In Ontario, the motion for leave to commence a claim under the OntarioSecurities Act (“OSA”) is usually heard at the same time as the certification motion in a prospective class action. We have previously discussed how these are two very separate steps with very different evidentiary burdens. In his July 18, 2014 decision, Mask v. Silvercorp., Justice Belobaba of the Ontario Superior Court emphasized this difference when he refused to let the plaintiff inspect hundreds of confidential corporate documents before the leave motion. The decision explores the purpose of the OSA and is welcome news for defendants, who may lead evidence in response to such certification motions and leave motions with less concern that it will result in extensive early discovery. The precedential value of the decision was further strengthened when the Ontario Divisional Court refused to grant leave to appeal it.

The Facts: Plaintiff Seeks Massive Production

The plaintiff sought leave to commence a claim pursuant to the OSA for negligent misrepresentation against a mining company and two of its executives, and asked the Court to certify the claim as a class action. The defendants filed four responding affidavits. Shortly thereafter, the plaintiff served requests to inspect documents referenced in the affidavits. The defendants refused to produce the documents and stated that to the extent that any of the requests for production were reasonable, they would answer those requests at the cross-examinations.

The Motion: The Defendants Refuse to Produce Confidential Documents

The plaintiff argued that Rule 30.04(2) of the Rules of Civil Procedure mandated that the documents be produced: “a request to inspect documents may … be used to obtain the inspection of any document … that is referred to in … an affidavit served by the other party.”

The defendants disagreed with this interpretation of the Rule. But they had a deeper concern about the plaintiff’s attempts to:

  • “scrambl[e] to find evidence in the responding affidavits that he does not yet have for his OSA leave motion”; and
  • venture on “a fishing expedition that is not only proscribed by the Rule 30.04(2) case law but is also precluded by the statutory language and policy behind the OSA leave motion provisions”.

The Decision: Production Not Required

Justice Belobaba held that the plaintiff was not entitled to inspect all documents referred to in the affidavits. He noted that courts have a discretion to refuse or delay production of documents, and this discretion should be exercised because the request ran counter to the principles of:

  • Specificity – many of the requested documents were described in vague and general terms in the affidavit and request to inspect documents
  • Relevance – many of the requested documents were not relevant to the misrepresentations which the plaintiff alleged were the basis of his claim
  • Proportionality – the voluminous nature of the document request was not proportional to the value of inspecting the documents at this early stage in the proceeding
  • Privilege – several documents were privileged
  • Prejudice – the practical effect of granting the motion would be to permit the plaintiff to rummage through a large volume of confidential corporate documents to find evidence that could support the proposed OSA leave motion
  • Timeliness – production should usually occur as part of discovery

This issue of timeliness dovetailed into Justice Belobaba’s second, policy-based reason for refusing to grant the motion: the idea that a public issuer that opposes a leave motion could be forced to divulge a large number of confidential corporate documents (which no shareholder could ordinarily demand) was troubling. The purpose behind the leave requirement in the OSA is to prevent investors from pursuing unsupported actions to the detriment of the shareholders of the target company. TheRules of Civil Procedure must be interpreted in a way that recognizes this policy consideration behind the OSA.

Divisional Court Refuses to Grant Leave to Appeal

On August 11, 2014, Justice Perell, sitting as a Divisional Court judge, refused to grant leave to appeal Justice Belobaba’s decision. He held that there was no good reason to doubt the correctness of Justice Belobaba’s decision and in any event it was not desirable to grant leave to appeal the decision. In his opinion, “Mr. Mask was making a tactical maneuver to obtain an examination for discovery and advance rulings on the production of documents in a case for which leave to proceed had not been granted. It was a trip to the tackle and bait store before a fishing expedition and Justice Belobaba, for a variety of reasons, put a stop to it.”

Production to Occur After Leave under the OSA is Granted

Justice Belobaba’s decision recognizes that leave motions play an important gatekeeper function in Ontario securities litigation. Though he left the door open to narrow and discrete requests to inspect a document referred to in an affidavit, his decision fundamentally affirms that an issuer’s decision to lead evidence in opposition to an OSA leave motion, whether in a class proceeding or otherwise, will not lead to massive production obligations prior to the leave motion being heard.