Securities class actions, which often have cross-border elements, are facing threats on a number of fronts in Canada
Enforcement issues and the fate of securities class actions are dominating what is turning out to be a watershed year in the evolution of class action litigation in Canada.
On the multi-jurisdictional enforcement front, Judge Katherine van Rensburg of the Ontario Superior Court of Justice agreed to remove NASDAQ investors from a class of Ontario investors certified in an action alleging misrepresentations in IMAX financial reports, leaving only the 15 percent of the class that had bought their shares on the Toronto Stock Exchange.
The March 2013 ruling followed on the settlement of a parallel proceeding that a US court had approved on condition that the Ontario class be reduced. The case is important, according to Andrea Laing, Ryan Morris and Max Shapiro, the authors of a Blake, Cassels & Graydon LLP's Securities Litigation Bulletin, because it demonstrates that class sizes can be reduced after certification, shows that globally certified cases do not need to be settled on a global basis and indicates that Ontario courts are willing to show deference to US judges in multi-jurisdictional cases.
For their part, securities class actions, which often have cross-border features because so many US and Canadian companies are cross-listed on the exchanges of the two countries, are facing threats on two fronts.
To begin with, the Supreme Court of Canada has granted leave in what has become known as the “market timing” case, which puts into issue whether private class actions can co-exist with regulatory enforcement proceedings.
The decision, which rocked Bay Street and has potentially broad implications for class actions generally, stems from the mutual fund market timing debacle of 2004. The Court of Appeal concluded that the settlement of regulatory enforcement proceedings against the funds in which they paid C$205 million to investors – less than the full value of investors’ damages – did not oust class action remedies in civil courts.
“Fischer engages a very important issue involving matters of principle to which each of the three courts that pronounced on it in this case have taken a very different approach,” said Benjamin Zarnett of Toronto’s Goodmans LLP, who with colleagues Jessica Kimmel and Melanie Ouanounou represents CI Mutual Funds Inc.
Joel Rochon of Toronto’s Rochon Genova LLP, who with colleagues Peter Jervis and Sakie Tambakos represented the class, says the decision provides “long-awaited crisp guidance to judges, lawyers and corporations as to the critical role class actions play in providing for access to justice” in the context of securities cases.
“Class actions will not be easily displaced by opaque procedures which provide no meaningful direct rights of participation to victims of corporate wrongdoing,” he says.
The Court of Appeal ruling, if upheld by the Supreme Court, means that the lawsuit against CI and AIC Limited can proceed to trial. The other defendants, IG Investment Management, Ltd., Franklin Templeton Investments Corp. and AGF Funds Inc. were not involved in the appeal as they chose to settle the class action suits.
But the case’s impact is not confined to securities cases. Indeed, the principle that the mere existence of a regulatory remedy for wrongdoing does not oust class action remedies has wide repercussions.
“The Class Proceedings Act requires that a class action be the preferable procedure for resolving a dispute before it can be certified,” Zarnett says. “So arguably Fischer could apply in any case where companies are holding up an alternative process, whether it’s regulatory or voluntary, as a preferable alternative to a class action.”
Fischer arose when the Ontario Securities Commission (OSC) commenced proceedings against the five defendant funds for failing to act in the public interest in relation to market timing activity in their funds. The regulatory proceedings ended when the funds agreed to pay C$205 million to aggrieved investors. All the settlements specified that they were without prejudice to the rights of investors to bring civil suits against the mutual fund managers with respect to the same subject matter.
Dennis Fischer and other representative plaintiffs initiated the class action after the OSC proceedings ended. The plaintiffs sought to recover the difference between the OSC settlement and the hundreds of millions of additional dollars they maintained were required to make full compensation to the investors.
In January 2010, Justice Paul Perell of the Ontario Superior Court of Justice refused to certify the case, but the Divisional Court reversed his ruling. The Court of Appeal upheld the Divisional Court result, but on different reasoning leaving little doubt that it would not tolerate judicial constructs that made it more difficult for plaintiffs to satisfy the preferable procedure test.
“The Court of Appeal’s reasons are an aggressive restatement of the preferable procedure test that keeps the door as wide open – and maybe a little wider open – than it has ever been for plaintiffs,” says Kirk Baert of Toronto’s Koskie Minsky LLP, who represents plaintiffs in class actions.
But defendants’ lawyers say that class actions, which are representative proceedings, should not be piggybacking on proceedings in which a regulator, acting in its statutory capacity, has recovered money for investors. Where regulatory enforcement has occurred, they say, class actions are not the “preferable procedure” mandated by class action legislation.
Otherwise, securities actions based on secondary market misrepresentations seemed to have suffered a telling blow when the Ontario Court of Appeal decided last year in a case involving Timminco Ltd. that plaintiffs had to obtain the required leave to commence such action within three years of the date of the impugned misrepresentation. Plaintiffs’ lawyers decried the decision, complaining that the inaccuracy of many representations did not even become public until well into or after three years.
When Timminco was released in early 2012, some defense lawyers called it the most important decision to date in secondary market class action jurisprudence. The Court of Appeal overturned Superior Court Justice Perell, who had ruled that s. 28 of the Class Proceedings Act, which suspends limitation periods applicable to class actions “on the commencement of the class proceeding,” began to run from the time that the plaintiffs announced their intention to seek leave in their statement of claim — which is precisely what the Timminco plaintiffs did. Subsequently, the Supreme Court of Canada denied leave to appeal in Timminco.
