Canada: Court Dismisses Secondary Market Securities Class Action Based On Extensive Evidence

In Coffin v. Atlantic Power Corp.¹, the Ontario Superior Court of Justice considered two motions: (1) for leave under section 138.8 of the Ontario Securities Act (the "OSA")² to commence an action for secondary market misrepresentation and (2) for certification to proceed as a class action under subsection 5(1) of the Class Proceedings Act, 199ba2 (the "CPA").³

Based on his review of the extensive evidence filed by the Defendants, Justice Belobaba dismissed both motions and found that there was, in fact, no actionable misrepresentation.⁴ In doing so, Justice Belobaba confirmed the close analytical relationship between requests for leave under the OSA and motions for class action certification under the CPA.

The Facts

During a November 2012 earnings call, the CEO of Atlantic Power Corporation ("Atlantic"), referring to a previously issued company press release, announced that Atlantic was "confident" that it could maintain its dividend at current levels (the "Statements").⁵ Four months later, after slashing its dividend by 65%, the price of Atlantic's shares and debentures dropped significantly.⁶

The plaintiffs, each of whom had purchased Atlantic's shares just weeks before the 65% dividend cut, commenced proceedings in Ontario alleging that Atlantic, its CEO, and CFO (together, the "Defendants") were liable, pursuant to subsections 138.3(1) and 138.3(2) of the OSA, for having made negligent and misleading secondary market disclosures. In particular, the plaintiffs alleged that the Statements and various other disclosures made by Atlantic (which, significantly, contained language warning that future dividends were not guaranteed)⁷ amounted to a misrepresentation of Atlantic's ability to maintain its dividend.⁸

The Motion for Leave under the OSA

To obtain leave to proceed under section 138.8 of the OSA, the Court must be satisfied that the plaintiff's action is brought in good faith and has a reasonable possibility of succeeding at trial.⁹

In assessing whether there was a reasonable possibility of succeeding at trial, the Court applied the Supreme Court's framework in Theratechnologies,¹⁰ highlighting that the leave threshold is intended to provide a robust screening mechanism for proposed securities class actions.¹¹ The Court applied the test for leave endorsed by the Court of Appeal in Green v. Canadian Imperial Bank of Commerce¹² which, according to Justice Belobaba, was consistent with the principles articulated in Theratechnologies: ¹³

...whether, having considered all the evidenced adduced by the parties and having regard to the limitations of the motions process, the plaintiffs' case is so weak or has been so successfully rebutted by the defendant, that it has no reasonable possibility of success.

In applying this test, the Court noted that the Defendants, having filed 10 bankers boxes of documents (including fact affidavits, expert reports, cross-examination transcripts, and other supportive material), had "made a conscientious decision to do battle from the outset."¹⁴ The Court highlighted that the alleged misrepresentations and the plaintiffs' expert report will generally "... persuade the court that there is at least a reasonable possibility that the plaintiff will succeed at trial."¹⁵ However, after reviewing the extensive materials filed by the Defendants, Justice Belobaba concluded that there was no evidence to establish that any of the Defendants had believed that Atlantic would be unable to sustain its dividend level.¹⁶ Rather, the parties agreed that Atlantic had sufficient cash flow to maintain its dividend level and did not dispute that dividend payments were "business judgment calls" rather than "formulaic calculations."¹⁷ In the result, Justice Belobaba rejected the plaintiffs' submission that the Defendants should have known that the dividend level was not sustainable and held that there was no misrepresentation upon which the plaintiffs might reasonably succeed at trial.¹⁸ As such, leave under section 138.8 of the OSA was denied.

The Motion to Certify

After dismissing the plaintiffs' motion for leave to proceed with statutory claims under the OSA, the Court confirmed that the plaintiffs could still seek certification of their remaining common law and statutory shareholder and debenture-holder claims.¹⁹ However, in order for these claims to be certified as a class action, the Court must be satisfied, pursuant to clause 5(1)(d) of the CPA, that a class action is the preferable procedure for the resolution of the common issues raised by the plaintiffs.

Before proceeding with its analysis, the Court observed that no securities class action had ever been certified once leave under the OSA had been denied, as the statutory causes of action are "tailor-made" for class proceedings.²⁰ Having been denied leave under the OSA, the plaintiffs were required to show that each shareholder and debenture-holder that purchased Atlantic's securities on the secondary market individually relied on the alleged negligent misrepresentation.²¹ The plaintiffs failed to do so.

Following the Court of Appeal in Musicians' Pension Fund of Canada (Trustees of) v. Kinross Gold Corp.,²² Justice Belobaba noted that the denial of leave under the OSA is a relevant factor in the clause 5(1)(d) preferability analysis.²³ Justice Belobaba concluded that the common law claims asserted by the plaintiffs rested on the same evidentiary foundation as the OSA claims, which had already been dismissed as part of the plaintiffs' motion for leave.²⁴ In concluding that a class action was not the preferable procedure for the plaintiffs' shareholder misrepresentation claims, Justice Belobaba noted that "encumbering the parties and the courts with a complex class action that is destined to fail promotes neither judicial economy nor access to justice."²⁵

For the debenture-holder claims, Justice Belobaba noted that neither of the current plaintiffs, who were shareholders only, were proper representative plaintiffs of the proposed class.²⁶ Should the debenture-holders and their lawyers wish to proceed with a class action, the Court reserved its right to hear their certification motion.²⁷

Comment

Justice Belobaba's decision underscores that, using the framework established by the Supreme Court in Theratechnologies, securities class actions will often be won or lost at the certification/leave stage. The Defendants' strategy—to marshal extensive volumes of evidence early on in support their position that the plaintiffs could not succeed at trial—proved successful in this case.

Footnotes

^{1 2015 ONSC 3686 [Coffin].}

^{2 Securities Act, RSO 1990, c s.5.}

^{3 SO 1992, c 6.}

^{4 Coffin, supra at paras 153-154.}

^{5 Ibid, at paras 2 and 11.}

^{6 Ibid, at para 2.}

^{7 Ibid, at paras 27-28.}

^{8 Ibid, at para 10.}

^{9 Ibid, at para 16. As noted by Justice Belobaba at paragraph 17 of the decision, whether or not the action was brought in good faith was not at issue on the plaintiff's motion.}

^{10 Theratechnologies inc. v. 12185 Canada inc., 2015 SCC 18.}

^{11 Coffin, supra at paras 18-19.}

^{12 2014 ONCA 90.}

^{13 Coffin, supra at para 20.}

^{14 Ibid, at paras 23-24.}

^{15 Ibid, at para 22.}

^{16 Ibid, at para 77.}

^{17 Ibid, at para 30.}

^{18 Ibid, at paras 111-122.}

^{19 Ibid, at paras 129-130.}

^{20 Ibid, at para 131.}

^{21 Ibid, at para 132.}

^{22 2014 ONCA 901.}

^{23 Coffin, supra at para 140.}

^{24 Ibid, at para 145.}

^{25 Ibid.}

^{26 Ibid, at para 147.}

^{27 Ibid, at paras 150-151.}

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