In its recent decision in LBP Holdings Ltd. v Hycroft Mining Corporation, 2017 ONSC 6342, the Ontario Superior Court of Justice dismissed a motion to certify an action in common law negligence and negligent misrepresentation against the underwriters involved in a public offering. In so doing, Justice Perell found that the proposed class proceeding did not satisfy the preferable procedure requirement given that there were no synergies with the related class action against the issuer and directors of the issuer.
Nature of the proposed class proceeding
The plaintiff in this action sought to certify a class proceeding against two classes of defendants. Firstly, the plaintiff alleged misrepresentation under s. 130 of the Ontario Securities Act as against the issuer and directors of the issuer. Secondly, the plaintiff alleged common law negligence and negligent misrepresentation against the underwriters.
The nature of the claim against the underwriters was founded on their statutory obligation to deliver a certificate in a prescribed form that certified that the prospectus was full, true and constituted plain disclosure to the best of their knowledge. The plaintiff alleged that, as a result of their ability to conduct due diligence in order to issue such a certificate, the underwriters knew or ought to have known that the prospectus failed to include material facts with regards to the production of a key mine.
While statutory action was certified, on consent, the underwriters resisted the motion to certify the common law claims on the basis that the claims did not disclose a reasonable cause of action and that a class proceeding was not the preferable procedure.
Justice Perell found that, while the negligent misrepresentation claim against the underwriters did disclose a reasonable cause of action, a class proceeding was not the preferable procedure for its adjudication.
Relying on the principles articulated by the Supreme Court of Canada in AIC Limited v Fischer, Justice Perell noted that in order to satisfy the preferable procedure criterion, the prospective plaintiff must demonstrate that the proposed class action would:
- Be a fair, efficient and manageable method of advancing the claim;
- Be preferable to any other reasonably available means of resolving the class members’ claims; and
- Facilitate the three principal goals of class proceedings, namely judicial economic, behaviour modification and access to justice.
In applying these principles to the case at bar, Justice Perell first found that a common law negligent misrepresentation claim can be certified notwithstanding that there will be individual trials to address reliance and damages. However, then circumstances of this case did not render the claim best suited to adjudication via a class proceeding.
Indeed, Justice Perell found that since no statutory cause of action could be advanced against the underwriters (unlike the statutory claims against the issuer and directors), there were no synergies in having the claims heard together. That is to say, the alleged misrepresentation made by the underwriters differed from those made by the issuer and directors. As noted by Justice Perell:
[c]oat tailing the tort claims against the Underwriters with the statutory misrepresentation claim against the Hycroft Defendants is problematic in terms of manageability and given the difference between the claims against the co-defendants, there is only modest advancement in judicial economy and much less than would be the case if a statutory claim against the Underwriters had been combined with the common law claims against them.
In addition to the importance of this case to the issue of potential underwriter liability to shareholders (and the limits thereof), this case serves as a useful reminder that distinct claims against differently situated defendants may result in divergent results when it comes to class certification. In particular, while there may be instances when a class proceeding against certain defendants is a preferable procedure, parallel claims against co-defendants that give rise to different legal tests, and different facts required to establish the legal tests, may not satisfy the preferable procedure criterion. To the extent that defendants are faced with certification of a class proceeding together with co-defendants but are subject to distinct claims that engage differing legal tests (and different factual underpinnings), it may be useful to challenge certification on the basis that a class proceeding is not the preferable procedure for resolving such claims.