In a previous post, we explained why the B.C. Supreme Court refused certification of a proposed securities misrepresentation class action in 0116064 B.C. Ltd. v. Alio Gold Inc., 2021 BCSC 540. The chambers judge applied the rule in Foss v. Harbottle — which generally prevents shareholders from suing for wrongs done to a corporation — and concluded that the proposed class of shareholders had no viable claim. The judge also determined that a class proceeding was not the preferable procedure because individual issues of reliance and causation predominated over common issues.

But in 0116064 B.C. Ltd. v. Alio Gold Inc., 2022 BCCA 85, the B.C. Court of Appeal overturned that decision, concluding that the rule in Foss v. Harbottle did not apply and that the issues of reliance and causation were not a bar to certification.

Some courts have commented that common law misrepresentation claims in securities cases are generally not suitable for certification because of issues of reliance. The Court of Appeal’s decision highlights the circumstances where such a case can be certified and where reliance might be established on a class wide basis.

To recap, the plaintiff and other shareholders sold shares of Rye Patch Gold Co. to the defendant, Alio Gold Inc., under a plan of arrangement. The plan was approved by Rye Patch shareholders and the court. Under the arrangement, Alio acquired all outstanding Rye Patch shares from Rye Patch shareholders in exchange for Alio shares. The price that Alio paid was determined in part by the value of Alio shares. The plaintiff alleged that, because of misrepresentations relating to Alio’s gold production forecasts, the proposed class of Rye Patch shareholders did not receive fair value for their shares under the arrangement.

Inapplicability of the rule in Foss v. Harbottle

The Court of Appeal concluded that the rule in Foss v. Harbottle did not apply because the claim was by a shareholder to recover a loss it claims to have suffered as a shareholder. The claim could not be characterized as a loss by Rye Patch since Rye Patch did not tender shares to Alio under the arrangement.

Issues of reliance and causation not a bar to certification

While acknowledging that many common law misrepresentation cases are unsuitable for certification, the Court of Appeal concluded that the issues of reliance and causation were distinguishable in this case based on the plaintiff’s theory.

The plaintiff alleged that the loss arose out of the transaction imposed upon all shareholders under the plan of arrangement. The plaintiff argued that reliance and causation could be addressed by asking whether Alio’s alleged misrepresentation induced Rye Patch shareholders to approve the plan of arrangement. Shareholders who voted in favour of the plan could be presumed to have done so on the basis of Rye Patch management’s information circular drafted for the purpose of inducing support for the plan, which was based on Alio’s alleged misrepresentation. Shareholders who voted against were nevertheless compelled to tender their shares under the arrangement.

The Court of Appeal reviewed the jurisprudence on misrepresentation, highlighting the following:

  • Reliance is not required if causation can be established by other means;
  • Reliance can be inferred; and
  • Certification of misrepresentation claims has been allowed where there is a single representation or multiple representations with common import.

The Court drew two key distinctions between this case and other misrepresentation cases where certification was denied:

  1. There were only a few specific representations at issue in this case, all made to shareholders at the same time.
  2. There was only one transaction at issue in this case — the arrangement — which led to an order compelling the exchange of all Rye Patch shares for Alio shares at a fixed exchange rate. This was not a case where loss to a particular shareholder would depend on the timing of its purchase.

The Court of Appeal also concluded that there was an evidentiary basis for the plaintiff’s methodology to establish causation in news releases and circulars that contained cash flow projections as a function of projected production and gold prices. The Court of Appeal confirmed it did not need to determine that causation would be proven, only that the plaintiff’s case on causation was arguable.

As a result, the Court of Appeal set aside the order dismissing the plaintiff’s claim and remitted the certification application to the B.C. Supreme Court.