In a decision released on July 25, 2013, the Ontario Superior Court of Justice granted leave and certification to the plaintiff class in Dugal v. Manulife Financial (hereinafter Dugal). This is one of a handful of Canadian cases in which leave and certification have been contested in a secondary market securities class action since the provincial securities acts were amended to enable such claims, starting in 2005.
The Dugal decision is noteworthy as it raises a number of significant issues that are ripe for consideration by an appellate court and that will be of interest to public issuers who are defending, or may be targets of, secondary market securities class actions. Most notably, Justice Belobaba:
- Arguably applied a more rigorous standard for granting leave than has been applied in Ontario to date
- Certified common law negligent misrepresentation claims, subject to subsequent determinations of individual reliance
The plaintiffs in Dugal allege that Manulife did not make accurate and timely disclosure that certain new guaranteed investment products were left exposed to fluctuations in equity markets without hedging or reinsurance. These new products were popular with investors, further increasing Manulife’s exposure to market fluctuations. When the global financial crisis hit in late 2008 and equity markets fell by more than 35%, Manulife had significant exposure to the holders of its guaranteed investment products and had insufficient reserves. In February 2009, Manulife released its annual financial statements for year-end 2008, revealing that corporate profits had fallen by C$3.8-billion. By the end of Q1 2009, the price of Manulife’s shares had dropped almost 77%.
The plaintiffs allege that, among other things, Manulife misrepresented its risk management, its diversification levels and the extent that it was exposed to both equity market and interest rate risks, causing shareholder losses.
Belobaba J. grapples with the dichotomy that has developed in the jurisprudence across the country with respect to the threshold that must be met for leave to proceed to be granted under section 138.8(1) of the Ontario Securities Act (OSA) and analogous sections of other provinces’ acts.
His analysis focuses on whether the plaintiffs have established a reasonable possibility of success at trial, based on a reasoned consideration of the evidence. Belobaba J. sets out the “two schools of thought.” First, the approach that has been adopted by Ontario judges that all a plaintiff has to show is “something more than a de minimus possibility or chance that the plaintiff will succeed at trial.” Second, the “higher threshold” that originated with the Ontario Law Reform Commission and was articulated by the British Columbia Supreme Court and affirmed on appeal in Round v. MacDonald Dettwiler and Associates Ltd. that “an action may have some merit and not be frivolous, scandalous or vexatious without rising to the level of demonstrating that the plaintiff has a reasonably possibility of success.”
Belobaba J. adopts the “higher threshold” approach but expresses reservations as to whether this approach will find favour going forward. He makes clear that he “would have come to the same conclusion under both the relaxed Ontario approach and the more demanding B.C./OLRC approach.” This issue has yet to be considered by an appellate level court in Ontario, but Belobaba J.’s decision sets the table for that analysis.
Certification of Common Law Negligent Misrepresentation Claims
In determining whether to certify the plaintiff class’s common law negligent misrepresentation claims, Belobaba J. similarly takes a path that purports to balance the different approaches taken previously.
In McKenna v. Gammon Gold, Justice Strathy held that “The inability to establish reliance as a common issue makes the common law misrepresentation claims, in both the secondary and primary markets, fundamentally unsuitable for certification.” By contrast, in Silver v. IMAX, Justice van Rensburg certified the plaintiffs’ common law misrepresentation claims, holding that “It should be open to the plaintiffs to attempt to establish in the common issues trial that, as a factual matter, reliance has been established for all members of the class through proof of the common action of purchasing shares.”
In Dugal, Belobaba J. certifies the questions of whether the defendants owed the class members a duty of care, whether that duty had been breached and whether each class member’s reliance can be inferred from the fact of the class member having purchased Manulife shares. He does not certify the question of whether class members are required to demonstrate individual reliance upon alleged misrepresentations in order to have a right of action against the defendants. Rather, he concludes that the answer must be “yes” given that the answer is indisputably clear in the case law.
The practical reality of Belobaba J.’s conclusion is that, unless the common issues judge determines that class-wide reliance can be inferred, liability for common law misrepresentation claims will not be determined at a common issues trial. If such reliance cannot be inferred, individual reliance by class members will need to be determined in individual trials before a finding of liability can be made. A multiplicity of proceedings for minimal recovery will result, which statutory secondary market claims were designed to avoid. This raises the question of whether, in practice, common law claims have a place alongside the statutory regime for secondary market securities class actions.