The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

For the second time, a court has given investors leave to proceed and also certified a plaintiff class in a secondary market misrepresentations claim under the revised Ontario Securities Act. In an order dated March 1, 2011, Ontario Superior Court Justice Wolfram Tausendfreund granted leave to investors to proceed against Arctic Glacier Income Fund, its trustees and related entities and executives. A copy of Justice Tausendfreund’s order can be found here.

As discussed at length here, effective in 2005, Ontario revised its securities laws (in legislative provisions now generally referred to as Bill 198) potentially making it easier for disappointed investors to bring actions for civil liability against directors and officers of public companies for alleged secondary market misrepresentations.

Section 138.8 (1) of the revised Ontario Securities Act specifies, however, that a liability action cannot be commenced "without leave of court granted upon motion with notice to each defendant." The court is to grant leave only "where it is satisfied" that the action "is being brought in good faith" and there is a "reasonable　possibility" the plaintiff will prevail at trial.

In a "landmark" December 2009 ruling, discussed here, Ontario Superior Court Justice Katherine van Rensberg granted plaintiffs in the Imax securities class action lawsuit leave to proceed with their claims. Justice van Rensberg also granted the plaintiffs’ motion to certify a global class in that case. In a February 2011 order (discussed here), another Superior Court Justice denied the defendants’ motion for leave to appeal Justice van Rensberg’s rulings.

The March 1 ruling involved an action brought by investors who had purchased shares of the Arctic Glacier Income Fund. The Income Fund is an unincorporated mutual fund trust that is a reporting issuer in ten Canadian provinces. Interests in the Income Fund trade on the Toronto stock exchange. The Income Fund’s sole assets are shares of Arctic Glacier Inc., a corporation organized under Alberta law. The company and its wholly owned subsidiary, Arctic Glacier International, provide packaged ice to consumers in Canada and the United States.

In March 2008, the Income Fund announced that it had become aware of an U.S. Department of Justice antitrust investigation involving the packaged ice industry. In 2009, Arctic International pleaded guilty to a criminal, anticompetitive conspiracy in the U.S. In the plea agreement, Arctic International agreed to pay a US$9 million fine and admitted that it had participated in a conspiracy to suppress competition in the packaged ice business in Michigan between 2001 and 2007. Following the announcement of the investigation, Income Fund’s unit price declined. The plaintiffs initiated an action alleging that they had been misled in connection with the company’s alleged legal and regulatory compliance programs.

As required under the revised Ontario Securities Laws, the plaintiffs moved for leave to proceed. In order to determine whether or not the plaintiffs had met the statutory requirement in order to obtain leave – that is, that "there is a reasonable possibility that the action will be resolved at trial in favor of the plaintiff" – Justice Tausendfreund followed the analysis of Justice van Rensberg in the Imax case with respect to the requirements to meet this standard. After noting that he saw no reason to depart from her analysis, Justice Tausendfreund said that "the applicable standard is more than a mere possibility of success, but is a lower standard than a probability."

Justice Tausendfreund concluded that the plaintiffs had met this "leave test" under Section 138.8 and granted them leave to pursue statutory claims for misrepresentation in the secondary market. He also granted the plaintiffs’ motion to certify a class of all investors who had purchased the Income Fund units during the class period, declining the defendants’ request to narrow the class.

The significance of Justice Tausendfreund’s ruling is that now a second set of plaintiffs has been granted leave to proceed with a claim for secondary market misrepresentations under the revised Ontario Securities Laws. In addition, Justice Tausendfreund, like Justice van Rensberg in the Imax case, found that the showing required to satisfy the "leave test" is relatively low.

It would is possible to overgeneralize from just these two cases, but at least so far that the plaintiffs have been relatively successful in overcoming the initial procedural hurdles in pursing secondary market misrepresentation claims under the revised Ontario Securities Act.

In addition, the plaintiffs have also succeeded in having a broad class certified as well. The certification of a global class in the Imax case may be of greater significance, given that Imax shared traded on both the Toronto and New York stock exchanges, whereas the Arctic Glacial Income Fund shares traded only on the Toronto exchange. But nevertheless, the relatively low initial threshold for leave and the courts’ willingness to certify broad classes are positive developments for the plaintiffs in these cases, and may make the remedies available under the revised Ontario Securities Act more attractive to other claimants.

An interesting and detailed March 8, 2011 analysis of the Arctic Glacier decision by the Osler, Hoskin & Harcourt law firm can be found here. The law firm memo raises a number of interesting questions about the decision, particularly with respect to the class certificaiton ruling. A March 4, 2011 Globe and Mail article about the recent ruling can be found here.

