Honest Weight: Court of Appeal Affirms Threshold for Leave in Secondary Market Securities Class Action
August 29, 2016
In its recent decision in Mask v. Silvercorp Metals Inc. (Mask), the Court of Appeal for Ontario (Court) dismissed an appeal of the denial of leave and certification to a proposed statutory secondary market securities class action under Part XXIII.1 of the Ontario Securities Act (Act). In so doing, the Court affirmed that it must engage in some weighing of the evidence adduced by both parties when deciding whether to grant leave to proceed with a statutory secondary market class action. The Court also reaffirmed that a common law misrepresentation claim based on the same evidentiary foundation as a statutory claim that is not granted leave is not suitable for certification.
In Mask, the proposed class claimed that Silvercorp Metals Inc. and two of its former executives had misrepresented the quantity and quality of its mineral resources and reserves, understating the quantity and overstating the quality of the minerals it was producing. Concurrent with the alleged misrepresentations, Silvercorp was the target of “short sellers” who were releasing information aimed at reducing Silvercorp’s share price.
On the leave and certification motion, the motion judge weighed the expert evidence adduced by the plaintiff against factual evidence adduced by the defendants and denied leave to proceed under the Act. The motion judge found that the plaintiff’s misrepresentation claim was “so weak or has been so successfully rebutted by the defendants that it has no reasonable possibility of success.” The motion judge further found that the common law misrepresentation claim based on the same factual footprint as the statutory claim was destined to fail and should not be certified.
DECISION ON APPEAL
The plaintiff appealed, arguing that the motion judge applied a higher leave standard than the standard set out by the Supreme Court of Canada in Theratechnologies Inc. v. 121851 Canada Inc. (see our April 2015 Blakes Bulletin: First Secondary Market Class Action to Reach SCC Denied Leave).
The plaintiff argued that it was only required to show “a plausible analysis of the applicable leave provisions, and some credible evidence in support of the claim,” and that the motion judge erred in weighing the plaintiff’s evidence against the defendants’ evidence, improperly turning the leave application into a mini-trial. By weighing the parties’ evidence, the plaintiff argued on appeal, the motion judge in effect imposed an obligation on the plaintiff to fully respond to the evidence advanced by the defendants, which is inconsistent with the purpose and spirit of the leave requirement to screen out only plainly unmeritorious claims.
The Court disagreed. Writing for the Court, Justice G.R. Strathy held that Theratechnologies requires a “reasoned consideration of the evidence to ensure that the action has some merit” and that a “reasoned consideration of the evidence” must include scrutiny of the evidence proffered by both sides, and some weighing of the defence evidence against that adduced by the plaintiff. To do otherwise, Justice Strathy held, would be inconsistent with the leave test being a “robust screening mechanism” for unmeritorious cases. Declining to weigh the parties’ evidence would also render meaningless the provisions of Part XXIII.1 of the Act that contemplate that both parties shall file evidence setting out the material facts upon which they intend to rely on the leave motion, and the provisions that provide each party the right to cross-examine the deponents of the affidavits filed.
Justice Strathy concluded that the motion judge was not limited to a consideration of the plaintiff’s evidence but “was entitled, indeed required, to undertake a critical evaluation of all of the evidence and this necessarily required some weighing of the evidence, drawing of appropriate inferences and the finding of facts established by the record.”
Justice Strathy went on to uphold the motion judge’s dismissal of the plaintiff’s common law misrepresentation claim. Justice Strathy endorsed the motion judge’s reasoning relying on the Court’s earlier decision in Bayens v. Kinross Gold Corporation (see our December 2014 Blakes Bulletin: Court of Appeal for Ontario Clarifies Leave and Certification Standards). In that case, the Court held that a class action is not the preferable procedure where leave to proceed with the statutory misrepresentation claim has been denied and where the common law misrepresentation claim rests on the same evidentiary foundation as the statutory claim.
The decision in Mask has important implications for defendants in securities class action proceedings. First, the decision in Mask affirms that courts must engage in some weighing of the evidence of all parties on leave motions as part of a “reasoned consideration of the evidence.” Second, the decision adds to the line of recent cases wherein defendants have succeeded in defeating leave with a substantial evidentiary record. Third, the Court in Mask continues its trend of denying certification of common law claims based on the same factual footprint as statutory claims that are denied leave, acknowledging again that “[t]o permit a class action to proceed in [these] circumstances would render access to justice more illusory than real and would significantly undercut the goal of judicial economy.”
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