Describe the nature and extent of securities litigation in your jurisdiction.
In Canada, securities litigation can refer to a variety of proceedings, including civil proceedings relating to securities transactions, enforcement proceedings by provincial securities regulators and industry self-regulatory organisations, and litigation relating to shareholder disputes, change of control, and other corporate law issues.
This chapter will focus on civil proceedings relating to securities transactions brought in the common law provinces of Canada (ie, excluding the civil law jurisdiction of Quebec). Such civil proceedings mainly take the form of investor class actions seeking damages for misrepresentations in issuers’ disclosure. Investors may allege misrepresentations either in initial disclosure documents such as prospectuses and offering memoranda (‘primary market’ claims), or in the continuous disclosure of material changes required under securities legislation (‘secondary market’ claims).
For constitutional reasons, securities regulation in Canada has so far occurred entirely at the provincial level, although legislation and regulatory instruments are harmonised between the provinces to a significant extent. Class proceedings legislation is also enacted by the individual provinces, and although it is broadly similar among the common law provinces that have enacted it, it may vary in particulars. This chapter is based on the law of Ontario, where the Toronto Stock Exchange (TSX) is located, most Canadian securities transactions take place, and the large majority of Canadian securities class actions are filed, except where we specifically highlight differences between the law of Ontario and that of other provinces.
Since 2006, when Ontario introduced Canada’s first statutory cause of action for secondary market misrepresentation, the number of new securities class actions commenced each year increased substantially from 2008 through to 2014, and has decreased in recent years. The new securities class actions commenced in recent years have almost all been secondary market claims.
The risk of facing a new securities class action remains lower for companies listed on Canadian securities exchanges than for those listed on major US exchanges. However, securities class actions in Canada are settled or dismissed at much lower rates than in the United States, at least in part because statutory secondary market claims are still a developing area of law and there has been protracted litigation regarding the circumstances in which such claims can be brought. Although many secondary market class actions have been certified, there have not yet been any reported trial decisions.
Securities litigation in Canada often has cross-border aspects, as many issuers trade both on the TSX and on one or more major US exchanges, and may face parallel claims in both countries. A significant emerging issue, discussed below, is whether and when courts in Canadian provinces may certify global classes that include investors resident or trading in the United States or other foreign countries.Available claims
What are the types of securities claim available to investors?
Investors frequently assert a mix of common law claims and claims under provincial securities legislation.
Common law claims
At common law, the main types of securities claims available to investors are negligent or fraudulent misrepresentation. These causes of action require investors to prove that they reasonably relied upon the misrepresentation and suffered damage as a result. As courts often conclude that detrimental reliance is an issue that is individual to each investor, which cannot be determined on a class-wide basis, standalone claims of common law misrepresentation typically cannot be certified as class actions.
Investors may be able to assert other common law causes of action in specific circumstances, such as claims of:
- negligence in providing tax opinions used to market certain investments;
- conspiracy to manipulate the market for a security; or
- breach of contract or breach of fiduciary duty claims against brokers.
The main claims available under provincial securities legislation are for misrepresentation either in primary market documents or in secondary market continuous disclosure. These statutory causes of action are available without regard to whether the investor relied on the misrepresentation, and consequently remove a major obstacle to class certification.
Securities legislation also provides less commonly used causes of action, including for misrepresentation in takeover bid circulars, for failure to deliver required disclosure documents, and for damages resulting from insider trading.
Investors may also bring claims of oppression under the federal or provincial business corporations act pursuant to which the issuer is incorporated. Oppression applications require investors to show that their reasonable expectations were violated by corporate acts that were oppressive, unfairly prejudicial, or unfairly disregarded their interests. A wide range of remedies is available, including compensation.Offerings versus secondary-market purchases
How do claims arising out of securities offerings differ from those based on secondary-market purchases of securities?
Statutory claims for misrepresentations in offering documents are available only to investors who purchased in the primary market (not in the secondary market) during the period of distribution under the offering document. Claims may be brought against the issuer, its underwriters, directors and persons (such as experts) whose consent or signature was required for the offering document.
