The decision of Justice Tausendfreund in Dobbie et al. v. Arctic Glacier Income Fund et al. is the most recent in a set of decisions that consider the leave test under Section 138.8 of Ontario’s Securities Act, and the suitability of securities misrepresentation cases for certification as class proceedings. Despite the fact that Ontario’s statutory liability regime for misrepresentations affecting the price of securities purchased on the secondary market (under Part XXIII.1 of the Securities Act) has now been in force for over five years, decisions arising from motions for leave to commence such actions and to certify them pursuant to the Class Proceedings Act have only recently started to be released.
The Arctic Glacier decision is striking for the sheer number of issues that Justice Tausendfreund was required to resolve. The decision encompasses: (i) a motion to strike a number of the claims pleaded, (ii) a motion for leave pursuant to Section 138.8 of the Securities Act, and (iii) a certification motion for claims including statutory claims for misrepresentation affecting securities purchased on both the primary and secondary markets and common law misrepresentation claims. Certain aspects of Justice Tausendfreund’s decision represent the first time an issue has been considered under Part XXIII.1, and several are likely to prove controversial. In this Update we highlight those of Justice Tausendfreund’s many determinations that are most likely to be of ongoing significance to public issuers, and identify the extent to which these findings may be subject to challenge in the future.
Nature of Claim
The representative plaintiffs in Arctic Glacier are two Ontario residents who purchased units of the defendant Arctic Glacier Income Fund (the Income Fund) during the period from March 13, 2002 to September 16, 2008. They brought their action against the Income Fund, an unincorporated mutual fund trust and a reporting issuer in ten provinces, including Ontario. The Income Fund owned all the shares of its underlying operating company, Arctic Glacier Inc. (Arctic Glacier), who was also named as a defendant. Arctic Glacier is a producer, marketer and distributor of packaged ice. The plaintiffs also sued individual officers, directors and/or trustees of Arctic Glacier and the Income Fund.
At the heart of the dispute are misrepresentations alleged to have been made by the Income Fund in a series of public disclosures, including prospectuses. The plaintiffs allege that, at the same time that a U.S.-based operating subsidiary of Arctic Glacier was engaged in anti-competitive practices in the State of Michigan, the Income Fund represented publicly that it and its subsidiaries were “good corporate citizens,” and that the packaged ice industry was a “competitive market”. After the Arctic Glacier subsidiary pleaded guilty to a charge of participating in a criminal, anti-competitive industry in the U.S. in 2009, the trading price of the Income Fund’s units experienced a significant decline. The plaintiffs sought to represent a class of similarly situated unitholders who purchased their units during the relevant class period. The claim alleges that the defendants are liable for breaches of Sections 130 (misrepresentations on the primary market) and 138.3 (misrepresentations on the secondary market) of the Securities Act, as well as for negligence and negligent misrepresentations at common law.
The decision consolidates rulings from Justice Tausendfreund on all three motions before him (the defendants’ motion to strike, and the plaintiffs’ motions for leave and certification).
The Motion to Strike—Legal Personality of the Trust and the Duties of the Directors
Justice Tausendfreund’s decision on the motion to strike raises a number of issues relating to the status of and duties owed by income trusts and their trustees/directors.
With respect to the Income Fund, Justice Tausendfreund determined that it did not have legal personality but that it operated and was accountable through its trustees. Because the Income Trust could not be sued as a defendant to the common law claims, the claims of negligence, negligent misrepresentation and breach of trust advanced against it were struck. However, Justice Tausendfreund concluded that the Income Fund was a proper defendant to the statutory claims advanced against it pursuant to Sections 130 and Part XXIII.1 of the Securities Act because it met the definition of an “issuer.”
The individual defendant directors of Arctic Glacier sought to have the common law claims of negligence struck against them on a number of bases, including that they owed no duty of care to the “shareholders” (i.e. the unitholders of the Income Fund). They argued that their duties of good faith, loyalty and care were owed to the underlying corporation and that they could not owe separate, parallel duties of the same nature to the unitholders. Somewhat confusingly, Justice Tausendfreund refused to strike this claim on the basis that it was asserted “at a time when they [the class members] were not shareholders, but chose to purchase Income Fund units and thereby become ‘shareholders’.”
This expansive determination, suggesting that a duty may be owed by directors to the investing public at large, does not address the question of whether a duty of care is owed by directors of an underlying operating company to unitholders of an income trust (or the investing public generally). It was either found or admitted by the individual defendants, for the purposes of granting leave pursuant to Section 138.8, that as directors of Arctic Glacier they were either: (i) de facto directors of the Income Fund, or (ii) “influential persons” with respect to the fund as directors and officers of Arctic Glacier.
