IMAX and Securities Class Actions Involving the Secondary Market: The Big Picture is Still Not Clear

Silver v. IMAX is the first decision to consider the new statutory cause of action provisions under Part XXIII.1 of the Securities Act (Ontario) for misrepresentations made in secondary market disclosures.¹ To bring such a claim, prospective plaintiffs must first obtain leave of the Court. This leave requirement serves a gatekeeper function, in order to weed out unmeritorious litigation. In Silver v. IMAX,² Justice Van Rensburg set a relatively low threshold for plaintiffs to obtain leave. The decision prompted much debate. An application for leave to appeal to the Divisional Court was argued in July 2010. On February 14, 2011, Justice Corbett denied the application for leave. At present, the low threshold test established by Justice Van Rensburg remains the law in Ontario.

In his reasons for denying leave,³ Justice Corbett left what he acknowledged were the controversial and difficult substantive issues to the Court of Appeal, following an actual trial of the issues (assuming a trial is held and an appeal is taken). His Honour's reasons do not reflect a view that Justice Van Rensburg's decision is necessarily correct. Rather, in his view, the issues and concerns before the Court should be left for a later date. In the interim, and subject to a judge taking a different view, the standard set for leave to bring an action under Part XXIII.1 as pronounced by Justice Van Rensburg, stands.

In Silver v. IMAX, the plaintiffs bought IMAX shares on the secondary market (the TSX and NASDAQ). The value of the shares dropped 40 percent following a press release from the company announcing it was responding to an SEC inquiry regarding the timing of its revenue recognition. The plaintiffs alleged that IMAX (and some of its directors and officers) improperly recognized certain revenue resulting in a misrepresentation of the true state of the company's revenue in its 2005 annual financial results and certain press releases. In 2007, IMAX restated its financial results and subsequently acknowledged that there had been an error in revenue recognition.

The test for leave to bring a claim 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.

For the first requirement of good faith, Justice Van Rensburg stated that the plaintiffs have to establish "that they are bringing their action in the honest belief that they have an arguable claim, and for reasons that are consistent with the purpose of the statutory cause of action and not for an oblique or collateral purpose." For the second part of the test (reasonable possibility of success), Justice Van Rensburg determined that while the court must undertake a preliminary analysis of the merits of the case, it must keep in mind the limitations of available evidence at this early stage. The evidentiary threshold applied by Justice Van Rensburg was therefore low and the plaintiffs were able to satisfy the test to obtain leave with minimal evidence. By way of contrast, the requirement for the defendants to successfully assert a statutory defence to defeat the plaintiffs' leave motion was significantly higher; the evidence of such a defence must "foreclose the plaintiffs' reasonable possibility of success at trial."

In companion reasons, Justice Van Rensburg certified the class action for a global class of investors for the statutory cause of action under Part XXIII.1 as well as for the common law claims of negligent and fraudulent misrepresentation, and conspiracy. The common law claims of negligent and fraudulent misrepresentation are often difficult to certify as a class action due to the requisite element of reliance. In fact, part of the impetus for Part XXIII.1 was to overcome the hurdle of reliance in such common law claims by removing that requirement.

Before Justice Corbett, the defendants argued that Justice Van Rensburg erred on several significant issues. For leave to appeal to be granted it is necessary to establish that there are conflicting decisions on a point and it is desirable for leave to be granted, or that there is good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that the granting of leave is justified. Justice Corbett found that neither two part test had been met. In reaching this conclusion His Honour took the view that in determining whether to grant leave the focus must be on the order or decision and not on "debatable aspects of the reasons" of the motions judge: "interesting legal questions raised by reasons, but not by decisions, can await other cases."

Justice Corbett found that since this was the first decision granting leave under s.138.8(1), there could be no conflicting decisions. He accepted that the nature of the leave test was a matter of general importance that would justify leave being granted if there was good reason to doubt the correctness of the decision below. However, in His Honour's view, there was no such reason: "this was not a close call that turned on the precise test to grant leave."⁴

One of the arguments made by the defendants was that the good faith requirement justified vigorous scrutiny of each aspect of the claim. Justice Corbett found this to be too restrictive an approach: plaintiffs can rely on their counsel to frame the claims. A further argument made was that the standard of proof for leave was too low for plaintiffs, and there was a reverse of the statutory onus for defendants to meet in respect of an affirmative defence. Justice Corbett did not state that the standard of proof and onus found by Justice Van Rensburg was correct. Rather, there was no reason to doubt the correctness of Her Honour's decision "whatever the precise formulation of the onus, standard of proof, and test to be applied in respect to affirmative defences."

Overall, Justice Corbett agreed that many of the substantive issues relating to Part XXIII.1 and common law claims for misrepresentation are important, complex and controversial. He concluded that "appellate courts will be in a better position to address them on a full factual record, after trial." Specifically, with respect to the common law claims, Justice Corbett concluded that Justice Van Rensburg's decision "does no more than permit the plaintiffs to proceed to trial. The Court of Appeal will be able to give full consideration to these issues if and when the case is appealed after a trial judgment."⁵

The proposition that these issues should be considered following a trial has much to recommend it. However, given the increasing number of secondary market class actions, the courts, counsel and clients would benefit now from further consideration of these new statutory provisions at an appellate level. The real question is whether Justice Van Rensburg took the "right approach" for her analysis of the leave requirement. Appellate review will have to await a lower court taking a different approach than Justice Van Rensburg, such that there will be conflicting decisions and the test for leave will be satisfied.

It is also a reality that few class actions, secondary market or otherwise, ever get to trial, let alone appeal. The impact of the IMAX approach may well put some pressure on defendants to settle in order to avoid the uncertainties and the market reality created by such uncertainties. In fact, it was in part the desire to avoid such pressures, where not justified by the facts, that lead to the inclusion of the leave test in the legislation. Other judicial reasoning has, in fact, suggested a different perspective. For example, Justice Lax in CV Technologies had a different and significantly more robust view of the court's gatekeeper function in relation to early disclosure by proposed defendants in secondary market class actions. This could indicate that a conflicting decision may well be on the horizon.

Notes

1. See prior Bennett Jones publication on this decision: "Silver v. IMAX: Round One to the Plaintiffs in a Secondary Market Misrepresentation Claim" dated January 19, 2010.
2. [2009] O.J. No. 5573 & [2009] O.J. No. 5585 (Sup. Ct. J.).
3. Silver v. IMAX, 2011 ONSC 1035.
4. The Court did not accept Justice Lax's reasoning in Ainslie v. CV Technologies, [2009] O.J. No. 730 (Sup. Ct. J.) as a "conflicting decision" [CV Technologies].
5. Justice Corbett agreed with Justice Sachs in the leave application in McKenna v. Gammon Gold (2010), 266 O.A.C. 314 (Sup. Ct. J.) that the facts determined by Justice Sachs in that case were distinguishable from the facts in IMAX.