Before a plaintiff can commence a claim under Part XXIII.1 of the Securities Act (Ontario) or Part 17.01 of the Alberta Securities Act for misrepresentations made in secondary market disclosures, he or she must obtain leave of the Court. This leave requirement was originally touted as an important safeguard against frivolous actions and represented an effort to avoid a litany of class actions being launched every time a company restates its financial statements. But a decision recently released by Justice Van Rensburg of the Ontario Superior Court in Silver v. IMAX, suggests that the threshold to obtain leave of the court is fairly low, and the statutory cause of action may be available to class members resident anywhere in the world in a single class action commenced in Ontario.
The plaintiffs bought IMAX shares on the secondary market (the TSX and NASDAQ) before the value of the shares dropped 40 percent due to a press release from the company announcing it was responding to an SEC inquiry regarding the timing of its revenue recognition. The plaintiffs alleged that IMAX (and some of its directors and officers) improperly recognized certain revenue resulting in a misrepresentation of the true state of the company's revenues in its 2005 annual financial results and certain press releases. In 2007, IMAX restated its financial results and subsequently acknowledged that there had been an error in revenue recognition. The defendants relied on the “reasonable investigation” defence under Part XXIII.1 of the Ontario Act to argue that they conducted a reasonable investigation into IMAX's revenue recognition policies and practices.
The test for leave under Part XXIII.1 is a two-part statutory test: (1) the action must be brought in good faith; and (2) the plaintiffs must have a reasonable possibility of success at trial. Justice Van Rensburg established a fairly low threshold in this first decision to apply the statutory test.
Regarding the first requirement (good faith), Justice Van Rensburg stated that the plaintiffs must establish “that they are bringing their action in the honest belief that they have an arguable claim, and for reasons that are consistent with the purpose of the statutory cause of action and not for an oblique or collateral purpose.” The plaintiffs satisfied this threshold because they had a personal financial interest in the outcome and had altruistic reasons for commencing the action.
Regarding the second part of the test (reasonable possibility of success), Justice Van Rensburg determined that while the court must undertake a preliminary analysis of the merits of the case, it must keep in mind the limitations of the available evidence at this stage. Justice Van Rensburg performed this analysis for each proposed defendant separately and based on her findings, the evidentiary threshold applied appears to be low. For example, the subsequent restatement by IMAX was sufficient to satisfy the plaintiffs' evidentiary threshold for the claim against IMAX and certain officers' involvement in the accounting process and signatures on the disclosure documents at issue was also sufficient.
By way of contrast, the threshold for the defendants to successfully assert a statutory defence to defeat the leave motion is much higher: the evidence of such a defence to the plaintiffs' claim must “foreclose the plaintiffs' reasonable possibility of success at trial.” Only two external directors were able to satisfy this threshold to defeat the claim against them. This determination was largely dependent on the facts and evidence lead by those directors.
There is a reasonable question about whether the enormous evidentiary record amassed in this case was what was envisioned for a leave requirement or whether it is consistent with the newly adopted doctrine of “proportionality” in civil proceedings in Ontario. However, with such a high threshold placed on defendants, it is certainly foreseeable that defendants in future cases will believe it necessary to develop a robust record in order to satisfy the burden imposed on defendants to succeed.
In the companion reasons, the class action was certified for a global class of investors for the statutory cause of action and the common law claims of negligent and fraudulent misrepresentation, and conspiracy. While acknowledging the rarity of global classes in Canada, Justice Van Rensburg found the conduct of the defendants has a real and substantial connection to Ontario and therefore should be certified in Ontario. The Court's willingness to certify a global class coupled with the availability of a statutory cause of action under Part XXIII.1 may well increase the number of plaintiffs that choose to commence potential securities class actions.
The claims of negligent and fraudulent misrepresentation are often difficult to certify due to the requisite element of reliance. In fact, part of the impetus for Part XXIII.1 was to overcome the hurdle of reliance in such common law claims by removing that requirement. Therefore, while certification of the Part XXIII.1 claims in the absence of actual reliance may not be surprising, the further certification of the common law claims in these circumstances is likely to attract appellate interest.
As the first decision granting leave under Part XXIII.1, Silver v. IMAX provides guidance on how courts will treat the leave requirement. As a novel decision on a new area of law, we can expect that the defendants will seek to appeal the decision. Nonetheless, this first decision which sets a low bar for leave and certifies a global class (which could have inherent conflict of law issues) suggests that this may only be the beginning of a prolific period of securities class actions in Ontario.