Statutory claims are available for secondary market purchasers in respect of misrepresentations in documents released or in public oral statements made by or on behalf of a public company, or where the company has failed to make the timely disclosure of material changes in its business, operations or capital required by provincial securities legislation. Claims may be brought against the company or its directors, officers, ‘influential persons’ including controlling shareholders and their officers and directors, and experts quoted in the company’s disclosure.
Leave of the court is required to commence secondary market claims only. The leave test is merits-based: the court will grant leave only if satisfied that the action is being brought in good faith and there is a ‘reasonable possibility’ of success. The Supreme Court of Canada has held that this requires plaintiffs to ‘offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.’
Further differences between the two types of claims are addressed below, including differences as to what constitutes actionable misrepresentation, the available defences and remedies, and the applicable limitation periods.Public versus private securities
Are there differences in the claims available for publicly traded securities and for privately issued securities?
Yes. Statutory secondary market misrepresentation claims are only available with respect to publicly traded securities.Primary elements of claim
What are the elements of the main types of securities claim?
To establish primary market misrepresentation, the plaintiff must prove that it purchased a security offered under a prospectus or offering memorandum during the period of distribution, and the offering document contained a misrepresentation (as defined in the next question).
To establish secondary market misrepresentation, the plaintiff must prove that (i) there was a misrepresentation in a document released or a public oral statement made by or on behalf of a public company, or a failure to make timely disclosure of a material change, and (ii) the plaintiff acquired or disposed of the company’s securities after the misrepresentation or failure to disclose, and before it was publicly corrected.
Common law claims
For negligent misrepresentation, the plaintiff must prove that:
- there was a duty of care based on a ‘special relationship’ between the representor and the representee;
- the representation was false or misleading;
- the representor acted negligently in making the misrepresentation;
- the representee reasonably relied upon the misrepresentation; and
- the reliance was detrimental to the representee, in the sense that harm resulted.
For fraudulent misrepresentation, the plaintiff must prove that:
- the representor made a false representation;
- the representor made the misrepresentation knowing that it was false, or recklessly without caring whether it was true or false;
- the representor intended that the representee rely on the misrepresentation; and
- the representee did rely on it in entering into the transaction.
What is the standard for determining whether the offering documents or other statements by defendants are actionable?
For purposes of the statutory claims, a misrepresentation is an untrue statement of material fact or an omission to state a material fact that was either required to be stated or necessary to make a statement not misleading in the circumstances. Securities legislation provides that a fact is material if it would reasonably be expected to have a significant effect on the market price or value of securities (a standard known as the ‘market impact’ test). Despite the statutory definition of materiality, Canadian courts have also applied the ‘reasonable investor’ test from US securities law: a fact may be considered material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to invest and at what price, in that it would have significantly altered the ‘total mix’ of information available.
A statutory secondary market claim can also be advanced on the basis of a failure to make timely disclosure of a material change as required by securities legislation. A ‘material change’ is defined as a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, and can include a decision by the board of directors or senior management of the issuer to implement a material change.
For common law misrepresentation claims, the plaintiff must prove on a balance of probabilities that a factual representation was untrue, inaccurate, or misleading. Forecasts and opinions are not actionable on this basis unless they contain implied misstatements of existing facts. Omissions are also not actionable, except where the omission renders a positive representation misleading.Scienter
What is the standard for determining whether a defendant has a culpable state of mind?
There is no culpable state of mind requirement for statutory primary market claims, or for secondary market claims of misrepresentation in ‘core’ documents or against experts. For all other secondary market claims, the plaintiff must prove that the defendant knew of the misrepresentation, deliberately avoided acquiring knowledge of it, or was guilty of gross misconduct in connection with the misrepresentation.
Certain defendants may be able to raise a due diligence defence to statutory misrepresentation claims as discussed at question 12.
For common law claims, plaintiffs must establish that the defendants acted negligently, knowingly, or with recklessness as to the truth or falsity of the representation.Reliance
Is proof of reliance required, and are there any presumptions of reliance available to assist plaintiffs?
Proof of reliance is not required for the statutory claims, but is required for common law negligent misrepresentation claims. Presumptions of reliance are not available; in particular, the ‘fraud on the market’ theory has not been accepted in Canada. As a result, reliance is generally considered a claimant-specific issue, requiring individual evaluation and fact-finding, and therefore inherently unsuitable for class certification.Causation
Is proof of causation required? How is causation established?
