It was another active year in securities class actions, with appellate courts demonstrating renewed interest in secondary market misrepresentation claims. In one such decision from February 2024, Drywall Acoustic Lathing and Insulation (Pension Fund, Local 675) v Barrick Gold Corporation (Drywall), the Ontario Court of Appeal re-examined the test for leave to commence a secondary market claim under section 138.3 of the Ontario Securities Act. The Court of Appeal endorsed a robust approach to the test for leave to assert secondary market claims and affirmed that motions judges are entitled to carefully scrutinize the evidence led in support of leave. The Court of Appeal also gave direction as to what constitutes a “public correction” under the Securities Act.
In Drywall, the plaintiff alleged that Barrick Gold made material misrepresentations in its continuous disclosure about a significant gold mine located in an environmentally sensitive area of Chile. The alleged misrepresentations focused on statements about the mine’s accounting practices and projected financial performance, including the projected capital expenditure (capex) budget and production schedule. The plaintiff also alleged that Barrick Gold had misrepresented whether it followed applicable environmental regulations.
The proceedings were fractured and complicated. While the plaintiff’s claim was issued in 2014, the proceeding was significantly delayed while two class counsel firms fought a “carriage motion” to determine which firm would be permitted to prosecute the putative class action. The Court directed that the plaintiff’s action would proceed, largely because the plaintiff sought to pursue claims for both accounting and environmental misrepresentations. By contrast, the competing law firm would have only sought to pursue the alleged environmental misrepresentations.
A plaintiff seeking to bring a claim under section 138.3 of the Securities Act, alleging that an issuer made misrepresentations in its public disclosure, must first obtain leave from the court. Section 138.8 provides that, in order to grant leave, the court must be satisfied that: (1) the action is brought in good faith; and (2) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. In order to satisfy the second prong of the test, the plaintiff must "offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support" of their claim.
On an initial motion for leave to pursue a claim under section 138.3 of the Securities Act, the plaintiff achieved very limited success: the Court only granted leave to pursue a single environmental misrepresentation claim. That decision was overturned on appeal.
On the second leave motion, the plaintiff sought leave to pursue damages arising from multiple alleged accounting, capex budgeting and production scheduling misrepresentations. The second leave hearing was lengthy and complex: the hearing lasted for five days, with 30,000 pages of evidence filed.
The motion judge dismissed the plaintiff’s motion for leave to pursue the alleged accounting misrepresentations and the vast majority of the alleged capex budget and production scheduling misrepresentations. However, she granted leave to pursue claims that Barrick had misrepresented the capex budget and production scheduling forecasts in its Q4 and 2011 year-end report issued on February 16, 2012, and in its Annual Information Form for the year ended December 31, 2011.
The motion judge also decided that a press release issued by Barrick Gold in July 2012—which disclosed that costs would exceed the previously disclosed capex budget—was a public correction of the alleged misrepresentations. This had the effect of significantly narrowing the potential class period.
On appeal, the plaintiff challenged only the motion judge’s denial of leave to pursue claims that Barrick Gold also made capex budget misrepresentations in its Q3 2011 Report, published in October 2011. It also argued the motion judge had identified the wrong potential public correction date.
The Court of Appeal rejected these arguments and dismissed the appeal. In arriving at this decision, the Court provided clarity on the level of scrutiny to be applied by motion judges at the leave stage, including how motion judges should approach conflicting evidence.
The plaintiff’s core argument on appeal was that the motion judge had erred in her approach to the voluminous evidence filed on the leave motion and, in effect, impermissibly weighed and rejected credible evidence that supported granting leave. In rejecting this argument, the Court of Appeal identified three core principles applicable to the judge’s role on a motion for leave.
First, the Court of Appeal reiterated that motion judges have a robust and important gatekeeping role in conducting the leave hearing, which includes determining whether there is sufficient evidence to support a reasonable or realistic chance that the action will be resolved in the claimant’s favor. It is not enough for the moving party to show that there is a triable issue or a mere possibility of success. Instead, the Court indicated that the motion judge must engage in a “qualitative evaluation of the proposed action.”
Second, the Court of Appeal clarified the interplay between the requirement to establish a “reasonable or realistic possibility of success” and the requirement to offer a “offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the [plaintiff’s] claim.” With respect to the latter requirement, while the Court affirmed that while the plaintiff must satisfy these conditions:
[they] do not alone express the leave standard. These conditions must be satisfied plus the record before the leave judge must demonstrate that there is a realistic or reasonable chance that the action will succeed.
