We recently reported on Public Companies’ Increased Exposure in Secondary Markets, set out in Justice van Rensburg’s decision in Silver v. Imax.1 This was the first securities class action lawsuit to be certified under Part XXIII.1 of the Ontario Securities Act (the “OSA”). This regime permits investors to pursue issuers for damages based on secondary market disclosure.
A second securities class action under Part XXIII.1 of the OSA has now been certified by Justice Tausendfreund in Dobbie v. Arctic Glacier Income Fund. This case is more complex than the Imax decision and raises new concerns and additional exposure for primary and secondary market misrepresentations.
The defendant in Dobbie is Arctic Glacier Income Fund (“Arctic”), an unincorporated income fund trust, and its officers, directors, and trustees. Arctic is a reporting issuer in ten provinces, including Ontario. The plaintiffs advanced the proposed class action on behalf of investors who purchased securities in Arctic from March, 2002 to September, 2008 (the “Class Period”).
During the Class Period, Arctic disclosed publicly, on several occasions, that it was a “good corporate citizen operating lawfully in a competitive industry” and that it was cooperating with the United States Department of Justice in an anti-trust investigation. In 2008, Arctic pleaded guilty to a charge of participating in a criminal anti-competitive conspiracy in the U.S. during the Class Period and agreed to pay a $9 million fine. The trading price dropped significantly as a result.
The implications of this judgment to issuers are as follows:
- A representative plaintiff advancing a class action can pursue two separate claims, one for negligence and the other for negligent misrepresentation under the OSA as long as the two claims are not substantially the same;2
- The negligence claim in this case focuses on primary market disclosure, namely that Arctic’s prospectus would not have been issued but for the defendants’ negligence;
- The negligent misrepresentation claim focuses on the secondary market representations, namely that Arctic made numerous similar misleading claims in its various public disclosures;
- Multiple misrepresentations can possibly be viewed as a common issue for the purposes of a class action under this provision, because the misrepresentations in this case were “consistent and repetitive” in the same core documents;
- Directors and officers of a reporting issuer may owe a common law duty of care to investors;3
- In order to bring a claim for negligence under section 130 of the OSA (statutory liability for misrepresentations in a prospectus), the court will not require that the plaintiff purchased shares in the primary market. As such, a representative plaintiff in these circumstances does not need to have purchased shares in the defendant company in order to represent the class;
- Despite these secondary market provisions coming into force on December 31, 2005, the legislation can apply retroactively to misrepresentations made before this date (in this case, the misrepresentations are alleged to have been made beginning in March, 2002); and
- If a defendant is a reporting issuer in multiple provinces, in order to certify a national class, plaintiffs must plead the relevant provisions of the securities acts in the provinces where the securities were purchased, particularly if the representative plaintiffs are not from Ontario and are not able to rely on the Ontario provisions.
Following van Rensburg’s lead in Imax, Justice Tausendfreund held that the plaintiffs brought the action in “good faith” under s.138(1)(a) of the OSA. Namely, the plaintiffs had a personal stake in the claim, they sought to hold the defendants accountable and deter similar behaviour, and there was no ulterior motive or conflict of interest.
Justice Tausendfreund’s ruling seems to further expand the obligations of reporting issuers in the primary and secondary markets by introducing the possibility that issuers can be held liable for both common law claims of negligence and statutory disclosure claims of negligent misrepresentation under Part XXIII.1 of the OSA. If this is the case, it is yet unclear whether statutory protections under the OSA for misrepresentations (such as caps on damages) will protect issuers held liable for simultaneous statutory and common law liability. More definitive answers to these questions are expected to emerge when this action proceeds at trial.