Significant Headwinds for Securities Class Actions

In April 2015, the Supreme Court of Canada released its decision in Theratechnologies Inc. v 121851 Canada Inc., 2015 SCC 18, in which it emphasized the need for a robust screening mechanism to prevent unmeritorious secondary market misrepresentation class actions from proceeding. We predicted then (see Theratechnologies Inc. v. 121851 Canada Inc.: The Supreme Court Gives the Leave Test Teeth) that the Supreme Court had intended to "give teeth" to the applicable test, to discourage unmeritorious securities class actions. This appears to be the case.

The recent decision in Coffin v Atlantic Power Corp., 2015 ONSC 3686, is the first decision to consider the certification bar set by the Supreme Court in its April 2015 Theratechnologies case. Atlantic Power indeed confirms that courts are willing to set a higher hurdle for Plaintiffs before green-lighting these types of class actions.

Effectively, the Plaintiffs in Atlantic Power alleged that Atlantic Power had made misrepresentations about its ability to sustain its dividend payments. Justice Belobaba of the Ontario Superior Court determined that in light of Theratechnologies, he had to decide the following issue: "... after considering all of the evidence presented by the parties, does any part of the plaintiffs' case have a reasonable or realistic chance of success at trial? Or is the plaintiffs' case so weak or has it been so successfully rebutted by the defendants that it has no reasonable possibility of success."

The evidentiary record was robust, primarily because Atlantic Power decided to aggressively rely on internal corporate records to show that it had not made any misrepresentation, and thus that the Plaintiffs' case could not succeed.

From the Defendant's evidence, the judge drew four important conclusions:

• the dividends were not guaranteed;
• the dividends were very much connected to and dependent upon cash flow;
• the company had enough cash on hand to continue to pay the $1.15 dividend for another one to three years even without any further acquisitions; and
• that dividend payments in general are not formulaic calculations but business judgment calls.

Justice Belobaba also relied heavily on the internal corporate records produced by Atlantic Power to construct a narrative of internal decision making and knowledge. That narrative was apparently not weakened in any material way by the Plaintiffs in the lead-up to the application. In fact, the judge felt comfortable enough with the Defendant's version of events that he seems not only to have found that the Plaintiffs' case had no reasonable prospect of success, but also to have conclusively found that there were in fact no misrepresentations made and no evidence that management had made any false statements about the future of the dividend.

The judge denied leave for a secondary market class action to proceed. Had leave been granted, the Plaintiffs would have been allowed certain favourable evidentiary exemptions, such as the need to prove individual reliance by every member of the class on the alleged misrepresentations, a requirement for an action in misrepresentation at common law. This meant that the Plaintiffs, having failed to get leave for the more favourable statutory action, were left trying to certify a class action for common law misrepresentation, which would require proof of individual reliance on the alleged misrepresentations. While the judge noted that such common law misrepresentation class actions had on occasion been allowed in the past by Ontario courts (despite the obvious difficulty of proving reliance for each class member), His Honour found that such class actions were no longer allowed in Ontario as a result of more recent jurisprudence. Further, and more importantly for these Plaintiffs, because the factual foundation for the proposed common law class action would be the same as in the proposed statutory secondary market class action, it too would be destined to fail, and was therefore not appropriate for certification as a class proceeding.

It is likely that the Plaintiffs will appeal this decision, but at least for now Atlantic Power stands as an example of the fact that the new leave test for secondary market class actions as enunciated by the Supreme Court in Theratechnologies has real teeth. Assuming that the defendant in such a proposed class action is in fact blameless, or has grounds to convince the court that the proposed proceeding is frivolous, defence counsel now have a great deal of running room to put forward a robust and aggressive defence. In fact, there seems to be great incentive now to do so as such a defence may not only prevent a statutory secondary market action, but any class proceeding based on misrepresentation.

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