In a decision which may be significant for public issuers defending securities class actions in multiple jurisdictions, an Ontario court has held that certain members of the class in an Ontario class action will be removed from the class as a result of the settlement of a parallel U.S. class proceeding. In Silver v. IMAX (IMAX), released on March 19, 2013, Justice van Rensburg of the Ontario Superior Court of Justice granted the defendants' motion to revise the class definition in the Ontario case to exclude those investors who purchased securities of IMAX Corporation (IMAX) over the NASDAQ exchange. The decision has the effect of removing approximately 85% of the class members from the Ontario action and limiting the class to the remaining 15% of investors who purchased their securities on the Toronto Stock Exchange (TSX). As the first decision to consider the effect of the settlement of a parallel U.S. secondary market class action on a class proceeding commenced under Part XXIII.1 of the Ontario Securities Act (OSA), IMAX provides an example of how Canadian courts may approach the settlement of securities class actions in cross-border scenarios.
BACKGROUNDTO THE DECISION
In 2006, parallel U.S. and Canadian proceedings were commenced against IMAX and other defendants in which it was alleged that the defendants made misrepresentations in IMAX's financial reports. IMAX is a Canadian-based public company, the shares of which are dual-listed on the TSX and NASDAQ exchanges. In August 2006, IMAX announced that it was responding to a formal inquiry from the U.S. Securities and Exchange Commission about revenue recognition in its 2005 financial results. IMAX's shares dropped by 40% the next day. Shareholder losses of over C$200-million were claimed.
The misrepresentation claims in the Ontario action were brought under Part XXIII.1 of the OSA, which provides a statutory right of action against reporting issuers, their officers and directors, and other related parties for misrepresentations in secondary market disclosures, and at common law. In 2009, leave was granted to proceed with the statutory claims, as is required by the OSA, and the action was also certified as a class proceeding. At that time, the court certified a global class of IMAX investors that included purchasers of securities on both the TSX and NASDAQ exchanges. Van Rensburg J., in certifying the "global" class, reasoned that the conduct of the defendants had a real and substantial connection to Ontario (in particular, because IMAX is a reporting issuer in Ontario and its shares are listed on the TSX).
In June 2012, a fairness hearing was conducted in the U.S. proceeding before Justice Buchwald in the Southern District of New York to consider a settlement agreement affecting only those purchasers who acquired their securities over the NASDAQ. Buchwald J. approved the settlement conditionally, pending an order from the Ontario court amending the class in the Ontario proceeding to exclude those persons entitled to participate in the U.S. settlement (i.e., those class members who purchased IMAX securities on the NASDAQ exchange).
Van Rensburg J. provided the requisite order, determining that removing the NASDAQ purchasers from the Ontario class accorded with the preferable procedure requirement in section 5(1)(d) of the Ontario Class Proceedings Act. In so doing, she rejected the plaintiffs' argument that granting the order requested by the defendants would "rip the guts out" of the pending Ontario class action. She concluded that keeping the NASDAQ purchasers in the Ontario class would not promote access to justice or be "preferable" for the NASDAQ purchasers who would lose the benefit of the U.S. settlement if the order was not granted. She also rejected the argument that reducing the class would be unfair to TSX purchasers who will be left to share the costs of litigating in Ontario amongst a smaller number of plaintiffs. She observed that the TSX purchasers had been provided with the opportunity to accept a settlement proportionate with what was offered to the NASDAQ purchasers in the U.S. and stated that it is "not the function of the court to favour or protect the interests of class counsel within this jurisdiction, knowing that they have invested time and resources into the litigation, and that their compensation will depend on the size of the judgment they are able to receive."
As part of the analysis, van Rensburg J. applied the test for recognition of a foreign judgment, as set out by the Ontario Court of Appeal in Currie v. McDonald's Restaurants of Canada. She concluded that the test had been satisfied because the NASDAQ purchasers' claims had a real and substantial connection to the U.S., that these plaintiffs had been accorded procedural fairness, and were adequately represented in the U.S. She pointed out that notice to these class members included information about the parallel Canadian proceedings and the implications of participation in the U.S. settlement on any claims they may have in Canada. In particular, she observed that notice of the U.S. settlement had been provided in Canadian newspapers and there was a degree of participation of Ontario class counsel in U.S. settlement discussions.
Although IMAX could still be subject to an appeal, it has a number of implications for cross-border securities class actions:
Defendants May Have Multiple Opportunities to Narrow the Class
While parallel securities class actions with overlapping classes are increasingly common, there are multiple junctures at which a defendant may seek to exclude investors who purchased securities over foreign exchanges from a class in Ontario (or potentially other Canadian provinces). The decision is encouraging from a defendant's perspective because it suggests that even when a global class of investors is certified in Canada, it may be possible to narrow the class at a subsequent point in time. In other words, defendants may have multiple "kicks at the can".
It May Be Unnecessary to Settle Cross-Border Claims on a Global Basis
Defendants to cross-border claims will have little motivation to settle either claim in isolation from the other if they cannot assure that class members who are entitled to participate in a settlement on one side of the border will be excluded from the class on the other side. They may stand to gain little or nothing in exchange for the settlement funds because they cannot be certain that plaintiffs who are members of both classes will not simply continue to assert their claims on the other side of the border. The IMAX decision may help to allay concerns of defendants that cross-border securities class actions cannot be settled other than on a global basis. It suggests that cross-border defendants may have the flexibility to negotiate different settlements in the U.S. and Canada and that they may choose to settle U.S. and Canadian cases at different points in time, depending on factors that may be specific to the litigation in each jurisdiction.
DeferenceFinally, the decision suggests that courts in Ontario and other Canadian provinces will likely show considerable deference to decisions of U.S. courts that affect the rights of class members in Canadian class proceedings, provided that basic procedural protections have been afforded to these class members. Significant amongst these protections is a notice program that adequately describes the rights that members of overlapping classes may have in Canadian proceedings and explains how these rights will be affected by their participation in the U.S. settlement.