We Are All One: In her fascinating article in the March 7, 2011 issue of The New Yorker entitled "The View from the Stands" (here) about soccer in Turkey, Elif Batuman reported the following comments of one fan of the Beşiktaş team about the team and its followers (who are known as Çarşi):

He characterized Beşiktaş as the team of the unexpected, the team of underdogs, and talked about Çarşi’s slogans, which are unveiled on giant banners during matches. “We are all Black,” proclaimed one banner, after rival fans had made references to the race of the French-Senegalese Beşiktaş star Pascal Nouma. When [competitior] Fenerbahçe disparaged a Beşiktaş manager whose father had been a janitor, there were banners saying “We Are All Janitors.” And when an international committee of astronomers removed Pluto from the list of planets Çarşi took up the cause: “We Are All Pluto.”

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a February 14, 2011 order (here), an Ontario Superior Court Justice has denied the motion of the defendants in the IMAX securities lawsuit pending in Ontario for leave to appeal the December 2009 rulings of Ontario Superior Court Justice Katherine van Rensberg granting the plaintiffs leave to pursue securities claims in a class proceeding.

At its most basic the order is essentially just a ruling that the defendants have not satisfied the relevant standard to justify an appeal at this stage in the proceedings. However, the court’s explanation of its decision implicitly endorses Judge Van Rensberg’s prior decisions – including in particular her decision to certify a global class of all Imax investors. Overall, as detailed below, the February 14 ruling is quite favorable to the plaintiffs.

Background

As detailed here, in December 2009, in "groundbreaking" rulings representing the first application of Ontario’s newly revised securities laws, Judge van Rensberg entered two orders granting the plaintiffs leave to bring their case, as required under to proceed under the laws, and certifying the suit as a class action. These rulings allowed the plaintiffs leave to proceed with their case against several IMAX directors and officers over disclosures in the company’s 2005 financial statements.

Justice van Rensberg’s decisions were the first to test recent revisions to the Ontario Securities Act that potentially made it easier for disappointed investors to bring actions for civil liability against directors and officers of public companies for misrepresentations in public disclosure documents.

These statutory provisions, which became effective　in December 2005, were first passed by the Legislative Assembly of Ontario in legislation now referred to simply as Bill 198, which is codified as Section XXIII.1 of the Ontario Securities Act. The　provisions provide for the liability of certain specified individuals for misrepresentations in companies’ public disclosure documents.

Section 138.8 (1) of the statute specifies, however, that a liability action cannot be commenced "without leave of court granted upon motion with notice to each defendant." The court is to grant leave only "where it is satisfied" that the action "is being brought in good faith" and there is a "reasonable possibility" the plaintiff will prevail at trial.

In granting the plaintiffs' motion for leave to proceed, Justice van Rensberg held that she "is satisfied that the action is brought in good faith and that the plaintiffs have a reasonable possibility of success at trial in pursuing the statuory claims against all... parties" other than with respect to two individual outside director defendants. 　

Justice van Rensberg also specifically held that the plaintiffs had satisfied the requirement for the certification of a global class to assert both the statutory claims and certain common law claims that the plaintiffs had raised. The approved class included both plaintiffs who had bought there IMAX shares on the TSX as well as those who had bought their shares on the NASDAQ exchange.

The defendants sought leave to appeal Judge van Rensberg’s rulings to the Divisional court.

The February 14 Ruling

Under applicable statutory provisions, leave to appeal may be granted at this stage in the proceedings, inter alia, when there is "good reason to doubt the correctness of the order." In his February 14 order, Superior Court Justice D.L. Corbett held that this standard had not been met and he denied the defendants’ motion for leave to appeal.

At its most basic, the order essentially just holds that the statutory standard has not been met. Indeed, throughout the February 14 order, Justice Corbett reiterates with respect to the various substantive issues presented that "appellate courts will be in a better position to address them on a full factual record, after trial."

However, in order to substantiate the ruling, Justice Corbett specifies the bases for the determination that "there is no good reason to doubt the correctness of the decision" – which is, as Justice Corbett specifically puts it, that "this is the sort of claim that ought to be permitted to proceed," adding, with respect to the plaintiffs’ substantive misrepresentation claims that "it seems that the plaintiffs have a good arguable case, one that is worthy of moving forward." As detailed in the Discussion section below, Justice Corbett's analysis in this regard is quite favorable to the plaintiffs, and to plaintiffs generally.

