Canada: Canadian Securities Litigation Outlook: Trends To Watch For Capital Markets Participants

In this issue of Canadian Securities Litigation Outlook, we review the following recent developments shaping the trends to watch in 2016: securities class action defence strategies, gatekeeper liability, insider trading prosecutions, the progress of Canadian securities regulators in enforcement initiatives, including credit for cooperation, whistle-blower regimes and other initiatives, and the impact and regulation of short seller activity in Canadian capital markets.

In the secondary market class action context, we examine the implications of the Supreme Court of Canada's clarification of the leave threshold, and review some recent examples of successful defence strategies.

We consider the increased focus on gatekeeper liability through the lens of auditor and underwriter liability in the secondary market liability context and the securities regulatory context.

Recent successes in the prosecution of insider trading cases highlight the regulator's ability to successfully prosecute in the absence of a "smoking gun" through effective reliance on circumstantial evidence.

The Ontario Securities Commission's credit for cooperation initiatives, pilot mediation program and proposed whistleblower policy are all examples of efforts to achieve enhanced enforcement and efficient resolution of regulatory matters.

Finally, with the recent wave of short seller reports hitting Canadian issuers with devastating results, we review the one attempt so far by a Canadian securities commission to regulate such activity and the troubling implications from short seller activity. It remains to be seen whether securities regulators will continue to step into the fray in the future.

We will continue to monitor and report on these and other key developments as they unfold.

1. SECURITIES CLASS ACTION "CHILL"?

Over the past year, Canadian courts have released a number of decisions in securities class action cases that have helpful implications for public companies (and their officers and directors) in defending against costly claims for secondary market misrepresentation. This article reviews recent encouraging developments and highlights defence strategies that have proven successful in defeating potential securities class actions.

AFFIRMATION OF A MEANINGFUL LEAVE TEST

In order to ensure that unmeritorious claims are not advanced, the Ontario Securities Act (the "OSA")¹ includes a screening mechanism which requires a plaintiff to obtain leave from the court prior to commencing a statutory secondary market liability action by demonstrating that: (1) the claim is being brought in good faith, and (2) there is a reasonable possibility that the plaintiff will succeed at trial.

Until recently, Canadian courts had developed a "relatively low threshold" that plaintiffs were required to meet in order to be granted leave to proceed with their claim.² However, in two key decisions in 2015,³ the Supreme Court of Canada unanimously confirmed that the "reasonable possibility" requirement of the leave test is more than just a procedural formality and that courts "must undertake a reasoned consideration of the evidence to ensure that the action has some merit." Under this more rigorous test, the Supreme Court has held that plaintiffs are required to advance both a "plausible analysis of the applicable legislation provisions" and "some credible evidence in support of the claim."

SUCCESSFUL DEFENCE STRATEGIES ON LEAVE MOTIONS

The Supreme Court's affirmation of a meaningful leave test is a positive development for public companies as it requires plaintiffs to meet a higher evidentiary burden on leave motions. This shift in the law signals that, in appropriate cases, a robust response to leave motions may be warranted and worthwhile. A review of subsequent decisions on leave motions establishes the following trends in successful defence strategies.

Substantial Evidentiary Records May be Appropriate

Although the Supreme Court has cautioned that leave motions should not be treated as a "mini-trial" with a full analysis of evidence, a substantial evidentiary record may be warranted where the record can establish that no misrepresentations have been made.⁴ For example, in Coffin v. Atlantic Power Corp.,⁵ the plaintiffs alleged that Atlantic Power had made misrepresentations about its ability to sustain its dividend payments, causing shareholders to suffer losses when the dividend was cut and the company's share price dropped. In response to the leave motion, the defendants relied on over 14,000 records to show that it had not made any misrepresentation. Evidence included expert reports, affidavits, and non-public, court-sealed corporate narrative evidence. Following a thorough review of the evidence, the Ontario court concluded that there were no misrepresentations by assertion or omission, or material changes that were not disclosed and that there was no reasonable possibility that the plaintiffs could show otherwise at trial. Accordingly, the motion for leave was denied.

Expert Evidence can be Crucial

Although costly, in appropriate cases,⁶ expert evidence may be the silver bullet in leave motions, as in Mask v. Silvercorp Inc.,⁷ a putative class action against Silvercorp for alleged misrepresentations in respect of the company's mineral resources and reserve estimates for its mine project in China. In support of their motion for leave, the plaintiffs filed an expert report identifying misrepresentations by comparing two reports released by Silvercorp which provided seemingly different mineral results. In response, Silvercorp filed an affidavit from an expert explaining that different reporting parameters had been applied to the two reports and, therefore, there were no actual discrepancies between the mineral results contained in the two reports. In considering the expert evidence, the Ontario court noted that the plaintiff's expert failed to rebut or even address the conclusions of Silvercorp's expert. As a result, the motion for leave was denied by the court on the basis that the plaintiffs had failed to adduce sufficient evidence of a misrepresentation and therefore failed to "clear the leave hurdle."

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Footnotes

1 For ease, we will reference the Ontario securities regime, however similar statutory secondary market liability regimes, including a screening mechanism, have been implement in securities legislation for each of the provinces and territories.

2 Green v. Canadian Imperial Bank of Commerce, 2014 ONCA 90.

3 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18; Green v CIBC, 2015 SCC 60

4 The court in Bradley v. Eastern Platinum Ltd., 2016 ONSC 1903, provided further guidance on the Supreme Court's test in Green v. CIBC noting that the leave test now "requires a robust, meaningful examination and critical evaluation of the evidence (or the absence of evidence)." The court drew parallels to a motion for summary judgment, noting that both frameworks require the examination and weighing of evidence (in contrast to a motion to strike). The court further noted that while there is no obligation on a responding party to file evidence on a leave motion, it may be a "risky venture" not to do so where there are highly contentious factual issues.

5 Coffin v. Atlantic Power Corp., 2015 ONSC 3686.

6 Parties filing expert evidence on a leave motion are cautioned to ensure that the record contains the necessary evidentiary foundation to support the expert's assumptions, absent which conclusions based on such assumptions may be given little (or no) weight (see Bradley v. Eastern Platinum Ltd., 2016 ONSC 1903 at para 99).

7 Mask v. Silvercorp Inc., 2015 ONSC 5348 [Silvercorp].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.