Ontario Court Upholds Limitations on Liability for Misrepresentations Contained in Take-Over Bid Circulars

In a decision released on July 30, 2015, the Ontario Superior Court of Justice has clarified that plaintiffs seeking to advance claims under section 131(1) of the Securities Act (Ontario) alleging misrepresentation in a take-over bid circular cannot proceed against both the offeror and its directors, but rather, are required to make an election. Notwithstanding the broad mandate for public protection created under the Securities Act, the Court clearly affirmed that the rights of action provided pursuant to section 131(1) are mutually exclusive. Plaintiffs are precluded from advancing such statutory rights of action concurrently against both an offeror and its directors, and, by necessary implication, from pursuing vicarious liability claims.

Rooney v ArcelorMittal SA, a putative class action, was commenced in Ontario following a successful joint take-over bid for Baffinland Iron Mines Corporation led by the corporate defendants and their directors, a number of whom were named personally as defendants in the proceeding. On the motion before Justice Rady, the defendants sought to strike the plaintiffs' amended statement of claim on several grounds, including on the basis that, pursuant to section 131(1) of the Securities Act, the plaintiffs were precluded from proceeding against both the joint offerors and their corresponding directors.

Section 131(1) of the Securities Act sets out a statutory cause of action for security holders, entitling security holders to claim rescission or damages in circumstances where take-over bid circulars are found to contain misrepresentations.

The plaintiffs argued that, as remedial legislation intended to foster investor protection, the Securities Act must be given a broad and liberal interpretation. On that basis, they suggested that any requirement for election in the legislation was intended to apply solely to the remedy (i.e., either for rescission or damages) and was not intended to require security holders to elect as between whom to pursue a cause of action against. In support of their argument, the plaintiffs also unsuccessfully sought to draw parallels between the provisions for prospectus liability and take-over bid liability.

After carefully reviewing the legislative history of section 131(1) and its judicial treatment post-enactment, the Court disagreed and found that, despite the fact the legislation was not as clearly expressed as it could be, an election as between the offeror and its directors was required. The Court arrived at this conclusion based on several factors, including the plain language of the provision, which expressly speaks to an election. Justice Rady also concluded that the plaintiffs' claims in vicarious liability against the directors would similarly be barred if they sought to pursue claims against the offeror, given that, to hold otherwise, would render the election requirement irrelevant and unnecessary.

As a final matter, the Court also concluded that section 131(1) excluded claims arising from secondary market transactions. Justice Rady ultimately concluded that since shareholders operating in the secondary market could never elect to exercise a right of rescission pursuant to section 131(1), the language of the provision must have been intended to exclude secondary market transactions.

It remains to be seen whether the plaintiffs will appeal.  However, the decision, which narrows the scope of permitted claims pursuant to section 131(1), is likely welcome news for public issuers and their directors in Ontario, who have been, in light of statutory deemed reliance provisions, particularly vulnerable to claims arising from circular misrepresentations.

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