Simon's Megalomaniacal Legal Resources

Securities - Securities Act - Statutory Tort

. Markowich v. Lundin Mining Corporation

In Markowich v. Lundin Mining Corporation (Ont CA, 2023) the Court of Appeal canvasses a Securities Act statutory tort, here under s.138.3(4) regarding disclosure by the listed company:

(3) Statutory cause of action and test for leave under s. 138.8 of the Securities Act

[47] Section 138.3(4) of the Securities Act creates a statutory right of action for an issuer’s failure to make timely disclosure. The provision gives a right of action to a person or company who acquires or disposes of the issuer’s security between the time when the disclosure should have been made and the time when the disclosure is made, regardless of whether the person or company relied on the issuer having complied with its timely disclosure requirements.

[48] While s. 138.3(4) of the Securities Act creates a statutory cause of action that eliminates the need to prove reliance, to guard against strike suits, s. 138.8(1) of the Securities Act requires that a party obtain leave of the court before proceeding with a claim: see Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60, [2015] 3 S.C.R. 801, at paras. 67‑69; Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719, 137 O.R. (3d) 241, leave to appeal refused, [2017] S.C.C.A. No. 443, at paras. 36‑38. The statutory test for leave provides that the court is only to grant leave if it is satisfied that: (a) the action is being brought in good faith, and (b) there is a reasonable possibility that the action will be resolved in favour of the plaintiff at trial.

[49] In Theratechnologies, at paras. 38-39, the Supreme Court explained, in relation to the same provision in the equivalent Quebec statute, that the “reasonable possibility” branch of the test for leave is meant to be “more than a speed-bump” but not meant to be a “mini-trial”. When seeking leave, a plaintiff must “offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim”: at para. 39. The court also explained the rationale for these requirements, at para. 39:

A case with a reasonable possibility of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim. This approach, in my view, best realizes the legislative intent of the screening mechanism: to ensure that cases with little chance of success – and the time and expense they impose – are avoided. I agree with the Court of Appeal, however, that the authorization stage under s. 225.4 should not be treated as a mini-trial. A full analysis of the evidence is unnecessary. If the goal of the screening mechanism is to prevent costly strike suits and litigation with little chance of success, it follows that the evidentiary requirements should not be so onerous as to essentially replicate the demands of a trial. To impose such a requirement would undermine the objective of the screening mechanism, which is to protect reporting issuers from unsubstantiated strike suits and costly unmeritorious litigation. What is required is sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant’s favour. [Emphasis added.]

[50] In Rahimi, at para. 48, this court emphasized that, on a motion for leave under s. 138.8 of the Securities Act, a motion judge is to engage in some weighing of the evidence, but this is also to include consideration of the evidence not available at this early stage of the proceeding:

To be clear, the motion judge's duty to scrutinize the entire record is not restricted to a review of the evidence filed on the motion. The motion judge is also obligated to consider what evidence is not before her. She must be cognizant of the fact that, at the leave stage, full production has not been made and the defendant may have relevant documentation that has not been produced or relevant evidence that has not been tendered. Consideration of these evidential limitations of the leave stage is important because they can work to the prejudice of plaintiffs who have potentially meritorious claims. [Emphasis added.]

. Wong v. Pretium Resources Inc.

In Wong v. Pretium Resources Inc. (Ont CA, 2022) the Court of Appeal considered a statutory tort under the Securities Act:

[34] The statutory claim was brought pursuant to Part XXIII.1 of the OSA, which provides under s. 138.3 for a claim in respect of a document issued by a “responsible issuer” (which includes a reporting issuer), where that document contains a misrepresentation, by a person who acquired or disposed of the issuer’s security between the time the document was released and the time when the misrepresentation was publicly corrected. A “misrepresentation” is defined as (a) an untrue statement of a material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. “Material fact when used in relation to securities issued or proposed to be issued” is defined as “a fact that would reasonably be expected to have a significant effect on the market price or value of the securities”. Section 138.4 provides for a number of defences to the statutory claim, including the defence of reasonable investigation.

[35] Section 138.8 sets out a leave requirement, which requires the court to 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.

