Leave and Certification for Secondary Market Securities Class Action : 
Defendants are Still on Thin Ice

Justice Tausendfreund of the Ontario Superior Court recently released Dobbie et al. v. Arctic Glacier Income Fund et al.,¹ the second decision considering whether to grant leave under the new Part XXIII.1 of the Securities Act (Ontario).² Part XXIII.1 creates a statutory right of action against reporting issuers, their officers and directors, and related parties for misrepresentations made in secondary market disclosures. Before such a claim can be brought, the plaintiffs must obtain leave of the court. In Dobbie et al. v. Arctic Glacier Income Fund et al., leave was granted to the plaintiffs and a national class of Arctic investors was certified for both the statutory causes of action and common law claims.

The proposed class of plaintiffs bought units of the defendant Arctic Glacier Income Fund during the period from March 13, 2002, to September 16, 2008.

At the heart of the dispute are alleged misrepresentations made by the Income Fund in a series of public disclosures, including prospectuses. These alleged misrepresentations were statements to the effect that the Income Fund was a good corporate citizen and that the packaged ice industry was a competitive industry. The plaintiffs' claim is based on the fact that a subsidiary of the Income Fund and two vice-presidents of the Income Fund's operating company, Arctic Glacier Inc., pled guilty to charges of participating in anti-competitive practices in the state of Michigan.

The test for leave under Part XXIII.1 is a two part statutory test: (1) the action must be brought in good faith; and (2) the plaintiffs must have a reasonable possibility of success at trial.

Justice Tausendfreund applied the leave test to each of the defendants individually. He granted leave against the Income Fund as a reporting issuer and against Arctic Glacier Inc. as an influential person who knowingly influenced the release of the impugned documents. The Court granted leave against the trustees of the Income Fund as both directors and influential persons. Leave was granted against Arctic Glacier Inc.'s CEO and CFO as de facto officers of the Income Fund who had authorized, permitted or acquiesced in the release of the impugned documents.

In addition, the Court also granted leave against two Vice-Presidents of Arctic Glacier Inc. (as proposed defendants) who had pled guilty to anti-competitive practices in the state of Michigan. These individuals were determined to be de facto officers of the Income Fund despite the absence of any evidence on the record that either individual had any role in the preparation of the impugned documents. His Honour was prepared to infer that these individuals were "probably aware that at least certain of the core documents in question contained misrepresentations."

The plaintiffs argued that the defendants' failure to swear personal affidavits, and accordingly subject themselves to cross-examination, was fatal to their ability to oppose leave. Justice Tausendfreund disagreed and held that there was no requirement that defendants swear affidavits and expose themselves to cross-examination.³ However this provides little comfort to future potential defendants if the court is prepared to grant leave based on inference that certain defendants were "probably aware" that core documents contained an alleged misrepresentation in the absence of any evidence.

The Court also granted leave against the defendants for alleged misrepresentations contained in documents dating back to March 2002. Section 138.14 of the Securities Act imposes an ultimate three-year limitation period in respect of actions commenced under section 138.3, which period commences to run from the date of the first release of the document containing the alleged misrepresentation. Justice Tausendfreund determined that the misrepresentations could be treated as one continuing fact situation, such that the limitation period provided under section 138.14 did not apply.

The Court also certified primary market claims under section 130 of the Securities Act, even though neither representative plaintiff purchased his units pursuant to a prospectus. Relying on prior authority, the Court found that sufficient nexus existed between the claims, such that it is not necessary to have a representative plaintiff with a right to assert the primary market cause of action.

In addition, Justice Tausendfreund certified the class as a national class of investors for the common law claims of negligence, negligent misrepresentation and breach of trust.

Traditionally, common law claims based on alleged misrepresentations have been difficult to certify due to the requisite element of reliance. In fact, part of the impetus for Part XXIII.1 of the Securities Act was to overcome the hurdle of reliance in such common law claims by removing that requirement. Justice Tausendfreund's reasons acknowledged that the statutory cause of action was introduced by the Legislature "in recognition of the obstacles to pursuing claims for secondary market misrepresentation under common law." Nevertheless, His Honour followed Justice Van Rensburg's decision in Silver v. Imax, finding sufficient evidence to certify both the common law claims and the Part XXIII.1 claim.

As one of the first two decisions granting leave under Part XXIII.1, this decision provides further guidance on how courts will treat the leave requirement and certification of secondary market class actions. The Defendants are seeking leave to appeal. These early decisions have set a low bar for plaintiffs to obtain leave and suggest that the protection the leave test was designed to provide to issuers, as well as to their directors and officers, is very limited. Whether this may be the beginning of a prolific period of securities class actions in Ontario remains to be seen.

Takeaways from Arctic

1. Test for granting leave under Part XXIII.1 of the Securities Act is a low threshold.
2. Failure to file evidence is not fatal to the defendants' case.
3. Treating multiple misrepresentations as one continuous fact pattern may be used by plaintiffs to defeat the limitation period in the Securities Act.

Notes

1. Bennett Jones LLP is counsel to one of the Vice President's of Arctic in this matter.
2. The first such decision was Silver v. Imax, [2009] O.J. No. 5573 (Ont. Sup. Ct. J.).
3. On this issue, Justice Tausendfreund's conclusion was similar Justice Lax's decision in Ainslie v. CV Technologies Inc., 2008 CarswellOnt 7227 (Ont. Sup. Ct. J.).