As a result, it is not sufficient for a plaintiff to point to credible evidence in support of their claim, and argue that a reasonable prospect of success is made out on that basis:
[A]t times, [the plaintiff] proceeded as if the entire standard for obtaining leave is the ‘some credible evidence’ standard. It attempted on a number of occasions to identify ‘credible evidence’ favoring its case and then submitted on this basis that the motion judge should have granted leave. However, … to be sufficient, evidence must be credible, but even credible evidence may not be sufficient to show that there is a realistic or reasonable chance that a claim will succeed.
Instead, on leave, the motion judge is required to conduct a holistic review of all of the evidence—not simply the evidence that supports the plaintiff’s theory. If the evidence relied upon by the defendant is so compelling that there is no reasonable possibility that the plaintiff would succeed at trial, leave may be denied. If critical evidence offered by a plaintiff is shown by other evidence to be “completely undermined by flawed factual assumptions”, a motion judge may choose not to accept that evidence.
Third, in responding to the plaintiff’s argument that the motion judge had impermissibly transformed the leave motion into a “mini trial”, the Court of Appeal provided guidance as to how the motion judge should approach conflicting evidence on a leave motion. In particular, the motion judge should not attempt to resolve realistic and contentious issues arising from conflicting credible evidence. The motion judge must also consider what evidence is not before them, given that leave motions are brought at an early stage of the proceedings and before discovery.
At the same time, the motion judge may assess the credibility and reliability of the evidence—including with reference to cross-examinations on affidavits—or the comparative strength of competing evidence: “a s. 138.8 motion judge cannot be found to have engaged in a mini-trial simply because their decision turned on considerations of the credibility and reliability or weight of the evidence.”
Applying these principles, the Court of Appeal held that the motion judge had not erred in refusing to grant leave to pursue alleged misrepresentation in Barrick Gold’s Q3 2011 disclosure. Importantly, there was no direct evidence establishing that Barrick Gold knew at that time that its capex budget was inaccurate or that its own capex budget forecasts were fundamentally unreliable. Instead, the plaintiff argued this could be inferred from Barrick Gold’s own documents. The motion judge did not take issue with the credibility of this evidence but held that there was no realistic or reasonable chance that the inferences advanced by the plaintiff would be drawn at trial. As such, it was inaccurate for the plaintiff to suggest that the motion judge had weighed and disregarded credible evidence because, in the Court’s view, she “found as she was entitled to do, that on the record as a whole, there was no realistic or reasonable possibility that this claim would succeed.”
A “public correction” of an alleged misrepresentation serves as the “necessary time post” for any alleged misrepresentation and any “eventual damages calculation.” As a result, determining when the issuer potentially corrected the alleged misrepresentation has important consequences in determining the potential class period and the potential damages arising from the misrepresentation.
The motion judge concluded that a press release issued by Barrick Gold in July 2012 corrected the alleged misrepresentation because the press released detailed challenges faced at the project, admitted that Barrick Gold’s prior projections were inaccurate, and identified a revised budget and production timeline.
While the plaintiff argued the misrepresentation was not corrected until much later, the Court of Appeal agreed that the July 2012 press release satisfied the “linkage test” for a potential public correction because it was "reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned" statements.
Drywall provides welcome clarity on the governing evidentiary principles on a motion for leave under section 138.3 of the Securities Act. It endorses a robust approach to the test for leave and allows judges to carefully scrutinize the evidence filed in support of a motion for leave. Since the motion for leave to pursue a claim under section 138.3 of the Securities Act will most often be the key determinant of whether a class action for secondary market misrepresentation can proceed, Drywall teaches that reporting issuers and other defendants should put their “best foot forward” and, where possible, lead comprehensive evidence to respond to the plaintiff’s leave motion. We expect that the evidentiary principles endorsed in Drywall will be particularly important as plaintiffs look to bring secondary market misrepresentation claims in new areas—including “greenwashing” claims—that may be susceptible to early challenge.
In 2024, we also expect to see continued development in the law applicable to secondary market misrepresentation claims. The Supreme Court of Canada recently granted leave to appeal from the Ontario Court of Appeal’s decision in Markowich v Lundin Mining Corporation (Lundin) which endorsed a broad interpretation of the concept of a “material change” in securities law. As we explained in last year’s Looking Forward publication, Lundin has important implications for reporting issuers across Canada and expanded the range of events that could qualify as a material change. The Supreme Court of Canada’s decision will be closely watched by reporting issuers and the capital markets more generally.