[36] The motion judge framed the first issue as whether there was a reasonable possibility that the appellant’s claim that Strathcona’s concerns were material and should have been disclosed (such that the failure to do so in the various impugned documents amounted to a misrepresentation by omission) would succeed at trial. The motion judge accepted that Pretium genuinely believed that Strathcona’s concerns were based on faulty data which, in Pretium’s judgment, were inherently unreliable. He also accepted that Pretium was ultimately proven right: the mill results after completion of the BSP were positive and confirmed the validity of the Resource Estimate. The issue was, however, whether there were misrepresentations by omission by virtue of the failure to disclose material information.

[37] Citing the Supreme Court’s guidance in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23, [2011] 2 S.C.R. 175 (an authority relied on by both sides at all stages of these proceedings, including on appeal), the motion judge observed that the materiality standard calls for the disclosure of information that a reasonable investor would consider important in making an investment decision, and that materiality is determined objectively from the perspective of the reasonable investor, and not based on the subjective views of the issuer.

....

(ii) Sharbern Holding

[70] Sharbern Holding is a decision of the Supreme Court that addresses the materiality of omitted information in the context of an alleged misrepresentation. At issue was information that was not disclosed by Vancouver Airport Centre Ltd. (VAC), in its marketing of strata lots in two hotels (a Hilton and a Marriott) it was developing on the same property. At trial, VAC was found liable at common law and under s. 75 of the Real Estate Act, R.S.B.C. 1996, c. 397, for having made material false statements in its disclosure documents when it failed to disclose to prospective purchasers of the Hilton units the more favourable financial arrangements it had offered to purchasers of the Marriott units. It was alleged that the Disclosure Statement (a document required under the Real Estate Act) for the Hilton units made actionable misrepresentations when it stated that VAC had entered into agreements with the Marriott that were “similar in form and substance” to those governing the Hilton, and that VAC was not aware of any existing or potential conflicts of interest that could reasonably be expected to materially affect the purchaser’s investment decision.

[71] The B.C. Court of Appeal allowed VAC’s appeal, concluding that, based on VAC’s extensive factual and expert evidence concerning actual and industry practice in the management of multiple hotels by a single entity, and the absence of evidence to objectively support that a reasonable investor would have been concerned about the details of the financial arrangements, the omitted information was not material.

[72] On further appeal, the Supreme Court concluded that the trial judge erred in finding that the omitted facts were “inherently” material and in not considering their materiality in light of the evidence. In his reasons for a unanimous court, Rothstein J. addressed in detail the meaning of “materiality” in the context of the requirement to disclose material facts, including the standard of proof that is required and the type of evidence that is relevant.

[73] At para. 45, Rothstein J. formulated the test for the materiality of an omitted fact as follows:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote…Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available” [citing TSC Industries Inc. v. Northway Inc., 426 U.S. 438 (1976), a leading U.S. case dealing with proxy solicitations, at p. 449].

[74] He observed that: “materiality” involves the application of a legal standard to particular facts; it is a question of mixed law and fact, determined objectively from the perspective of a reasonable investor; and, it is a fact-specific inquiry to be determined on a case-by-case basis in light of all relevant considerations and “from the surrounding circumstances forming the total mix of information made available to investors”: at para. 61.

[75] Rothstein J. explained that the requirement that the material fact “would”, rather than “might”, have been considered important by a reasonable investor creates a “standard tending toward probability rather than toward mere possibility”: at para. 49. He held that issuers are not under an obligation to “disclose all facts that would permit an investor to sort out what was material and what was not”, and that doing so would “overwhelm investors with information and impair, rather than enhance, their ability to make decisions”: at para. 65.

[76] He explained that the materiality of a fact, statement or omission is something that must be proven by the party alleging materiality, except in those cases where common sense inferences are sufficient. He described the required analysis for materiality in the case of an omission as follows, at para. 61:

A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer. [Emphasis added.]

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[110] Finally, I would observe that the motion judge’s analysis does not run afoul of the well-canvassed policy objectives of securities regulation. It is trite that a core objective of the continuous disclosure regime is the protection of investors through the “full, true and plain disclosure of all material facts”: Pacific Coast Coin Exchange of Canada Ltd. v. Ontario (Securities Commission), 1977 CanLII 37 (SCC), [1978] 2 S.C.R. 112, at p. 126. Continuous disclosure creates “a ‘level playing field’ where all investors have access to the same information and all pricing and investment decisions are made from the same starting point”: Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18, [2015] 2 S.C.R. 106, at para. 25. Continuous disclosure in the secondary market is “at the heart of securities regulation and must be scrupulously accurate and fair”: Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719, 137 O.R. (3d) 241, at para. 80, leave to appeal refused, [2017] S.C.C.A. No. 443. None of these policy objectives would have been served by the disclosure of Strathcona’s concerns in the factual circumstances of this case.

. Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v. Barrick Gold Corporation

In Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v. Barrick Gold Corporation (Ont CA, 2021) the Court of Appeal heard an appeal from a Securities Act class action lawsuit motion, dealing with the s.138.1(1) issue of when (and whether) a listing corporation issued a 'public correction', and it's effect. Securities Act cases are unusual so I've linked the entire case [114 paras and an appendix] for now.

. Wright v. Horizons ETFS Management (Canada) Inc.

In Wright v. Horizons ETFS Management (Canada) Inc. (Ont CA, 2020) the Court of Appeal reviews statutory remedies under the Securities Act:

(2) The Legal Framework

(a) Purposes of the Securities Act

[126] One of the underlying purposes of the Securities Act is “the protection of the investing public through full, true and plain disclosure of all material facts relating to securities being issued”: Pacific Coast Coin Exchange v. Ontario Securities Commission, 1977 CanLII 37 (SCC), [1978] 2 S.C.R. 112, at p. 126, citing Re Ontario Securities Commission and Brigadoon Scotch Distributors (Canada) Limited, 1970 CanLII 436 (ON SC), [1970] 3 O.R. 714, at p. 717.

[127] With some exceptions, the Securities Act requires companies to file a prospectus before engaging in a trade in a security that qualifies as a “distribution”. The statutory definition of distribution under s. 1(1) of the Securities Act captures “that moment of initial distribution when a security first becomes available to the public, thereby triggering the disclosure obligations designed to protect investors”: David Johnston, Kathleen Rockwell, and Cristie Ford, Canadian Securities Regulation, 5th ed. (Toronto: LexisNexis Canada, 2014), at 5.7 (italics in original).

[128] The prospectus must make “full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed”: Securities Act, s. 56(1). Thereafter, companies must meet continuous disclosure obligations under Part XVIII of the Securities Act.

(b) Sections 130 and 138.3 of the Securities Act

[129] Sections 130 and 138.3 of the Securities Act enhance the common law by providing statutory causes of action for misrepresentations that affect the value of securities purchased.

[130] Section 130 provides a statutory cause of action for misrepresentations in a prospectus for funds distributed on the primary market: Tucci v. Smart Technologies Inc, 2013 ONSC 802, 114 O.R. (3d) 294, at paras. 21, 40. Section 130 in Part XXIII provides that:

130. (1) Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made…

[131] Section 138.3 provides a statutory cause of action for misrepresentations for purchasers who acquire securities on the secondary market: Sharma v. Timminco Limited, 2012 ONCA 107, 109 O.R. (3d) 569, at paras. 7-8, leave to appeal refused, [2012] S.C.C.A. No. 157. Section 138.3 in Part XXIII.1 provides that:

138.3 (1) Where a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,

(a) the responsible issuer; …

[132] Section 138.3 provides fewer remedies to investors than s. 130. Unlike s. 130, s. 138.3 includes a damages cap of the greater of 5% of the issuer’s market capitalization or $1 million for a responsible issuer, and a loser pays costs rule: Securities Act, ss. 138.1, 138.7, and 138.11. Moreover, a plaintiff who brings a claim pursuant to s. 138.3 must first obtain leave to commence an action, unlike a plaintiff who commences an action under s. 130: Securities Act, s. 138.8(1).

[133] As such, there are distinct advantages to pursuing a claim under s. 130 rather than s. 138.3 of the Securities Act.

[134] Both sections enhance the remedies available to investors under the common law. The common law tort of negligent misrepresentation requirements are as follows:

a. There must be a duty of care based on a “special relationship” between the representor and the representee;

b. The representation must be untrue, inaccurate, or misleading;

c. The representor must have acted negligently in making the representation;

d. The representee must have relied, in a reasonable manner, on the negligent misrepresentation; and

e. The reliance must have been detrimental to the representee in the sense that damages resulted.

Queen v. Cognos Inc., 1993 CanLII 146 (SCC), [1993] 1 S.C.R. 87, at p. 110.

[135] While at common law plaintiffs must demonstrate reasonable reliance, plaintiffs who proceed with a claim for statutory misrepresentation are not required to demonstrate reliance in order to recover damages: Securities Act, ss. 130(1), 138.3(1).