In Tucci v. Smart Technologies Inc., a recent certification decision of the Ontario Superior Court of Justice, Justice Perell excluded investors who purchased securities of the defendant on the secondary market from a proposed class of investors pursuing claims for prospectus misrepresentation under subsection 130(1) of the Securities Act (Ontario) (the Act). The decision reinforces existing case law establishing that subsection 130(1) does not apply to secondary market purchasers (such as someone who buys securities on the Toronto Stock Exchange (TSX)) even if the secondary market purchase was made during the "period of distribution" of the prospectus offering.
The decision emphasizes the distinctions between primary and secondary market claims in the context of class certification and should discourage creative attempts by plaintiffs to certify secondary market claims without confronting the specific burdens and restrictions imposed by Part XXXIII.1.
On July 15, 2010, Smart Technologies Inc., made an initial public offering (IPO) of shares in Canada and the United States. As the shares began trading on the TSX and NASDAQ on the same date, certain secondary market purchases were made during the period of distribution of the IPO.
In a proposed class action, the plaintiff, a primary market purchaser, sought damages under section 130 of the Act and equivalent provisions of other Canadian securities legislation, alleging that the prospectus contained misrepresentations that became apparent when corrective disclosure was made on November 9, 2010.
The defendants consented to the certification of a class of primary market purchasers but opposed the inclusion of secondary market purchasers within the class. Justice Perell's decision focused on this narrow issue.
The plaintiff argued that secondary market purchasers who had acquired shares after the date of filing of the prospectus but before the closing of the IPO (i.e., "during the period of distribution or during distribution to the public") should be included as members of the class since the two groups were similarly situated and, accordingly, it would be good public policy to treat them in the same manner rather than imposing the leave requirement set out in section 138.8 of the Act on the secondary market purchasers.
Justice Perell concluded that existing precedents, including the British Columbia Court of Appeal's decision in Pearsonv.Boliden Ltd., confirm that the remedies provided under subsection 130(1) are available exclusively to primary market purchasers. He noted that subsection 130(1) includes a remedy of rescission against issuers, selling security holders and underwriters, in addition to the remedy of damages. As such, an expansive interpretation of the provision to include claims brought by secondary market purchasers would create an undesirable inconsistency. Secondary market purchasers would not have access to the rescission remedy because it is not available against vendors in secondary market transactions.
Justice Perell went on to determine that the plaintiff's "unconventional" interpretation of subsection 130(1) was "not necessary to serve the purposes of the Act" which includes distinct remedial regimes for primary and secondary market purchasers who allege they have been harmed by misrepresentations. He concluded that there "is no legislative purpose to be served by adding a special class of secondary market purchasers whose purchases happen to occur during the primary market's operation."
This decision limits the application of subsection 130(1) to primary market purchasers of securities under a prospectus and underscores the distinctions between primary and secondary market statutory liability regimes. This is encouraging for public issuers and their directors and officers, who would lose the benefit of pro-defendant provisions of Part XXIII.1 – such as the leave requirement, liability limits and "loser pay" cost rules – if plaintiffs are permitted to avoid them through recourse to section 130.
Significantly, the case may support future arguments that, even if primary and secondary market claimants may pursue their claims within the same class proceeding (subject to leave being granted to pursue secondary market claims), the claims of primary and secondary market investors are sufficiently distinct to require separate subclasses, with a separate representative plaintiff appointed to represent each group.