For statutory misrepresentation claims, the plaintiff is not required to prove causation. The onus is on the defendant to prove that all or part of the claimed damages are attributable to a change in the value of the security unrelated to the alleged misrepresentation or failure to make timely disclosure.
For common law misrepresentation claims, the plaintiff must prove that the loss for which compensation is claimed was caused by reliance on the misrepresentation.Other elements of claim
What elements present special issues in the securities litigation context?
The following elements have presented special issues in recent cases:
- Materiality: As discussed in question 6, for misrepresentation claims under securities legislation, there is both a statutory definition of a ‘material’ fact or change (the market impact test), and an alternative test adopted by Canadian courts from US federal securities law (the reasonable investor test). The recent decision in Paniccia v MDC Partners Inc, 2018 ONSC 3470 [MDC Partners] highlights the importance of the materiality element. The court denied leave to commence a statutory claim for secondary market misrepresentation because all of the alleged misrepresentations lacked materiality. The plaintiff alleged that the issuer had omitted to disclose a regulatory subpoena, and had made various misrepresentations with respect to executive compensation, accounting practices and internal controls. The court held that the mere receipt of a regulatory subpoena was not a material fact that triggered a duty to disclose. Furthermore, in the absence of any restatement of the issuer’s financial statements, withdrawal of the auditors’ unqualified opinions, criminal or regulatory findings, or acknowledgment of any misrepresentation of material fact by the issuer, the plaintiff had to adduce some other evidence to establish materiality of the alleged misrepresentations, and had failed to do so. Evidence from an expert accountant did not assist the plaintiff: the court noted that the expert was qualified to opine on what was material from an accountant’s or auditor’s perspective, but not on what was a material fact or material change for purposes of securities legislation, which is a legal test.
- Reliance: As discussed in question 2, the element of reliance poses a significant obstacle to class certification of common law misrepresentation claims, since reliance will usually be an individual issue that is not amenable to determination on a class-wide basis. Reliance is not an element of statutory misrepresentation claims.
- Public correction: A public correction of the alleged misrepresentation is an element of the statutory cause of action for secondary market misrepresentation. Damages are measured as the difference between the price paid or received for securities while the misrepresentation was operative, and the trading price of the securities following its public correction. There is no statutory definition of ‘public correction’. The public correction need not be made by the issuer of the security, and could in principle take any form, including statements by the issuer, rating agencies, market analysts or short-sellers. The public correction need not be a mirror-image of the alleged misrepresentation or a direct admission that a previous statement was untrue, but must be reasonably capable of revealing to the market the existence of a prior misrepresentation. The MDC Partners decision discussed above is also notable as the first case in which leave to proceed with a statutory secondary market action was denied in part because the plaintiff had failed to plead any public correction of some of the alleged misrepresentations.
What is the relevant limitation period? When does it begin to run? Can it be extended or shortened?
Common law claims are subject to the limitation periods set out in provincial limitation statutes. In most provinces, including Ontario, the limitation period generally applicable to civil claims is two years from the date when the plaintiff discovered or could reasonably have discovered that it had a claim.
Securities legislation prescribes special limitation periods for statutory misrepresentation claims. For statutory primary market claims, the limitation period for seeking rescission is 180 days from the date of the purchase of securities. The limitation period for damages claims is the earlier of three years after the date of the transaction or 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action.
For statutory secondary market claims, the limitation period is three years from the release of the document or statement containing the misrepresentation, or from the failure to make timely disclosure. The interplay between this limitation period and the requirement for leave to commence a statutory secondary market action has been heavily litigated. In Canadian Imperial Bank of Commerce v Green, 2015 SCC 60, the Supreme Court of Canada held that leave must be obtained before the end of the three-year period, but that courts have the discretion to grant leave retroactively (‘nunc pro tunc’) where the motion for leave was filed within the limitation period but granted after its expiry. As this litigation was ongoing, Ontario’s securities legislation was amended in 2014 to provide that filing a motion for leave to bring a secondary market action suspends the three-year limitation period.