In a recent decision that will be of interest to public issuers, the Ontario Court of Appeal in Kaynes v. BP has stayed a potential securities class action against BP, PLC (BP). As a result of the decision, it is likely that Ontario courts will take a more restrained approach to determining whether actions involving foreign issuers whose securities do not trade on a domestic exchange should be adjudicated in Ontario.
The background to the Kaynes decision is set out in our October 2013 Blakes Bulletin: Will Recent Decision "Open the Floodgates" to Securities Class Actions Against Foreign Issuers? The plaintiff, a Canadian resident, commenced a proposed class action in Ontario alleging that BP made misrepresentations in its public disclosure relating to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Common law and statutory misrepresentation claims were advanced. The plaintiff held BP American Depository Shares (ADS) purchased exclusively over the New York Stock Exchange. BP ADS were traded on the Toronto Stock Exchange until August 2008, when they were de-listed due to low trading volume, but none of the plaintiff’s securities were purchased on the TSX.
While BP conceded that the Ontario court did have jurisdiction over claims of purchasers of BP securities on the TSX, BP moved to dismiss or stay the action on the basis that the Ontario court did not have jurisdiction over the claims of purchasers of BP securities on exchanges outside of Ontario. The Ontario Superior Court of Justice dismissed BP’s motion. The court concluded that the statutory cause of action for secondary market misrepresentation against BP pursuant to Part XXIII.1 of the Ontario Securities Act should be classified as a "statutory tort" that was committed in Ontario, creating a presumption that Ontario courts have jurisdiction over the dispute. The court rejected BP’s argument that courts in the U.S. or U.K. were more appropriate forums for adjudicating the claims of the proposed class.
COURT OF APPEAL STAYS ACTION BY PURCHASERS ON FOREIGN EXCHANGES
In a unanimous decision, the Ontario Court of Appeal agreed that although Ontario courts could assume jurisdiction over the claims of purchasers of BP securities on foreign exchanges, jurisdiction in this case should have been declined because there were more appropriate forums available to resolve the dispute.
The Court of Appeal agreed with the motion judge that the proposed action against BP involved “a tort committed in Ontario,” which is one of the “presumptive connecting factors” for jurisdiction set out by the Supreme Court of Canada in Club Resorts Ltd. v. Van Breda. The Court of Appeal concluded that BP’s release of its normal course disclosure documents to shareholders in Ontario established a presumption that a tort had been committed in Ontario:
“…when BP released documents that it was legally required to provide its Ontario shareholders, it committed an act that had an immediate and direct connection with Ontario, an act that is sufficient to establish a real and substantial connection between the claim of this plaintiff and Ontario.”
Having found that Ontario courts had jurisdiction over the dispute, the Court of Appeal then considered whether to exercise its discretion to decline jurisdiction under the forum non conveniens doctrine. Under this doctrine, which the Supreme Court explained in Club Resorts, a court can decline jurisdiction if the moving party establishes that another forum has a sufficient connection to the dispute and is a more appropriate forum for its adjudication. The principle of comity and respect for the courts and legal systems of other countries underlies the forum non conveniens analysis.
In determining that Ontario was not the appropriate forum in Kaynes, the court had regard to the following factors:
- The U.S. securities class action regime and the U.K. law allowing for secondary market misrepresentation claims are based on the principle that securities litigation should take place in the forum where the securities transaction takes place (this is known as the “exchange-based” approach, and has been adopted by the U.S. Supreme Court)
- There was a pending class action in the U.S. based on the same alleged misrepresentations and included claims of all BP shareholders, including the plaintiff
- Purchasers on foreign exchanges should have a reasonable expectation of needing to look to a foreign court to litigate their claims
- The overwhelming majority of Canadians who acquired BP equity shares during the proposed class period did so on foreign exchanges, and the volume of ADS traded on the TSX “was dwarfed by the trading in ADS on foreign exchanges”
- Order and fairness will be achieved by “adhering to the international standard tying jurisdiction to the place where the securities were traded,” thus avoiding a multiplicity of proceedings involving the same claims or class of claims
The Court of Appeal concluded the motion court erred by not recognizing the full international context of the securities law regimes of Ontario, the U.S., and the U.K. It emphasized that the number of BP shareholders who acquired shares on a Canadian exchange was negligible, and agreed with BP’s argument that permitting the plaintiff to proceed with the proposed Ontario class action in such circumstances would be a classic example of the “tail wagging the dog.”
The decision in Kaynes
reduces the likelihood that Ontario will become an “overflow” jurisdiction for securities class actions against foreign issuers with securities traded on foreign exchanges. The Court of Appeal’s focus on the merits of the exchange-based approach adopted in the U.S. and U.K. suggests that Ontario courts will now take a more restrained approach to determining whether actions involving securities purchased on foreign exchanges should be allowed to proceed in Ontario. This is consistent with the outcome in Silver v. IMAX, where the Ontario Superior Court effectively removed the 85 per cent of class members who purchased on a foreign exchange from an Ontario securities class action, limiting the class to investors who purchased their shares on the TSX. See our March 2013 Blakes Bulletin: U.S. Settlement Reduces Global Class in Ontario Securities Class Action for more on this case.
Subject to the outcome of any appeal, the Court of Appeal’s decision in Kaynes is likely to result in securities class actions commenced in Ontario being analyzed in a broader international context. This could make it more difficult for such claims to proceed against foreign issuers whose securities do not trade over a Canadian exchange.