Secondary Market Actions (“Bill 198”): Where Are We Now?

Grey Swan,

Nearly a decade ago, “Bill 198″ was proposed and eventually enacted into law. The amendment to the Securities Act (initially in Ontario and subsequently across essentially all of Canada) was designed to make it easier to bring class action suits against companies that mislead investors when they traded on the secondary market. The changes removed an arduous requirement that shareholders prove they relied on faulty disclosures when they invested on the secondary market, which requirement had previously been the death knell of class actions. That was then; where are we now with secondary market actions?

Bill 198 sought to avoid some of the perceived deficiencies our neighbours to the south had experienced with frivolous lawsuits, the so-called “strike suits”, brought by plaintiffs who believed that companies would quickly pay out to get them to go away, even absent compelling evidence. And, it was often the case that companies, and insurers, did. The Canadian amendments include provisions that put into place safeguards to guard against this type of behaviour. Although secondary market suits under the new provisions have been slow off the mark in Canada, the last couple of years have finally brought judicial developments that are helping to shape the landscape.

Here are a few examples of some of the significant decisions which have provided interpretation of, and clarity on, the Canadian secondary market legislation.

    1. Ravinder Kumar Sharma v. Timminco Ltd. Investors alleged that Timminco defrauded investors by claiming it could deliver inexpensive solar-grade silicon for production of solar panels. A $520 million class action was launched against the company, as well as the CEO, Chairman of the Board of Directors, and other officers and directors. The action stalled in February 2012 when the Ontario Court of Appeal overturned an earlier ruling that indicated that the “clock had stopped” on the three-year limitation period under the Securities Act (Ontario), during which plaintiffs must bring a class action, while the leave application was proceeding. The Appeal Court decided that the limitation period under the Securities Act was not eradicated by the Class Proceedings Act, which allows the court to stop the clock running while the plaintiff is seeking certification of the action.

The Supreme Court of Canada dismissed leave to appeal this decision, so it now stands as the law, causing somewhat of an uproar amongst the plaintiffs’ bar, and leading to a request to the government for a change in the legislation. Two subsequent cases (Green v CIBC ; and Silver v Imax) have looked at the Timminco decision and reached opposite determinations. Both of these cases are under appeal. Timminco is one of the most important rulings on secondary market class actions to date, and it may well affect a number of existing cases whose pace has not met the 3 year limitation period. In future, we will undoubtedly see a change in the approach of plaintiff’s counsel bringing one large combined motion seeking both leave and certification of the class action. Instead we can expect a much faster push for the leave motion.

    1. Morrison v. National Australia Bank.TThis was a US Supreme Court decision that held that unless shares were traded or listed in the US, cases could not be brought in the US. Only the “purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States” are covered by Section 10(b) of the Exchange Act (the US equivalent to our secondary market legislation).

Contrary to this ruling, and opening a wide gap between US and Canadian interpretation of our respective securities laws, there have been some decisions in Canada that have allowed Canadian courts to reach outside its borders and take jurisdiction over securities actions against issuers whose shares are solely listed on a foreign exchange. In the case of Abdula v. Canadian Solar Inc., for instance, the Ontario Court of Appeal ruled Canadian Solar, which traded on the NASDAQ and which had its principal place of business in China, was indeed a “responsible issuer” and therefore, could be sued under the Securities Act (Ontario). This ruling will help to solidify Ontario’s reputation as the new ”hot spot” for securities class actions.

    1. Silver v. IMAX and Gould v. Western Coal Corporation. In Silver v. IMAX, the Ontario Court first considered the test for granting leave to allow an action to proceed. In granting leave and allowing the action to proceed against IMAX, which had allegedly misrepresented itself on the secondary market, the court stated that the threshold test for leave is “relatively low”. All the test requires is a determination of whether the action was brought in good faith and if there is a reasonable possibility that the action would be resolved in favour of the plaintiff. Leave to appeal this decision was denied. Many argued that this would lower the threshold for leave, while others viewed the decision as in alignment with the law and its interpretation.

In Gould v Western Coal Corporation, the plaintiff alleged that Western Coal, as well as its major shareholder, lender, and a number of directors and officers, had created a fictitious financial crisis in order to drive the price of shares down and allow the defendants to profit. In this case, leave to bring the action was not granted because the court felt that the plaintiff’s claim had “no reasonable possibility of success at trial.” In this case, there was substantial evidence provided by the defendant to refute the allegations that raised the threshold for leave ultimately beyond the reach of the plaintiff.

  1. The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v Sino-Forest Corp. A number of Canadian courts have recently heard cases asking that third parties be able to fund class action litigation in Canada. Third party funding is common in countries like the US and the UK, but it is a relatively new and significant issue for Canada. Recent cost awards in some failed class action litigation, such as Smith v Inco, in which the court awarded $1.77 million to Inco, have highlighted the potential risk for failed plaintiffs, or more likely, plaintiffs’ law firms. Most recently in The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v Sino-Forest Corp., the Ontario Superior Court approved a funding agreement with an Ireland-based company, Claims Funding International. These funding agreements are important as they open the door for plaintiff law firms to pursue such risky and expensive litigation in a more unfettered manner. It is likely that with the financial risk of failure removed, plaintiff law firms will have increased incentive to generate class action business.

These decisions, as well as others, have played a pivotal role in the maturation of secondary market litigation in Canada. We are beginning to see how the legislative provisions are going to be judicially interpreted, and we are seeing how such class actions will practically proceed. Although carriage fights amongst plaintiff firms to determine who would have control of the litigation initially reared their heads, more recently we are seeing increased collaboration and cooperation amongst plaintiff counsel. We are also seeing the importance of the directors and officers insurance as plaintiffs push for production of insurance policies early in the proceedings (see Timminco for example). The dynamics of a policy holder who wants to get back to its business and end the substantial inconvenience of litigation, together with early disclosure of available insurance, and an excess insurance tower that is actively pushing for settlement within the underlying layer(s), is creating an environment ripe for early settlements. This may well result in more claims to come.

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Grey Swan

Grey Swan provides specialized independent insurance advice delivering a focused perspective to clients that is based on the over 25 years of insurance industry, legal, and claims experience that our founder brings to the table.

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