On Thursday November 3, 2011, the Ontario Court of Appeal released its long-awaited decision in Jeffery v. London Life Insurance Company, 2011 ONCA 683. Jeffrey is an important case concerning the regulation of financial institutions in Canada for two main reasons. First, it demonstrates that approval of a transaction by the Office of the Superintendent of Financial Institutions ("OSFI") is not a guarantee that a court might not substitute its own assessment of the legality of the transaction. Second, it recognizes that the Insurance Companies Act ("ICA"), unlike business corporations statutes, does not provide a broad remedial platform to encourage litigation aimed at vindicating policyholder expectations. The remedial section of the ICA exists to enforce compliance with the ICA and not to serve a broader punitive or even compensatory purpose.
The decision in Jeffrey resulted from an appeal from a decision of Justice Morissette released in October 2010 in a class action commenced by certain participating policyholders of both Great-West Life and London Life. The policyholders claimed that certain transactions entered into when Great-West Life acquired London Life in 1997 violated the ICA. The trial judge found that the transactions violated the ICA and ordered that they be unwound and that some $390 million be paid into a litigation trust for the participating policyholders of both companies. The Court of Appeal found that the trial judge was right to conclude that the transactions breached the ICA, but significantly curtailed the remedy granted.
The challenged transactions involved the participating policy accounts of both companies (the "PAR accounts") and are referred to throughout the Court's reasons as the PAR account transactions, or "PATs". The PATs involved an exchange of some $220 million in the PAR accounts for account entries referred to as pre-paid expense assets ("PPEAs") which were intended to represent the expense savings to the par policyholders occasioned by the acquisition.
The business reason for the PATs was that the PAR accounts stood to benefit from the synergies resulting from the transaction, just as the shareholders of the two companies did, it was difficult to ensure that the PAR accounts paid for any of these synergies given the restrictions in the ICA controlling the accounting applied to the PAR accounts. The PATs were proposed as a means of having the PAR accounts pay for their share of the synergies.
The trial judge found that, however well-intentioned the transactions might have been, they breached sections 331(4), 458 and 462 of the ICA. In essence, the trial judge found that the PPEAs were not assets for GAAP purposes, and that money could not lawfully be paid out of the PAR accounts in exchange for them. The Court of Appeal agreed with the trial judge that the PPEAs were not assets for GAAP purposes, such that the PATs could not be used as a means to permit the PAR accounts to pay for their share of the merger synergies. The Court of Appeal took pains to note, however, that the ICA is not so inflexible as to prohibit transfers from participating accounts that nevertheless preserve the value of such accounts.
The companies were largely successful in challenging the remedy applied by the trial judge. While the trial judge ordered a form of relief to be paid directly to participating policyholders, the Court of Appeal held that this kind of order was not justified by section 1031 of the ICA, which is a limited remedy allowing courts to order companies to comply with the ICA. The remedy sought by the plaintiffs and ordered by the trial judge was tantamount to an oppression remedy and was inconsistent with the deliberate decision not to provide an oppression remedy in the ICA.
The Court of Appeal found that any remedy had to ensure compliance with the ICA without giving the PAR policyholders a windfall by permitting them to benefit from merger synergies without paying for them. As a result, the Court held that the appropriate remedy was to unwind the PATs, but only as of the date of the court's order.
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