Leave Findings with Respect to “Influential Persons” and “Experts”
With respect to the plaintiffs’ statutory claims for secondary market misrepresentations under Part XXIII.1, Justice Tausendfreund considered whether leave could be granted to proceed against each of the defendants under Section 138.8. He granted leave to proceed against the trustees of the Income Fund in their capacity as directors of the responsible issuer at the time the documents containing the misrepresentations were released (in accordance with subsection 138.3(1)(b)).
Justice Tausendfreund also granted leave against the trustees in their capacity as “influential persons” who “knowingly influenced” the Income Fund to release the documents. The definition of “influential person” in Part XXIII.1 includes a “promoter,” which is defined, in part, as a person who “directly or indirectly takes the initiative in founding, organizing or substantially reorganizing the business of an issuer.” Justice Tausendfreund held that the trustees were “promoters” given their direct involvement in the formation of the Income Fund. He further held that they “knowingly influenced” the release of the documents given that, as trustees, they were the controlling minds of the Income Fund (which, somewhat circularly, was the reason that an action already lay against them under subsection 138.3(1)(b)).
Justice Tausendfreund further held that Arctic Glacier itself was a “promoter” and therefore an “influential person,” in that it was party to the corporate arrangement pursuant to which the Income Fund was created and all of Arctic Glacier’s shares were acquired. He held that Arctic Glacier “knowingly influenced” the release of the documents, given that: (i) the Income Fund had no independent operations and was entirely dependent upon Arctic Glacier’s business; (ii) the documents containing the misrepresentations were reports on Arctic Glacier’s business; and (iii) the documents were signed by Arctic Glacier’s officers. In this respect, Arctic Glacier is the first decision to consider whether leave can be granted against the operating company as an “influential person” under Part XXIII.1 when the issuer itself is an income trust.
Arctic Glacier also involved a brief consideration of whether leave may be granted under Part XXIII.1 against an employee of a defendant company alleged to be acting in the capacity of an “expert.” Subsection 138.3(1)(e) of the Securities Act provides a cause of action against an “expert” when the documents at issue include an opinion from an expert in which a misrepresentation is contained, and the expert consents to the use of the opinion in the document. The plaintiffs alleged that an officer of Arctic Glacier who provided his opinion in the documents was, in his capacity as Vice-President of Accounting, an “expert.”
Justice Tausendfreund held otherwise, finding that there was no evidence that the officer made the statements at issue in his capacity as an expert as opposed to his capacity as an officer, nor was there evidence that he had consented to being an expert. This determination supports the conclusion that the definition of “expert” under Part XXIII.1 contemplates an independent third-party and not a professional employed by a defendant company.
- The Controversial Certification of Common Law Claims
Arctic Glacier is the latest in a controversial line of cases, including McCann v. CP Ships and Silver v. IMAX, in which motions judges have certified common law misrepresentation claims alongside statutory claims. Traditionally, common law claims based on misrepresentations affecting the price of securities in the secondary market have been considered unsuitable for certification because each member of the proposed class must establish that he or she relied on the alleged misrepresentation. This, in turn, requires complex individual inquiries into the decisions of each investor, including whether the investor read and understood the misrepresentation at issue, and whether the misrepresentation influenced the investment decision as opposed to other, unrelated factors. Indeed, the need for plaintiffs to prove reliance and the hurdles it raised on certification were primary reasons for the enactment of Part XXIII.1.
In this new line of cases, however, three motions judges have certified common law negligent misrepresentation claims. In Silver, for example, Justice van Rensburg certified the common law claims alongside parallel statutory misrepresentation claims advanced pursuant to Part XXIII.1 (which departs from the common law in that it does not require plaintiffs to prove reliance). Such findings have been justified on the basis that judicial economy may be achieved in the context of an action in which the statutory misrepresentation claims have been certified, as some of the common issues that must be resolved to determine the statutory claims will also be common issues which must be determined to resolve the common law claims. The decisions accept arguments for the certification of common law reliance-based claims which have previously been rejected by Ontario courts, including the following:
- It is open for plaintiffs to argue at trial that they can succeed on a negligent misrepresentation claim without proving reliance;
- If the plaintiffs ultimately must prove reliance, it is open to them to argue that reliance should be inferred, on a class-wide basis, from their conduct in purchasing the securities; and
- The question of whether reliance can be inferred on a class-wide basis is capable of certification as a common issue.