Justice Corbett’s determination is most interesting with respect to Justice van Rensberg’s certification of a global class. In holding that there is "no reason to doubt the correctness" of Justice van Rensberg’s decision on these issues, Justice Corbett noted:

It would be wrong, of course, to compel foreign investors to be bound by Canadian proceedings, if they prefer to have their claims adjudicated elsewhere. But similarly, it would be wrong to preclude the from participating in Canadian proceedings if they wish their claims to be pursued in Ontario

Justice Corbett specifically found there is no prohibition of overlapping class proceedings in different jurisdictions, holding that the separate proceedings should not be viewed as "competing." Rather the proceedings should be "complementary" so as to "achieve a proper vindication of the rights of plaintiffs, fair process for the defendants and the plaintiffs, respect for the autonomous jurisdictions involved and an integrated and efficient resolution of claims." This process does not "required balkanization of class proceedings, but rather sensitive integration of them"

Discussion

For the parties, Judge Corbett’s ruling essentially means that the case will now go forward in Ontario. The larger significance may be that another court has corroborated Justice van Rensbert’s approach and conclusions with respect to the application of the new statutory provisions to the IMAX case.

But the most interesting aspect of Justice Corbett’s ruling is the determination that the certification of a global class was not clearly in error. The practical effect is a global class action might now go forward in Ontario courts under Ontario law under circumstances in which a global class might not be certified in U.S. courts under U.S. law.

As it happens, on December 22, 2010, Southern District of New York Naomi Reice Buchwald denied the motion for class certification in the parallel U.S. IMAX securities suit, holding that various circumstances prevented the lead plaintiff from serving as class representative.

But in any event, the plaintiffs in the U.S. case had not sought to include in the class the investors who had purchased their shares in IMAX on the Toronto stock exchange, having amended their motion for class certification in light of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, to limit their proposed class to those investors who purchased their shares on NASDAQ. That is, the plaintiffs essentially conceded that under Morrison the class in the U.S. class action could not include investors who purchased their shares outside the U.S.

In other words, the class certified by the Ontario court is more encompassing than the one that could be certified by a U.S. court. And Judge Corbett’s recent decision found no reason to doubt the correctness of Justice van Rensberg’s determination of these issues.

One of the questions commentators have asked in the wake of the U.S. Supreme Court’s decision in the Morrison case is whether plaintiffs’ counsel may seek to pursued securities claims outside of the U.S. The recent action filed in the Netherlands on behalf of Fortis investors provides some evidence that the plaintiffs’ attorneys are indeed pursuing alternatives to litigating cases outside of the U.S.

The recent affirmation that Ontario’s courts are authorized to certify a global class in a securities liability suit, in circumstances where a U.S. court cannot, highlights the question whether plaintiffs’ attorneys may look to Ontario’s courts as an alternative securities litigation forum, particularly in light of Justice van Rensberg’s earlier ruling that the threshold for establishing the right to pursue a securities claim under Ontario’s new legal provisions is a low one. Ontario’s courts certainly could be an attractive form at least with respect to Canadian companies.

I should add that even beyond the class certification issues, the February 14 opinion is favorable to plaintiffs. Among other things, Justice Corbett stated (in paragraph 29) that fraud alleged do "not require the plaintiffs to adduce direct evidence of the state of mind of the defendants" which "may be 'inferred from all of the circumstances," which is "a common way of determining knowledge and intention." 

Justice Corbett also evinced his support (in paragraph 32) for the view that "a different standard of proof" applies to defendants affirmative defenses than is to be applied to plaintiffs to determine whether they should be permitted to proceed. The plaintiffs standard is "relatively low" while the defendants must establish their affirmative defenses "to a standard sufficient to grand summary judgment dismissing a claim." Indeed, Justice Corbett went on (in paragraph 37), the "constellation of facts" alleged "may well preclude the defendants' affirmative defenses."

Finally, Justice Corbett also supported the view that reliance be established by showing reliance on the market (in a manner similar to a fraud on ther market theory) rather than by individual reliance, if supported by the facts.

Special thanks to Daniel Bach of the Siskinds law firm for providing me with a copy of the February 14 decision. The Siskinds law firm and the Sutts, Strosberg law firm represent the plaintiffs in the IMAX case in Ontario.

