Shareholder claimants seeking to pursue a misrepresentation claim under the Ontario Securities Act must obtain leave of court to proceed based on a statutory requirement that the plaintiff must show a “reasonable possibility that the action will be resolved at trial in favor of the plaintiff.” Ontario’s courts agree that this requirement sets a “low bar,” but they have struggled to establish just how low this bar is.


In a November 5, 2013 decision in a securities suit against Kinross Gold Corporation and certain of its directors, Justice Paul Perell of the Ontario Superior Court of Justice examined the Act’s leave requirements and concluded that though the bar to obtain leave is low, the shareholder claimants had not met the statutory requirements and therefor leave to proceed was denied. A copy of the November 5 decision can be found here.


Though the decision will not end the debate about just how low the requirements are, the decision does show that even though the bar is low, the leave requirements do serve as a “genuine screening mechanism” and claimants may fail to meet the requirements.


Kinross is a Canadian international mining company. The plaintiffs are trustees of a Canadian pension fund who filed an action in the Ontario Court of Justice asserting a statutory claim for damages under the Ontario Securities Act and a claim for common law misrepresentation. The plaintiffs purported to represent a class of investors who purchased Kinross shares between May 3, 2011 and January 16, 2012.


The plaintiffs alleged that the defendants had made three misrepresentations. First, the plaintiffs alleged that Kinross ought to have written down goodwill associated with respect to two West African gold mines; Second, that Kinross had failed to disclose that drilling operations at one of the two West African mines had shown high concentrations of low grade ore; and third that Kinross had misrepresented that expansion efforts at one of the two West African mines remained on schedule.


Kinross was also targeted in a separate securities class action lawsuit that had been filed against the company and certain of its directors and officers in the Southern District of New York, under U.S. securities laws. The defendants had moved to dismiss the S.D.N.Y. action. The dismissal motion was granted in part, but it was denied with respect to the U.S. plaintiffs’ claim that the company had misrepresented that the accelerated schedule for developing one of the West African gold mines was achievable.  A copy of Southern District of New York Judge Paul Engelmayer’s March 22, 2013 order granting in part and denying in part the defendants’ motion to dismiss the U.S. action can be found here.


The plaintiffs in the Ontario case sought the court’s leave to proceed with their action and also sought to have the action certified as a class proceeding. The defendants opposed the request for leave and the request for class certification.


Part XXIII.I of the Ontario Securities Act provides a statutory cause of action for a company’s misrepresentations in its continuous disclosure documents. Section 138.8 (1) of the Act provides that the misrepresentation action may not proceed without leave of court to proceed, with leave to be granted only if “there is a reasonable possibility that the action will be resolved at trial in favor of the plaintiff.


Courts considering this leave requirement have reached what Justice Perell described as a “consensus” that the leave test imposes only a “low evidentiary threshold” (refer for example, here and here) – but Justice Perell added that “the test is nevertheless a genuine screening mechanism that requires the court to assess and weigh the evidence and to determine whether the plaintiff’s chance of success is a reasonable possibility.”


But while courts considering the question have agreed that the bar to meet the leave test is low, Justice Perell commented that “I do not think the debate about the measure of the height for the bar for the test for leave is over.” He described the debate about just how low the threshold is as a “limbo dance” as the courts have tried to resolve the questions of “how low is the low threshold and what must a plaintiff do to show that he or she has a reasonable possibility of success.”


For his part, Justice Perell determined that the leave test is a “genuine screening mechanism” that requires the court “to assess and weigh the evidence and that requires the court to determine wither the plaintiff’s chance of success is reasonable possibility.”


Applying these standards to the plaintiffs’ claims and assessing the allegations and the expert testimony on which the plaintiffs sought to rely, Justice Perell concluded that the plaintiffs failed the test for leave, and he denied class certification for both the statutory claims and the common law claim.


The plaintiffs are likely to appeal Justice Perell’s ruling, particularly the extent to which he assessed and evaluated the expert testimony on which the plaintiffs sought to rely in support of their allegations.


While this case may have much further to go yet, it does provide a useful reminder that though the bar for claimants to obtain leave to proceed is low, the grant of leave is not automatic. There are still minimum standards that must be met, and if the claimants do no meet these standards, leave to proceed will be denied.


It is interesting to note that the shareholder claimants were denied leave to proceed in the Ontario proceeding while the dismissal motion was denied in part in the S.D.N.Y. action. The difference in outcome is attributable to the fact that the U.S. claimants’ allegations differed slightly from those of the Ontario claimants. The Ontario plaintiffs sought to try to raise these same allegations in the Ontario proceeding and to rely on the dismissal motion ruling the S.D.N.Y. action, but Justice Perell rejected their efforts to rely on these allegations because they had not pleaded these allegations in their complaint. Justice Perell commented that “I do not see how the circumstances of a differently pleaded action in a different jurisdiction have any relevance to considering whether to grant leave in the case at bar.”


Special thanks to a loyal reader for supplying me with a copy of Justice Perell’s Reasons for Decision.


Coverage Under Canadian D&O Policy for Costs Incurred Defending Bankruptcy Claims Involving Bankrupt U.S. Subsidiary Not Precluded: In a February 25, 2013 decision (here), the Ontario Court of Appeal held that coverage was not precluded under the Canadian D&O policy for costs incurred in defending the claims of bankruptcy trustee against the directors and officers of a U.S. subsidiary of the Canadian policyholder.


As discussed in a November 14, 2013 memo from the McMillan law firm (here), the Court of Appeal rejected the insurer’s argument that coverage was precluded by the policy’s insured vs. insured exclusion and due to the failure of the policyholder to satisfy the policy’s notice requirements.