg and Sapna Thakker in an August 2014 Canadian Class Actions Monitor blogpost, Kaynes, depending on how it is interpreted by other Canadian courts, has the potential to reverse the growing trend of global class action certification in Canada.
In Kaynes, the plaintiffs sought certification of a global securities class action alleging that BP PLC made misrepresentations in its financial statements with respect to the April 2010 Deep Water Horizon oil spill in the Gulf of Mexico. The plaintiffs sought certification in Canada despite the fact that BP shares do not trade on a Canadian exchange. In overturning the decision of the Ontario Superior Court to certify the proposed class, the ONCA surprised observers by citing the US principle that securities litigation should take place in the forum where the related securities transaction(s) took place. This “transactional” test, firmly entrenched in the United States by the 2010 US Supreme Court (“USSC”) decision Morrison v. National Australia Bank Ltd.(Morrison), contrasts starkly with the general Canadian approach in which the holder of a foreign security may participate in a Canadian class action so long as there is a “real and substantial connection” to the applicable Canadian province. Club Resorts Ltd. v. Van Breda, 2012 SCC 17. Kaynes did not reject the “real and substantial connection” test. However, Kaynes significantly limited its application by holding that, on the facts of the case, principles of international comity dictate adhering to the US standard tying jurisdiction to the place where the securities were traded.
The precise impact of Kaynes on Canadian certification standards for global securities class actions remains unclear. This article is the first in a series of blog posts in which we predict that the US style transactional test, cited with approval in Kaynes, will come to replace the “real and substantial connection” test currently in use by Canadian courts. Our prediction stems from two distinct but related ideas:
- the value investors place on securities class actions is increasingly in question; and
- the “real and substantial connection” test for securities class action certification raises significant conflicts of laws problems with our largest trading partner the United States.
Institutional Investor Behaviour in the Aftermath of Morrison v. National Australia Bank Ltd. Do Investors Actually Value Global Securities Class Actions?
The Ontario Court of Appeal’s decision in Kaynes comes at a time when academia is increasingly questioning the value of securities class actions. In January 2015, the University of Chicago Law School’s Journal of Legal Studies published a paper by professor Robert P. Bartlett III which suggests that institutional investors may in fact place little value on a private right of action for securities fraud.
Bartlett’s work focused on institutional investor behaviour in the aftermath of the USSC’s decision in Morrison. In Morrison, the USSC limited investors’ ability to bring private Rule 10b-5 securities fraud lawsuits against non-US issuers. Robert P. Bartlett III, Do Institutional Investors Value the Rule 10b-5 Private Right of Action? Evidence from Investors Trading Behaviour following Morrison v. National Australia Bank Ltd., 44 J. Legal Stud. 183, 184 (2015)(“Bartlett”). Prior to Morrison, private Rule 10b-5 lawsuits against non-US issuers were allowed to proceed in US courts as long as the alleged fraudulent conduct occurred in the US or produced immediate and substantive effects there. After Morrison, Rule 10b-5 will only apply with respect to the purchase or sale of a security listed on a US stock exchange or the purchase or sale of any other security within the United States.
As Bartlett explains, because the equity securities of a large number of non-US firms trade simultaneously on both US and non-US exchanges, Morrison provides a unique opportunity to test the value investors place on the Rule 10b-5 private right of action. Specifically, if investors value the Rule 10b-5 private right of action, then, in the aftermath of Morrison, one might have expected to see a shift in investment in cross-listed firms towards their US listed securities and away from their foreign listed securities. However, Bartlett found no evidence of such a shift, and instead concluded that the “Rule 10b-5 private right of action plays a remarkably small role in the trading decisions of large institutional investors.”
The Limited Utility of Global Securities Class Actions is Outweighed by the Conflict of Laws Issues They Present
If it is true that investors place little value on private rights of action for securities fraud, then Canada’s generous approach to global securities class actions may not be ideal. Moreover, the limited utility of expanding Canada’s class action regime to incorporate securities listed on a foreign exchange is diminished by the significant conflicts of laws issues raised in doing so.
The first Canadian case to certify a truly global class was Silver v. Imax Corp, 2009 CanLII 72334 (ON SC) (“IMAX”). IMAX is a classic securities fraud case in which aggrieved shareholders initiated a class action against the defendant IMAX Corp. for allegedly overstating its revenues. In IMAX, Justice van Rensberg certified a global class of shareholders who bought IMAX Corp. shares on both the TSX and the Nasdaq. Justice van Rensberg certified the class despite the fact that 85-90% of IMAX Corp’s shareholders were foreign residents and most had purchased their shares on the NASDAQ. Tanya J. Monestier, Is Canada the New Shangri-La of Global Securities Class Actions, Nw. J. Int’l L. & Bus. 305, 337 (2012)(“Monestier”).
The IMAX decision stands in sharp contrast to the US Supreme Court’s holding in Morrison. Whereas Morrison restricts Rule 10b-5 securities fraud lawsuits to purchases or sales of securities listed made within the US, IMAX certified a global class of IMAX Corp. securities holders, a significant majority of whom purchased their shares on a non-Canadian exchange. This generous approach to global class certification set forth in IMAX was most recently affirmed by the Ontario Superior Court on August 15, 2014, in Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP., 2014 ONSC 4118, one day after the Ontario Court of Appeal released its decision in Kaynes.