The Sports Highlight of the Decade?: In a February 14, 2011 article, The Wall Street Journal asked the rhetorical questoin whether Wayne Rooney's game-winning goal in the 78th minute of Saturday's game between Manchester United (Rooney's team) and Manchester City is the "sports highlight of the decade." All I know is that when Rooney executed his amazing, backwards bicycle kick, I shouted so loud that my wife came downstairs to make sure I was alright. Best of the decade or not, it is simplty amazing. So here is the video footage -- be sure to watch the slow motion replay to really appreciate how amazing the goal is.　

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a landmark development for private securities litigation in Canada, a Justice of the Ontario Superior Court has ruled that a proposed securities suit against IMAX under Ontario’s new statutory provisions allowing private securities litigation may proceed. The court separately certified a global class of IMAX investors on whose behalf the case will now proceed.

According to a December 14, 2009 National Post article (here), Ontario Superior Court Justice Katherine van Rensberg, in two separate orders, granted the plaintiffs leave to bring the case and certified the action as a class suit, allowing plaintiffs to proceed with their case against several IMAX directors and officers over disclosures in the company’s 2005 financial statements. Justice van Rensberg's December 14, 2009 opinion granting the plaintiffs' motion for leave can be found here. Her December 14, 2009 opinion granting the plaintiff's motion for class certification can be found here.

Justice van Rensberg’s decisions are, according to the Post article “groundbreaking” because the case is the first to test recent revisions to the Ontario Securities Act that potentially made it easier for disappointed investors to bring actions for civil liability against directors and officers of public companies for misrepresentations in public disclosure documents. 

These statutory provisions, which became effective in December 2005,  were first passed by the Legislative Assembly of Ontario in legislation now referred to simply as Bill 198, which is codified as Section XXIII.1 of the Ontario Securities Act. The provisions provide for the liability of certain specified individuals for misrepresentations in companies’ public disclosure documents.

Section 138.8 (1) of the statute specifies, however, that a liability action cannot be commenced "without leave of court granted upon motion with notice to each defendant." The court is to grant leave only "where it is satisfied" that the action "is being brought in good faith" and there is a "reasonable possibility" the plaintiff will prevail at trial.

The significance of Justice van Rensberg’s decision in the IMAX case is that, according to Justice van Rensberg, the IMAX case represents "the first .case in Ontario in which the court has been asked to grant leave in such an action." She also observed that the statutory provision "has never been interpreted previously" adding that there is no other statutory similar statutory provision in force in any other Canadian jurisdiction.

In granting the plaintiffs' motion for leave to proceed, Justice van Rensberg held that "she is satisfied that the action is brought in good faith and that the plaintiffs have a reasonable possibility of success at trial in pursuing the statuory claims against all ... parties" other  than with respect to two individual outside director defendants.  

Of particular significance is Justice van Rensberg's conclusion that the standard to be used in determining whether a case should proceed is relatively low. With respect to the first part of the test, she said that "there is no reason to read in a 'high' or 'substantial' onus requirement for good faith in this type of proceeding." She also ruled against a more onerous threshold for the "reasonable possibility of sucess" part of the test, stating that "a threshold that is too difficult may have little deterrent value" and that an onerous threshold "may unduly lengthen and complicate the leave procedure." 

In a portion of the ruling that is of particular significance for outside directors serving on the boards of Canadian corporations, Justice van Rensberg specifically held that the statutory thresholds had been met with respect to several outside director defendants who served on the audit committee to the board or who otherwise had oversight responsibilties for the company's disclosure documents. 

Justice van Rensberg also separately held that the plaintiffs had satisfied the requirement for the certification of a global class to assert both the statutory claims and certain common law claims that the plaintiffs had raised.  The approved class included both plaintiffs who had bought there IMAX shares on the TSX as well as those who had bought their shares on the NASDAQ exchange.

In certifying the class, van Rensberg specifically rejected the defendants' arguments that the court could not include within the class the 80 to 85% of IMAX shareholders who resided in the U.S. or were otherwise non-Canadian. The defendants argued that it would be "extraordinary" for the court to recognize a class where most of the class members resided outside the jurisdiction. The defendants also argued that given the pendancy of the separate securities lawsuit pending in the U.S., it would be "premature" for the court to certify a worldwide class.

In rejecting the defendants' arguments against certification of a worldwide class, Justice van Rensberg took particular note of the arguments that the defendants had raised in opposing class certification in the U.S. securities lawsuit, in which they had also argued against the certification of a global class in that case as well. The defendants in particular had urged the superiority of the Canadian action, leading van Rensberg to conclude that the defendants were trying to have it both ways.

