Ontario Affirms Gatekeeping Function Of Robust Leave Test For Securities Class Actions
August 19th, 2021
The well-documented barrage of litigation against Montreal-based engineering and construction giant SNC-Lavalin continues. In a recent decision by Justice Perell in Peters v. SNC-Lavalin Group Inc., 2021 ONSC 5021, the Ontario Superior Court of Justice denied leave to commence a secondary market securities class proceeding under Part XXIII.1 of the Securities Act (“the Act”). The decision affirms the Supreme of Court of Canada’s characterization of the leave requirement in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18 as a “robust deterrent screening mechanism” that is more than just a “speed bump”.
SNC was charged with offences under the Criminal Code and the Corruption of Foreign Public Officials Act. If convicted, it would be barred from bidding on government contracts. To avoid this death sentence, SNC successfully lobbied for amendments to the Canadian Criminal Code that would provide prosecutors with the option of negotiating a “Remediation Agreement”. These have the effect of suspending criminal prosecution in return for a corporate accused agreeing to abide by certain conditions.
In February 2018, the Federal Government announced its decision to introduce a deferred prosecution regime that would authorize Remediation Agreements. Shortly thereafter, SNC’s Settlement Counsel entered into discussions with the Director of Public Prosecutions of Canada (“DPP”) to negotiate a Remediation Agreement. Talks continued for months, but SNC did not publicly disclose the ongoing discussions, nor did they publicly disclose any views about the likelihood of SNC’s success.
In a phone call on September 4, 2018, the DPP told Settlement Counsel it would not invite SNC to negotiate a Remediation Agreement, but left open the opportunity for further submissions on the matter. Frequent talks continued for the next month, until, on October 9, 2018, SNC received a letter stating that the DPP had decided an invitation to negotiate would not be appropriate in the circumstances. On October 10, 2018, SNC issued a press release informing the public of the DPP’s decision. IIROC temporarily halted trading of SNC’s securities on the TSX, and once it resumed, the price of SNC shares declined by 13%.
In this proposed class action, the plaintiff, John Peters, advanced two causes of action against SNC-Lavalin and four of its senior officers and directors: (a) a statutory cause of action for misrepresentation in the secondary market for securities pursuant to Part XXII.1 of the Act; and (b) common law misrepresentation.
Mr. Peters argued that the 13% decline in value of SNC’s shares on October 10, 2018 was a result of the press release, and this information would have caused an equivalent reaction if it had been disclosed on September 4, 2018. He therefore concluded that SNC’s decision to disclose the information on October 10, 2018 rather than September 4, 2018 caused damages to any investor who purchased SNC’s shares during those 36 days.
The essence of Mr. Peters’ two causes of action was that SNC’s failure to disclose the September 4, 2018 phone call was a failure to disclose a material change. He further alleged that SNC breached ss. 75(1) and (2) of the Act by failing to file a news release and a material change report, as required.
Ontario Superior Court of Justice Decision
S. 138.3(4) under Part XXIII.1 of the Act creates a statutory cause of action for a reporting issuer’s failure to make timely disclosure of a material change, which is available to any person who acquires or disposes of the issuer’s securities between the time the material change should have been disclosed and the time it was disclosed.
The two-part test for leave to advance the statutory cause of action requires the Court to be satisfied that, (a) the action is being brought in good faith; and (b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.
There are two categories of required continuous disclosure: (1) periodic disclosure of “material facts”; and (2) timely disclosure of “material changes”. Justice Perell concluded that the fundamental flaw of Mr. Peters’ argument was that it applied a material fact analysis and not a material change analysis.
A material fact is one that would reasonably be expected to have a significant effect on the market price or value of securities. This is a much broader concept than that of a material change, which requires: (a) a change in the business, operations, or capital of the issuer; and (b) that the change is “material”, or reasonably expected to have a significant effect on the market price or value of the securities. In Kerr v. Danier Leather Inc., 2007 SCC 44 the SCC explained that this distinction is deliberate and policy-based, in order to relieve reporting issuers of the obligation to continually disclose external developments, unless they will result in a change of business, operations, or capital.
SNC had three arguments:
- Peters mischaracterized the business risk that allegedly was not disclosed. The prospects of achieving a Remediation Agreement were always uncertain.
- The September 4, 2018 message was not a “change” as there was no finality that could signal a change. Discussions continued after the phone call.
- Determining whether a material change has occurred depends on what the audience for the notice of change already knows. It is against this “old news” that a change is measured. In this case, the public already knew that: (a) SNC was at risk of conviction and disbarment; (b) disbarment would be catastrophic; (c) SNC wanted to negotiate a Remediation Agreement; and (d) SNC had not been invited to negotiate a Remediation Agreement. These facts remained the same following the call.
Justice Perell was persuaded by all three arguments and concluded that there was never a change in the risk of disbarment or SNC’s prospects of risk avoidance through a Remediation Agreement. He explained that the status quo of SNC’s business, operations, and capital was the same on September 4, 2018 and on October 10, 2018, despite the fact that the value of the market price of its securities may have been different. There is no bright line test for denoting a material change. Cornish v. Ontario Securities Commission, 2013 ONSC 1310 and Theratechnologies both demonstrate that while market impact and share value are relevant considerations as to whether there has been a material change, they are not determinative. No single factor is. The critical matter is the effect on an issuer’s business, operations, or capital – not the effect on the value of its securities.
Common Law Action
The constituent elements of the common law tort of negligent misrepresentation are: (a) the defendant owes a duty of care to the plaintiff based on a special relationship; (b) the defendant made an untrue, inaccurate or misleading representation; (c) the misrepresentation was made negligently; (d) the plaintiff reasonably relied on the misrepresentation; and (e) the plaintiff suffered damages as a result of the misrepresentation.
Justice Perell stated that where leave to assert a statutory claim under Part XXIII.1 has been denied, a common law claim based on the same alleged misrepresentation will not satisfy the preferable procedure criterion for certification of class actions, and thus will not be certified. However, he further explained that even if he had granted leave for the statutory misrepresentation claim and certified the common law negligence claim, he would have concluded that reliance is not a common issue for the common law negligence claim. The plaintiff has the burden of proving reliance, in a reasonable manner, on the misrepresentation that resulted in damage. Given the variety of ways in which purchasers of securities come to the decision to purchase, the reliance element is typically an individual issue in the context of securities misrepresentation class actions.
As such, the proposed class action was dismissed.