No Statutory Claim? No Certification for Securities Class Action

Written By Jonathan G. Bell and Jason M. Berall

Last week, Justice Perell released a securities class action decision (LBP Holdings Ltd. v. Hycroft Mining Corporation, 2017 ONSC 6342 [Hycroft]) refusing to certify a common law claim for negligent misrepresentation against the underwriters of Hycroft Mining Corporation’s $150-million bought deal, which closed in May 2013. Unlike most securities class actions, the plaintiffs did not pursue a claim for misrepresentation under the Securities Act. In the result, Justice Perell held that a class action was not the preferable procedure by which to resolve the plaintiffs’ standalone common law claims.

Common Law vs. Statutory Claim: The Element of Reliance

In a common law claim for negligent misrepresentation, plaintiffs must establish that they relied on the misrepresentation. Ontario’s Securities Act creates a statutory cause of action for misrepresentation in a public disclosure under which plaintiffs are deemed to have relied on the misrepresentation, thus, removing a significant hurdle for plaintiffs. In exchange for deeming reliance, the Securities Act sets a cap on damages.

Due to the deemed reliance provisions of the Securities Act, class action plaintiffs generally advance statutory misrepresentation claims whenever possible. Due to the statutory cap on damages, plaintiffs also routinely tack on common law negligent misrepresentation claims to impose the threat of increased damages.

Where class action plaintiffs have commenced both statutory and common law claims, courts have generally found both claims to be certifiable. As the statutory claim does not raise individual issues such as reliance, courts have found it to be well suited for class proceedings. When coupled with a statutory claim, courts have certified some elements of common law negligent misrepresentation as common issues, including whether there was a misrepresentation. However, even when courts have certified some elements of the common law claim, courts have held that reliance and damages must be determined on an individual basis.

Hycroft: Standalone Claim for Common Law Negligent Misrepresentation Not Suitable for Certification

In Hycroft, the plaintiffs pursued a standalone common law negligent misrepresentation claim against the underwriters because their statutory claims were statute-barred by the limitation provisions contained in the Securities Act, which differ from those applicable to a common law claim. Accordingly, the court was presented with the opportunity to determine whether a claim for common law negligent misrepresentation was certifiable in the absence of a statutory claim.

As a prerequisite to certification, the Class Proceedings Act requires that a class action be the preferable procedure. Justice Perell ruled that the common law claim for negligent misrepresentation was not certifiable because a class action was not the preferable procedure. His decision largely turned on the fact that the elements of reliance, causation, and damages were “highly individual issues that must be proven at individual issues trials.”

Looking Forward

While Justice Perell was careful to note that some common law claims for negligent misrepresentation may be certifiable as class actions, he also noted that courts typically only certify common law claims when coupled with a statutory claim.

While standalone common law claims are rare in securities class actions, they may be advanced where plaintiffs face Securities Act limitations issues or for other strategic purposes. In light of Justice Perell’s reasoning in Hycroft, it would be difficult to conceive of a claim for common law misrepresentation in a putative securities class action that would be certifiable in the absence of a statutory claim. 

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