The more Canadian firms poke their noses into cross-border settlements, the clearer it becomes that private securities reform in the U.S. is making Canada appear the friendlier jurisdiction for investors.
While the Americans have raised the bar with their Private Securities Litigation Reform Act 1995, the Canadians have boosted investor armoury with part XXIII.1 of the Ontario Securities Act, and the few decisions that have been made under that act are warming the hearts of plaintiffs’ lawyers.
An early indicator of this has come in the case of CP Ships Ltd., which has come to an abrupt end in the U.S. but is still alive north of the border. CP Ships is the former maritime transport arm of Canadian Pacific Ltd.
Its class action woes arose from its August 2004 restatement of financial information on the Toronto Stock Exchange and the New York Stock Exchange. A certification application has been argued in Quebec and is currently under reserve. A certification motion is being heard in Ontario in September 2008 and a motion to strike has already been denied.
Dimitri Lascaris, of Siskinds LLP in London, went south to object to the U.S. settlement in CP Ships Ltd., and saw the class action founder on the rocks of the PSLRA.
“In the U.S. the pleading standard is very high. You must plead fraudulent intent with a high degree of particularity. Thirty to 40 per cent of securities class actions do not survive a motion to dismiss these days and CP Ships was one of them. Everyone thinks the U.S. is the more investor-friendly regime but in some respects the Canadian regime is more protective of investors,” he says.
In the U.S., one of the elements you have to prove is “scienter,” which means intent to defraud. You have to plead a state of mind that is at least equal to recklessness if not actual intent. Recent decisions have shown that scienter is very difficult to plead.
The Canadian standard with respect to misrepresentation of financial statements is negligence, which is a lower standard, unless you are trying to remove the damages caps that are set out in s. 138.7 of the Securities Act.
Paul Steep, senior litigator at McCarthy Tétrault LLP in Toronto, explains that going this extra mile puts you in a not-so-different position as in a U.S. case. “In order for the plaintiff to get leave they must establish a reasonable possibility of succeeding at trial.
You must plead that the facts are sufficient to establish that misrepresentation occurred with knowledge of the misrepresentation. Whether that’s fraud is rather a nice question. It is commonly understood as fraud or near fraud.”
Steep is involved in the Canadian IMAX class action, which has a counterpart on the other side of the border. IMAX Corp. is alleged to have knowingly overstated revenues and not made timely disclosure of a material change. A motion to dismiss the U.S. action was argued in early August but the outcome is not out. The Canadian class action will be in court in mid-December.
Siskinds also represents the plaintiffs in the IMAX case, and Lascaris believes it may bring the first opportunity for the court to interpret leave requirements, including what constitutes a “reasonable possibility of success.” “There will be more guidance after the first leave motion is heard and a court articulates the standard for allowing those cases to proceed,” he says.
Daniel Kramer, of Paul Weiss Rifkind Wharton & Garrison LLP of New York, is seeing the changes from an American perspective. “The changes in the law in Canada have certainly made investor actions more viable there. With respect to CP Ships, we were fortunate to get a dismissal of the U.S. action. The Canadian actions haven’t progressed to that stage, so we’re not sure if it is the friendlier forum or not.”
Kramer and his colleagues have been living with the PSLRA for over a decade. “In many respects it has made it more difficult to maintain a securities fraud action,” he agrees. “There have also been several important Supreme Court cases in the past four or five years that have lead to higher scrutinizing.”
Steep believes it is premature to draw conclusions on which place might treat investors better. “The heightened pleading requirement is a new hurdle and it is strictly enforced, but securities class actions are still relatively new in Canada. We haven’t even got a court-sanctioned secondary-market hearing yet.”
Steep notes there has not been a large volume of securities class actions commenced since the passage of Bill 198. “The U.S. is still more active. There was an expectation of a big upswing in Canada but it really hasn’t happened.” When asked to speculate why not he points to a number of generally held opinions.
“Firstly, there are not a lot of plaintiff firms that have devoted resources to secondary class actions. It is a big investment of time and money to develop cases in a new area.
“The second view is that, until recently, the markets have performed pretty well, with a general tightening of corporate governance. People are saying there has been heightened scrutiny from boards of directors and regulators since the collapse of the tech market.” Steep believes that there’s some truth in that. “Corporate governance and disclosure have improved, but there are always issues to explore.”
With so many Canadian companies listing their shares in the U.S., those that strike trouble will increasingly attract plaintiffs that are dual-listed. Beyond the pleadings stage, the newness of the Canadian law is a stumbling block in itself.
Kramer’s firm represents Hollinger in litigation against Conrad Black in the U.S. and Canadian class actions. They have settled all the class actions and are in the process of getting approval in the various jurisdictions.
“In the U.S., the phenomenon of class action securities law has been around for decades, so the case law is more developed,” he says. “There are fewer open issues and more certainty. In Canada, secondary market actions are a relatively new phenomenon. The case law is just developing so there is considerably less certainty.”
The only decision under the investor-protection legislation so far is a preliminary ruling on matters of document production and the scope of cross-examination in the IMAX case. “The essential principle is that the normal test for production on a motion applies for class actions as well,” says Lascaris.
“It demonstrates what the drafters of the legislation intended - that plaintiffs have the opportunity to examine relevant documentation held by the defendant in advance of the application for leave. A significant proportion of evidence is usually in the possession of the defendant and we strenuously try to obtain it. This decision is consistent with the spirit of the act.”
Steep thought it was a generous decision that his firm sought leave to appeal. “Investors will have a new tool. There is now a broader scope to explore the case at an earlier pre-certification stage than in the U.S.”
And that’s another piece of good news for investors from Canada.