There was a time only a few short years ago when the U.S. courts were the preferred forum for the litigation of securities class actions claims, arguably even claims whose relationship to the U.S. and to U.S. laws was slight. The U.S. courts role as preferred forum for securities suits was undermined by the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which underscored the fact that the U.S. securities laws apply only to domestic U.S. securities transactions. Since Morrison, a free-ranging inquiry has emerged to determine whether another country’s courts might emerge as the preferred forum for cross-border securities suits.
Among other countries, Canada has emerged as a candidate. However, a recent decision by Court of Appeal of Ontario examining the jurisdictional reach of Ontario’s securities laws expressly rejects the possibility that Ontario (where the bulk of Canadian securities suits are filed) “would become the default jurisdiction for issuers around the world.” The Court of Appeal’s July 11, 2018 decision in Yip v. HSBC Holdings can be found here. An August 9, 2018 memo from the Toronto-based Blake, Cassels & Graydon law firm can be found here.
HSBC is the parent company of an international banking organization with its headquarters in London, U.K. It securities are traded on the London and Hong Kong stock exchanges with secondary listings in Bermuda and Paris. HSBC’s ADRs trade on the NYSE. However, its securities have never traded on any Canadian stock exchange. Wai Kin Yip bought HSBC shares on the Hong Kong stock exchange using a Hong Kong bank account using his home computer in Markham, Ontario. He accessed HSBC disclosure documents from HSBC’s website also using his home computer.
Yip filed a securities class action in Ontario court under the province’s Class Proceedings Act, asserting a statutory claims for secondary market misrepresentation under the Part XXIII.1 of the Securities Act, alleging that HSBC had misled investors by stating that it had complied with anti-money laundering and anti-terrorist laws and that it had not participated in an international scheme to manipulate certain international banking benchmarks. Yip claimed these misrepresentations had caused about $7 billion dollars in losses, as due to these alleged misrepresentations had caused investors to purchase HSBC shares at inflated prices.
HSBC moved to dismiss Yip’s claims, based on its argument that Yip’s claims lacked a sufficient basis for the Ontario court to exercise jurisdiction. Section 138.1 of Part XXIII.1 creates a statutory cause of action against a “responsible issuer” for misrepresentations in public documents or statements. Section 138.1 defines a “responsible issuer” to mean “(a) a reporting issuer, or (b) any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded.” The parties conceded that HSBC is not a “reporting issuer.” HSBC argued further that it did not have a “real and substantial connection” to Ontario, and therefore it was not a “responsible issuer” and the court lacked jurisdiction over Yip’s claims.
The trial court agreed with HSBC ruling that HSBC is not a “responsible issuer” and therefore that it lacked jurisdiction to hear Yip’s claims. The trial court ruled further that even if there were jurisdiction, principles of comity would require the court to dismiss Yip’s claims on grounds of forum non conveniens. Yip appealed.
The July 11, 2018 Opinion
In a July 11, 2018 opinion written by Justice Peter Lauwers for a three-judge panel, the Court of Appeal for Ontario dismissed Yip’s appeal, rejection the arguments he asserted as the basis of his appeal.
In arguing that the trial court had erred in ruling that HSBC is not a “responsible issuer,” Yip contended that HSBC holdings must have known that people like him and the other putative class members would access the information on its website and use it to trade in the company’s securities, to their detriment. In considering this argument, the appellate court noted that at oral argument, Yip’s counsel conceded that his proposed formulation might make Ontario a universal jurisdiction for secondary market misrepresentations made anywhere in the world. This, the court said, “is precisely the problem that leads us to reject his argument.”
In considering Yip’s argument, the appellate court reviewed both the legislative and judicial history of Section 138.1 Among other things, the appellate court concluded that both the legislative and judicial history of the statutory provision “the Legislature fully intended to prevent jurisdictional overreach,” and specifically, the Legislature “did not intend to create universal jurisdiction.”
The court specifically rejected Yip’s claim that in enacting Section 138.1 the Legislature intended to create a new jurisdiction definition for statutory claims different and apart from the existing common law jurisdictional test, expressed in the “real and substantial connection” test. Applying this traditional test to Yip’s claims, the court said that HSBC “could not be said to be carrying on business in Ontario simply because [Yip] could access a non-reporting issuer’s disclosure information using his home computer in Ontario.” Downloading the materials from an issuer “is an extremely weak connection and does not point to any real relationship between the subject matter of the litigation and Ontario.”
Finally, the appellate court agreed with the trial court’s forum non conveniens analysis. Principles of comity, the lower court found and the appellate court agreed, should favor the forum where a securities transaction took place. These considerations of comity are “particularly important to maintain an orderly and predictable regime for dispute resolution.” HSBC could not “reasonably have expected that it would be subject to the regulation of the law of Ontario.” Accordingly, the appellate court said, the motion judge was right to conclude that Ontario was forum non conveniens.
The Court of Appeal’s decision is interesting in and of itself as an exercise of judicial analysis in the context of the increasingly international ambit of securities trading. The decision arguably is even more interesting as it represents a significant example of the issues involved as cross-border investors seek to find a preferred forum for the resolution of global securities misrepresentation claims. As I noted at the outset, since Morrison, investors and their advocates have endeavored to find a forum where they might assert class or collective basis on a transnational basis. This Ontario case highlights the kinds of problems claimants may face as they try to assert claims on a cross-border basis.
The Ontario court was expressly concerned with the possibility that Ontario might become the “default jurisdiction” for issuers around the world whose securities were purchased by Ontario resident. The appellate court concluded upon review of the legislative and judicial history of the relevant statutory provision that this was not the Legislature’s intent in enacting the legislation. Rather, the court said, the Legislature’s inclusion of the words “real and substantial basis” were intended to avoid “jurisdictional overreach.”
In our inter-connected world, it is increasingly possible for investors not only to trade in the securities of companies located outside the investors’ home countries, but to trade on far-flung securities exchanges as well. Because of this, the search for a preferred forum for investors’ to assert claims on a collective cross-border basis will continue. This case underscores that as investors seek the preferred forum, they will continue to face domestic court concerns about jurisdictional overreach. They will also face judicial comity concerns arising from the need for courts to maintain an orderly and predictable regime for dispute resolution.
All of that said, the Ontario court did not say, as the U.S. court said in Morrison, that its laws apply only to domestic transactions in securities. Rather, the Court said that Ontario’s courts will not exercise jurisdiction where the connection between the subject of the litigation is not “real and substantial.” The court’s decision is not at all preclusive of the possibility that in a different case an Ontario court might have a sufficient basis to exercise jurisdiction if the facts asserted are sufficient to show that the issuer’s connection to Ontario can be shown to be real and substantial.
For example, here, the claimant was not able to allege sufficient fact to show that HSBC is doing business in Ontario. In another case involving a different global company, claimants might be able to show that the defendant company is conducting substantial business activities in Ontario, and that might be sufficient to establish that the defendant has a “real and substantial connection” Ontario for the province’s court to exercise jurisdiction. In other words, at least as I read the appellate court’s decision, on a different court on a different day, Ontario’s courts could well find that they have a sufficient basis to exercise jurisdiction over the kinds of claims Yip asserted here. There could well be more to be said about the extraterritorial reach of Ontario’s securities laws notwithstanding the court’s decision here. However, estimates about what might be said about the extraterritorial reach will have to be tempered by a recognition of the prudential considerations such as notions of comity, which might well restrain a more vigorous reach by the courts.