At the end of 2005, Ontario legislation came into effect which enabled aggrieved shareholders to bring a statutory action for secondary market misrepresentation against issuers and their directors and officers (and others) without the requirement to establish individual reliance. In order to commence such an action, however, a shareholder must first obtain leave from the Superior Court. Much of the jurisprudence in secondary market securities class actions has been devoted to examining the standard for leave.
- confirmed the merits-based test for leave to proceed;
- and affirmed that Motion Judges should not certify common law misrepresentation claims if leave to proceed with the parallel statutory claim is denied.
The plaintiff shareholders brought a common law claim against Kinross Gold Corp., a Toronto-based international mining company, and four of its officers, for alleged misrepresentations in connection with two of its gold mines in Africa. They asserted that Kinross overstated the value of the mines by failing to record a goodwill impairment charge on a timely basis.
On the shareholders’ motion for leave to proceed with the statutory claim, the Court refused to grant leave because there was no reasonable possibility that it could succeed. The Motions Judge came to this conclusion due to deficiencies in the expert accounting evidence on which the plaintiffs relied to argue Kinross should have recorded the impairment charge sooner. The Court also refused to certify the plaintiffs’ statutory and common law claims under the Class Proceedings Act, 1992, because it had refused leave to proceed with the statutory claims.
The Court of Appeal unanimously dismissed the plaintiffs’ appeal from the refusals to grant leave and to certify their action. In doing so, Justice Cronk addressed the leave requirement, and the relationship between the leave to proceed analysis and the certification criteria.
1. The Leave Requirement: Just how low is the merits threshold?
To grant leave to pursue a secondary market misrepresentation claim under Ontario’s Securities Act,a court must be satisfied that:
- the action is being brought in good faith; and
- there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.
The second part – the merits test – was in issue in Kinross.
Previous authority established that the leave test is a “relatively low threshold” and a “preliminary low-level merits based leave test”. However, the Ontario Court of Appeal in Green had recently compared the merits test with the very low standard for striking out a claim as disclosing no reasonable cause of action, which is the same test applied under s. 5(1)(a) of the CPA. In Kinross, the same Court reiterated that although the court applies the same test for leave under the OSA and under s. 5(1)(a) of the CPA, the evidentiary record to which the test is applied is very different. Under s. 5(1)(a), the court assumes the facts in the Plaintiff’s pleadings are true, but on the leave test, the court weighs the evidence filed by the investor and, if any, by the named Defendants and any cross-examination transcripts; from that evidence, it may draw reasonable inferences and make findings of fact. In short, Kinross clarified that while the standard for leave is not high, it is a true merits analysis, which critically assesses the evidentiary basis for the plaintiff’s allegations.
2. Leave and Certification: Are they Related?
In Kinross, the Court of Appeal also addressed the relationship between the leave test and the certification analysis under the CPA. Justice Cronk confirmed that when a court refuses leave to proceed with a statutory misrepresentation claim, that statutory claim also cannot meet the CPA certification criteria.
However, the same is not true for its companion common law misrepresentation claim. Justice Cronk held that because the merits are generally irrelevant to certification, the refusal to grant leave because the statutory claim lacks merit will not automatically preclude certification of common law misrepresentation claims.
Nonetheless, the refusal to grant leave to pursue a proposed OSA claim is relevant to the preferable procedure criterion of the certification analysis for the common law claims. The preferable procedure inquiry asks whether (1) a class action would be a fair, efficient and manageable way to prosecute the claims, and (2) a class action is preferable to other reasonably available means of pursuing the claims. Justice Cronk in Kinross explained that if a court certified common law misrepresentation claims after having refused leave to pursue statutory claims, the proceedings would effectively continue “against the backdrop of an existing judicial determination that the appellants’ core claims of misrepresentation … hold no reasonable prospect for success at trial,” which would be contrary to the first preferability inquiry. This reasoning applies to common law misrepresentation claims in any case in which the court refuses leave for the OSA claims, and virtually forecloses any possibility that a common law claim will be certified if statutory leave is refused.
The Court of Appeal for Ontario’s analysis in Kinross is significant for issuers and their executives for two reasons. First, the Court confirmed that although the leave requirement to proceed with a secondary market misrepresentation claim sets a relatively low standard, it is appropriate to weigh the evidence and make findings in relation to the plaintiffs’ expert evidence. In doing so, the Court clarified the comparison in Green between the OSA leave test and the test under s. 5(1)(a) of the CPA. The Court’s reasoning Kinross, confirming that Motion Judges must conduct a merits test, is a welcome development for issuers after the same Court’s comments in Green.
Second, the Court held that a claim for common law misrepresentation could be certified under the CPA even if a court refuses the plaintiffs’ leave to proceed with a companion statutory misrepresentation claim. However, the refusal to grant leave is relevant to the preferability criterion under the CPA and weighs powerfully against a class action’s being the preferable means of resolving the claim. Indeed, in light of Justice Cronk comments, it appears very unlikely that a common law claim will be certified when leave to pursue a statutory claim has been refused.
Bayens v. Kinross Gold Corporation, 2014 ONCA 901
Date of Decision: December 17, 2014