On March 3, 2014, the Ontario Divisional Court released its decision in Dugal v. Manulife Financial Corporation, denying the defendant Manulife Financial Corporation’s motion for leave to appeal the decision of Justice Belobaba (the Motion Judge) granting leave to the plaintiffs to pursue a secondary market claim under Part XXIII.1 of the Securities Act (Ontario) and certifying the action as a class proceeding.

Background

In Dugal, the plaintiffs alleged that during the class period of April 1, 2004 to February 12, 2009, Manulife misrepresented its equity market risk from its segregated fund/guaranteed investment products by failing to disclose that it had largely abandoned hedging and reinsurance of these products during the class period. The Motion Judge found that the plaintiffs had met the test for leave under Part XXIII.1 on the basis that they had raised serious arguable questions regarding Manulife’s liability and that they had a reasonable possibility of succeeding at trial. The Motion Judge also held that the action should be certified as a class proceeding.

The Motion for Leave to Appeal

Manulife brought a motion for leave to appeal at the Divisional Court. Appearing before Justice Sanderson, counsel for the company argued that the Motion Judge had erred in four important respects: (i) in finding that that there was a serious arguable question regarding what the market knew about the nature and extent of Manulife’s equity risk prior to the alleged corrective disclosure; (ii) in finding that the alleged corrective disclosure was “corrective” as opposed to simply the timely release of the 2008 annual financial results; (iii) in relying on inadmissible hearsay evidence and speculative opinions from unqualified experts; and (iv) in finding that there was an evidentiary basis for the plaintiffs’ allegation that market declines of 2008 were not entirely unforeseeable and that Manulife’s equity market sensitivity was an “existential threat to Manulife’s business”.

Sanderson J. rejected Manulife’s argument that the Motion Judge had improperly disregarded and misapprehended the evidence regarding what the market knew about the nature and extent of Manulife’s equity market risks prior to the alleged corrective disclosure. Sanderson J. held that it was open to the Motion Judge to reach the conclusion that there was an arguable question regarding what the market knew.

With respect to the argument that no corrective disclosure was issued by Manulife, Sanderson J. held that the Motion Judge was entitled to consider the uncontroverted evidence of the plaintiffs’ expert that there was a significant decline in the price of Manulife stock on February 12, 2009 that was “directly attributable” to news of the conditional tail expectation (CTE) level it was using to calculate losses and Manulife’s decision not to hedge or reinsure its guaranteed investment products.

Sanderson J. rejected Manulife’s argument that the Motion Judge relied on hearsay evidence, finding that Belobaba J. had not relied “much or at all” on a newspaper article that was hearsay and that there had been other evidence supporting his conclusion. Sanderson J. also noted that while Manulife disparaged the plaintiffs’ experts’ qualifications, Manulife had not moved to strike the expert opinions or to have the expert disqualified.

With respect to the argument that the Motion Judge had erred in his findings regarding the 2008 financial crisis and the foreseeability of the “existential threat to Manulife’s business”, Sanderson J. held that there was an evidentiary basis for the plaintiffs’ allegation that market declines of 2008 were foreseeable and that there was no good reason to doubt the correctness of the Motion Judge’s conclusion on that point.

Regarding Manulife’s motion for leave to appeal the certification order, Sanderson J. rejected the company’s argument that the Motion Judge had erred in certifying the common law negligent misrepresentation claim. Sanderson J. accepted the Motion Judge’s finding that the misrepresentation alleged by the plaintiffs “could stand alone as a single Representation that is judicially manageable in a class proceeding.” Sanderson J. rejected Manulife’s argument that permitting the plaintiffs to assert both common law misrepresentation claims and a Part XXIII.1 claim made the statutory regime redundant. She concluded that in Green v. Canadian Imperial Bank of Commerce, the Ontario Court of Appeal had made it clear that a common law misrepresentation claim can be certified alongside the statutory claim.

Finally, Sanderson J. determined that the issues raised did not transcend the interests of the parties and did not warrant granting leave to appeal.