In Is Canada the New Shangri-La of Global Securities Class Actions?, professor Tanya J Monestier discusses how Canada’s generous approach to global class actions certification may lead to conflict with US courts. Monestier explains that if Canadian courts follow IMAX and continue to certify global classes based on the “real and substantial connection” test, then US claimants who purchased their securities on a US exchange may unwittingly find themselves subject to the Canadian class actions regime. This raises the odd prospect that US claimants intending to pursue a class action regarding a US security purchased on a US exchange may be foreclosed from doing so by a Canadian judgment. This in turn raises the question of whether and to what extent a US court should recognize and grant res judicata effect to a Canadian global class action judgment affecting US security holders. While we are not aware of any case to date in which a US court has directly considered this issue, Monestier explains that it is far from certain that a US court would recognize and grant res judicata effect to a Canadian global class action judgment. Indeed, a separate but related line of US cases from the 1990s and early 2000s suggests that there is a significant risk that a US court could refuse to grant res judicata effect to a Canadian global class action judgment, particularly if such a decision follows the approach set forth in IMAX.
Reasons to Doubt That a US Court Will Recognize and Give Res Judicata Effect to a Canadian Global Class Action Judgment
In Derenis v. Coopers & Lybrand Chartered Accountants, 930 F. Supp. 1003, (D.N.J. 1996)(“Derenis”), a federal district court judge in New Jersey specifically addressed the question of whether it was better for a securities class action involving a Canadian company whose securities traded on a US exchange to be decided in a Canadian or US court. In Derenis, the plaintiffs brought a securities class action against the International Nesmont Industrial Corporation (“Nesmont”). Nesmont was incorporated in British Columbia and had its principal office in that province. While Nesmont was listed on the Vancouver stock exchange, the bulk of trading in Nesmont’s securities took place on the NASDAQ. The plaintiffs brought a securities class action alleging that Nesmont had submitted misleading financial statements to the SEC and thus defrauded thousands of US investors. The defendants in the action sought to have the case removed to Canada. In rejecting the defendants’ request, the Derenis court held that regardless of whether Canada was an appropriate alternative forum for hearing the dispute, public interest factors required that the case be heard within the United States.
Among the factors listed by the Derenis court were two which foreshadow the holding of the Ontario Court of Appeal in Kaynes and therefore may prove relevant to a US court deciding whether to give a Canadian global class action judgment res judicata effect. First, the Derenis court found that US investors have a strong interest in seeing disputes involving United States securities laws settled by a US court. Notably, the Derenis court acknowledged that Canada has an interest in regulating the conduct of corporate entities registered within its borders, but found that the “United States interest in [protecting] the integrity of both domestic investor decision making and market mechanisms is overriding.” Secondly, the Derenis court held that the longstanding US principal of avoiding unnecessary conflicts of laws weighed in favour of hearing the Nesmont class action within the United States. Noting that the action was brought with respect to United States securities laws, the Derenis court concluded that US securities laws would govern the dispute. Since US law must govern, the Derenis court concluded that the only logical venue for a hearing was the United States.
The views expressed by the Derenis court were subsequently embraced by the US Second Circuit Court of Appeals in DiRenzo v. Philip Servs. Corp. 294 F.3d 21 (2d Cir. 2002)(“DiRenzo”). In DiRenzo, the plaintiffs were US securities holders who brought a class action alleging securities fraud against the directors and officers Philip Services Corporation (“Philip”), a Canadian company. As in Derenis, the defendants argued that Canada was a more appropriate forum for the litigation to take place, and brought a motion to dismiss the plaintiffs’ action on grounds of forum non conveniens. The Second Circuit rejected the defendants’ motion finding that regardless of whether Canada was an appropriate forum, the United States’ interest in the integrity of its securities laws weighed overwhelmingly in favour of US jurisdiction. In particular, the DiRenzo court noted that “the majority of [Philip’s] securities transactions were conducted entirely within the United States, by Americans, in American dollars, on American stock exchanges.” Therefore, although Canada was an appropriate forum to hear the dispute, the Second Circuit determined that the United States was a better location for the matter’s resolution.
In IMAX, the Ontario Superior Court decided that a global securities class action involving transactions which mainly took place on a US exchange could go forward in Canada. This decision contrasts sharply with the logic of the decisions in Derenis and DiRenzo. By contrast, the decision in Kaynes is broadly congruent with US law. In a fashion similar to the decisions in Derenis and DiRenzo, the Kaynes court concluded that while Canada may be an appropriate forum, the United States was a better venue for the resolution of the plaintiff’s claims because the relevant securities transactions primarily took place on a US exchange. Therefore, while IMAX is in direct conflict with the limited body of US case law relating to Canadian class action certification decisions, Kaynes is broadly congruent with it.
Conclusions and Next Steps
It is too early to tell whether the IMAX approach to global class action certification or the Kaynes approach to global class action certification will prevail in Canada. In our next post we will discuss in detail the growing body of academic research which questions the value of private rights of action for securities fraud in the global context. As we shall see, the development of this body of research raises important questions for both investors and issuers regarding the best approach to take in resolving disputes regarding financial statements.