What followed, however, were conflicting decisions from various Superior Court judges as to the scope of the relief, if any, available to plaintiffs who had missed the three-year limitation as interpreted by the Court of Appeal.
In Green v. CIBC, Justice George Strathy held that the court had no discretion to extend the limitation period following its expiry. He refused to apply the common law doctrine of “special circumstances” to secondary market cases. The doctrine extends limitation periods where the interests of justice so require and there is no prejudice to defendants apart from having to defend the actions. Strathy did state, however, that he would have extended the limitation period on the facts had he found that the doctrine was applicable.
But in Silver v. Imax, Justice van Rensburg did grant relief. She concluded that the court had discretion to grant leave to proceed with a class action nunc pro tunc so as to situate the granting of leave within the limitation period.
Subsequently, in Trustees of the Millwright Regional Council of Ontario Pension Trust Fund v. Celestica Inc., Justice Perell, in direct opposition to Justice Strathy, found that discretion to extend relief from the limitation period existed and applied the doctrine of “special circumstances” to extend the limitation period. He found that the defendants were not prejudiced by the extension because they had been aware of the claims since 2007 and had been defending parallel claims in the US since then.
The upshot is that the rulings in Silver and Celestica significantly diluted the hard-line approach taken by the Court of Appeal in Timminco, which created serious problems for plaintiffs who only discovered a misrepresentation well into the three-year period and then had to encounter the vagaries of a notoriously slow litigation process abetted by defendants well aware of the advantages of delaying the hearing of the leave application.
“If relief is not available when courts do not have adequate resources to deal with leave applications expeditiously, defendants will have an extraordinary economic incentive to delay the proceedings,” says Dimitri Lascaris, who represents plaintiffs in Siskinds LLP’s London, ON, office.
Indeed, as Justice Perell saw it, the legislature “did not intend to sacrifice access to justice on the altar of expeditiousness.” He noted that the special circumstances doctrine was developed to “ameliorate the rigors of an absolute limitation period in appropriate circumstances.”
But Larry Lowenstein of Osler, Hoskin & Harcourt LLP’s Toronto office, who represents defendants in class action cases, does not regard Celestica as opening the floodgates.
“Justice Perell recognized that the special circumstances doctrine is principled and narrow,” he says. “It comes down to an inquiry as to whether the plaintiffs, by initiating the litigation within the limitation period albeit not obtaining leave within that period, have put the defendants on proper notice to avoid prejudice.”
In May 2013, the Ontario Court for Appeal convened a five-member panel to hear the appeals in Silver and Green. At press time, the decision was on reserve.
Although the central issue before the court was whether relief from the limitation period was available at all and if so, in what circumstances, the plaintiffs in Silver and Green asked the Court of Appeal to go further and reconsider its own decision in Timminco.
“What is apparent is that Timminco is creating difficulties for Superior Court judges who have to apply it,” says Brian Radnoff in Lerners LLP’s Toronto office. “At the least, the Court of Appeal has to look at the original decision and determine whether it merits a reconsideration.”
But Radnoff is skeptical that the court will overrule itself. “The Court of Appeal may well accept that exceptions can be carved into Timminco, but I would not be confident that the decision will be reversed,” he says. “While it’s clear that the legislation could be read in other ways, the Timminco interpretation is consistent with the wording of the Securities Act. It’s certainly not some ridiculous statutory interpretation.”
Radnoff agrees that ultimately the problem is a practical one.
“The question is whether plaintiffs in many cases are in a position to get leave within three years even where they act reasonably and with dispatch,” Radnoff says.
However that may be, defense counsel argue, the solution is one for the legislature, not the courts.
“It may be that a three-year limitation period is not sufficient given the complexities of the litigation process,” says Lowenstein, “but the proper remedy for a legislative measure that is not working is a legislative amendment.”
Baert says that the debate over extending the limitation period that followed Timminco was inevitable.
“It shows that the original rulings that the three-year limitation continued to run until leave was actually obtained made no sense,” he says. “So now we have had to deal with a whole new area of law that makes complicated proceedings even more unnecessarily complicated.”
For his part, Alan D’Silva in Stikeman Elliott LLP’s Toronto office, who represented Timminco, maintains that the Court of Appeal dealt with the matter correctly in Timminco.
“The Court of Appeal determined that to hold otherwise would be unfair because it would extend the limitation period for class plaintiffs beyond the period allowed to individual plaintiffs or shareholders,” he says. “The court also recognized that this interpretation was consistent with the legislative purpose of ensuring that secondary market claims proceeded ‘with dispatch’ so they are not held over the heads of the company and other potential defendants.”
Some defense counsel also relish the idea that Timminco could have implications well beyond secondary market class actions.
“The decision will have profound implications for many types of class actions,” says Jennifer Dolman, a franchise law partner in Osler’s Toronto office. “There are other statutes with pre-conditions to litigation, such as the requirement to give notice or obtain leave, and Timminco is certainly open to the broader interpretation that the Class Proceedings Act does not suspend time limits for satisfying the pre-conditions that are found in these particular statutes.”