Justice van Rensberg went on to conclude that the court had authority to certify an international class, noting that the case had a real and substantial connection between the claims asserted on behalf of the foreign class members and the jurisdiction. She also specifically rejected the argument that that the existence of the parallel U.S. proceeding represented a reason not to certify a global class in Canada.

The Post article quotes two leading Canadian plaintiffs’ class action securities attorneys, who predictably find much to like with the court rulings. Dimitri Lascarias, of the Siskinds law firm, who is co-lead counsel for the plaintiffs in the case, is quoted as saying the decisions represented a “huge undertaking” for the court because there are “no parallels.” He is also quoted as saying that “it’s a very good day for the investing public in Canada. For a long time it’s been difficult for them to advance their claims in a class action setting. Finally, there’s relief on the class-action horizon.” (The other co-lead counsel on the case was Jay Strosberg of the Sutts Strosberg firm.)

UPDATE: Dimitri Lascaris emailed me the following additional comment on the IMAX case: "We are obviously pleased with the decision, and are particularly gratified that the court certified a global class. Insofar as canadian issuers are concerned, the proper place for the rights of their shareholders, whether foreign or domestic, to be adjudicated is this country. "

I previously wrote about the IMAX case here in a post in which I raised the question about whether an action in Ontario might be used as a way to obtain discovery that could be used to support a parallel securities action pending in the United States. While that concern may remain, it may be likelier in light of these rulings that litigants may seek to pursue claims in Ontario not to support litigation elsewhere, but for its own sake and purposes, without reference to litigation in the U.S. or elsewhere. That said, the principles reflected in these rulings will be most compelling with respect to Canadian based corporations, suggesting that it is unlikely that the Ontario courts will be flooded with securities litigation involving companies from outside Canada.

With respect to Canadian companies, these rulings in the IMAX case unquestionably represent significant developments, and they suggest that there potentially could be significant additional litigation to come in the Ontario courts. Both Justice van Rensberg's ruling that a low threshold should apply on a motion to leave and that an Ontario court may certify a worldwide class, if followed by other courts, could make Ontario an attractive jursidiction in which to pursue securities litigation, at least with respect to Canadian companies if not with respect to companies domiciled or based elsewhere.  

Julie Triedman has a December 15, 2009 article on the Am Law Litigation Daily (here) about the IMAX decisions that among other things quotes Lascaris as saying that the court certified of global class "and the door is now open for foreign investors to benefit from that protection."

UPDATE: Loyal reader and blog friend, Dave Williams of Chubb, sent me an email reminder that he will be chairing a panel on Securities Litigation developments in Canada at the PLUS D&O Symposium in New York on February 3-4, 2010. Background infromation regarding the Symposium can be found here. Speakers at the panel will include Justice Colin Campbell and Dimitri Lascaris, among others.

Very special thanks to Dimistri Lascaris for providing me with copies of Justice van Rensberg's opinions in the IMAX case.  

I welcome comments on this blog from readers on these developments, particularly from my many friends north of the border that I know regularly read this blog.

Book Note: While I am in a Canadian mode, I want to recommend a recent excellent biography of Samuel de Champlain, the French explorer, navigator and mapmaker. In his splendid book Champlain's Dream, author David Hackett Fischer (who also wrote the excellent book, Washington's Crossing) tells Champlain's extraordinary story.

Fischer convincingly argues that the success of French attempts to explore and colonize  North America were largely the result of Champlain's persistent and courageous efforts. The portrait that emerges is one of a man of uncommon bravery and intelligence, who mastered not only the arts required for voyages of discovery but also the tact and finesse required to maintain necessary relations at court during the reigns of several French monarchs.  

Fischer also argues that Champlain was a noble and perhaps even heroic figure, in part because of his insistence that the Native Americans the French settlers encountered should be treated with dignity and respect. As a result, the French were able to establish far more amicable relations with the locals than were the English, Dutch and Spanish colonists.

A particularly good review of Fischer's book from the October 31, 2008 New York Times can be found here.

What Passes for Humor These Days: My 16-year old son: “What’s brown and sticky?” Me: “I don’t know, what’s brown and sticky?” My son (after a pause): “A stick.” 

He told me that one right after he asked me, “What do you call cheese that isn’t yours?” Me: “I don’t know, what do you call cheese that isn’t yours?” My son: “Nacho Cheese.” (You might have to repeat that last one out loud a couple of times.)

• Email This
• Print
• Comments
• Trackbacks
• Share Link