On February 14, 2011, the first decision in respect of secondary market provisions under section 138.3 of the Ontario Securities Act, which permits investors to pursue issuers for damages suffered based on market disclosure, was upheld. Investors are entitled to pursue issuers under this provision regardless of whether or not they relied on the market disclosure that is alleged to be misleading.

In this Ontario Superior Court decision, Justice Corbett dismissed a motion for leave to appeal to Divisional Court by IMAX corporation, which sought to overturn the certification of global class action lawsuit.1 Justice Corbett upheld the certification decision stating that a group of shareholders in Canada and the United States are entitled to proceed against IMAX Corporation in a global class action lawsuit. The group of shareholders allege that IMAX made misleading public statements about its revenues, resulting in a sharp drop in share price causing the shareholders to lose money.

Since IMAX is listed on both the TSX and the NASDAQ, investors on both sides of the border were affected by the alleged misleading statements, resulting in the certification of a global class of plaintiffs.

The implications of this judgment to issuers are as follows:

  • If a public issuer makes a misrepresentation or improper, misleading, or untimely disclosure, it could face both regulatory proceedings and a shareholder class action under s.138.3 of the OSA;
  • A low threshold has been set for leave sought under s.138.3; the plaintiff investors must demonstrate that the claim is being brought in “good faith”, which means they have to prove that they are bringing the claim to recover investment losses with a view to preventing other issuers from wrongful behaviour in the future, and show a lack of ulterior motive;
  • s.138 of the OSA eliminates the need for investors, as individuals, to prove that they relied on a misrepresentation to their detriment; typically, in these types of claims, an investor’s loss can be so small that the cost of legal proceedings would be prohibitive, but this new provision permits large groups of these shareholders to form a class to assert a claim as a common issue. Issuers will want to be aware of this risk, which could be financial and reputational;
  • If an issuer is listed on exchanges in different jurisdictions, investors in these jurisdictions can form a class and sue together in Canada. This is new law but there is no reason to believe that investors in different jurisdictions couldn’t sue any Canadian issuer, regardless of whether the issuer is listed on the TSX or TSX-V, in a single Canadian action. In Justice Corbett’s decision, he made it clear that integration is generally a good thing in these circumstances. Justice Corbett stated as follows:

This action will also involve other important issues, such as whether a public issuer owes a common law duty of care to the “investing public” for statements made in continuous disclosure documents, and the implications resulting from integrating statutory and common law causes of action. Justice Corbett acknowledged the importance of these issues to both issuers and investors and expects such decisions on will ultimately be rendered at the Court of Appeal level.

Therefore, issuers’ legal risks have been substantially increased now that they can be held accountable to both regulatory bodies and the investing public for misrepresentations in market disclosure.

“It would be wrong, of course, to compel foreign investors to be bound by Canadian proceedings if they prefer to have their claims adjudicated elsewhere. But similarly, it would be wrong to preclude them from participating in Canadian proceedings if they wish their claims to be pursued in Ontario.”

“As a matter of common sense, there is integration of Canadian and American capital markets, and there are legitimate bases for enforcement to be possible in both Canada and the U.S.A., both by regulatory action and by civil claims. The manner in which this integration takes place will vary from case to case. Certainly integration does not imply a prohibition on overlapping class proceedings in different jurisdictions.”

This action will also involve other important issues, such as whether a public issuer owes a common law duty of care to the “investing public” for statements made in continuous disclosure documents, and the implications resulting from integrating statutory and common law causes of action. Justice Corbett acknowledged the importance of these issues to both issuers and investors and expects such decisions on will ultimately be rendered at the Court of Appeal level.

Therefore, issuers’ legal risks have been substantially increased now that they can be held accountable to both regulatory bodies and the investing public for misrepresentations in market disclosure.