Such findings should be of concern to issuers and their officers and directors since, if this reasoning is ultimately upheld on appeal, plaintiffs could potentially certify common law securities actions simply by pleading that reliance on the alleged misrepresentation should be inferred. This could subvert the Legislature’s careful balancing of rights in Part XXIII.1, including the damages caps and other protections for defendants, potentially exposing issuers and related parties to indeterminate liability.
In the recent decision of McKenna v. Gammon Gold, Justice Strathy rejected the novel approach described above and applied established principles. He concluded that the need for individual reliance inquiries renders common law proceedings for misrepresentation in the securities market unsuitable for certification.
Some judges, including Justice Tausendfreund in Arctic Glacier, have distinguished Justice Strathy’s approach on the basis that the claim in McKenna involved multiple misrepresentations rather than a single representation (or several representations with a common import). However, whether “single” or multiple misrepresentations are alleged may be a distinction without a difference, and placing undue emphasis on the question could lead to serious inconsistency in the many subsequent decisions that are likely to consider the suitability of common law securities misrepresentation claims for certification in the future. It is unclear why the individual inquiries into each class member’s investment decisions would be meaningfully different in cases involving a single misrepresentation. Yet leave to appeal to the Divisional Court in each of Silver and McKenna on this issue was denied on the bases that the approaches taken in the two cases do not conflict. Despite the fact that there will be no appellate consideration of Silver or McKenna, the issue is unlikely to go away. Ultimately, it will need to be clarified by our appellate courts.
- The Certification of Claims in which Neither Representative Plaintiff has a Cause of Action
A unique feature of Arctic Glacier - and one that should also be of concern to potential defendants of securities class actions - is that Justice Tausendfreund certified primary market claims (including statutory claims brought pursuant to Section 130 of the Securities Act) notwithstanding the representative plaintiffs’ admissions that neither of them purchased their units pursuant to a prospectus. In other words, causes of action were certified despite the fact that no named plaintiff was capable of advancing them.
Justice Tausendfreund cited one authority for this determination – a pleadings decision (Boulanger v. Johnson & Johnson Corp.) in which the Divisional Court held that representative plaintiffs may assert causes of action on behalf of the members of the class, even if the representative plaintiffs could not personally advance those causes of action. In Boulanger, the Ontario-based plaintiff pleaded a cause of action under Ontario’s Health Insurance Act. The Divisional Court held that the plaintiff could also plead the equivalent causes of action under the health insurance statutes of other Provinces, which are similar to the claims that the plaintiff could advance personally. The Divisional Court noted, however, that it did not decide any certification issues, including whether the proposed representative plaintiff was suitable to represent the class.
The important question arising from Justice Tausendfreund’s expansive interpretation of Boulanger is where to draw the line. In Boulanger, the Ontario plaintiff was able to personally advance a claim in Ontario, but not similar extra-provincial claims. In Arctic Glacier, however, the representative plaintiffs were not able to personally advance the primary market claims either in Ontario or anywhere else. How closely must the representative plaintiff be connected to a cause of action in order to advance it? Can the mere fact that a representative plaintiff has a cause of action against a defendant entitle him or her to advance entirely unrelated causes of action with different requisite elements and different defences and remedies on behalf of a class? This aspect of the decision raises fundamental questions about the role of representative plaintiffs and the management of class proceedings in Ontario, and as such warrants appellate review.
- The Certification of a National Class, Including Investors who Purchased Trust Units under Prospectuses in Other Provinces
Justice Tausendfreund also considered whether the Ontario-based representative plaintiffs had standing to advance statutory claims on behalf of a national class, since each province is governed by its own securities legislation. Justice Tausendfreund recognized that the recent decisions on this issue conflict. In both Silver and McKenna, the Court held that the issue of the applicable law for extra-provincial class members does not need to be decided at the certification stage. In contrast, in Coulson v. City Group – released two days after McKenna – Justice Perell excluded extra-provincial purchasers from the class where they did not have a claim under Section 130 of the Securities Act. Justice Tausendfreund adopted the permissive approach in McKenna and held that the issue need not be determined at the certification stage. Although there are conflicting positions on this issue, Arctic Glacier suggests that Ontario courts are generally not concerned at the certification stage with the differences in the provincial securities legislation when they are asked to certify national classes.
In short, the Arctic Glacier decision will give issuers, their directors, officers and counsel much to ponder. As part of the first generation of cases brought pursuant to Part XXIII.1, the arguments that Justice Tausendfreund and other motions judges have accepted have not yet been the subject of appellate scrutiny. Until a more substantial body of case law is developed in this area and our appellate courts weigh in on the various issues raised in the case, it will be difficult to assess whether the decision will ultimately prove to be an “outlier,” or whether Justice Tausendfreund’s permissive approach represents the new prevailing trend in securities class actions.