The Man Who Sold (Around) the World: Ontario Not a Default Jurisdiction for Securities Class Actions
August 9, 2018
In its decision in Yip v. HSBC Holdings PLC, the Ontario Court of Appeal clarified the proper interpretation of “responsible issuer” in the context of a statutory claim for secondary market misrepresentation under Part XXIII.1 of the Ontario Securities Act (OSA) and related common law claims, providing guidance to entities faced with class action claims arising from Canadian trading of their securities on international exchanges.
The proposed class representative in the claim, Mr. Yip, bought shares in the defendant public issuer using a Hong Kong bank account on the Hong Kong Stock Exchange, which he accessed using his home computer in Markham, Ontario. He also accessed disclosure documents from the issuer’s website.
The defendant is the parent holding company of an international banking conglomerate with its head office in London, U.K. Its securities are not traded on any Canadian stock exchange but are traded on the London and Hong Kong Stock Exchanges, with secondary listings on the Bermuda Stock Exchange and the Paris Euronext Stock Exchange.
Mr. Yip asserted that he and a proposed class of investors were misled by continuous disclosure documents and public statements, which allegedly caused the class to suffer approximately US$7-billion in losses.
The statutory tort claim based on section 138.3 of the OSA gives investors a cause of action against a “responsible issuer” for a misrepresentation in a document released by it or contained in a public statement. “Responsible Issuer” is defined in the OSA to mean (a) a reporting issuer, or (b) any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded. It was common ground that the defendant is not a reporting issuer. Therefore, the Court of Appeal’s analysis concerned whether it met the definition of responsible issuer. In other words, did it have a real and substantial connection to Ontario?
Mr. Yip argued that the proper interpretation of “responsible issuer” is an issuer that knows or ought to know that its investor information is being made available to Canadian investors. Mr. Yip asserted that such an interpretation creates a securities regulatory nexus with Ontario sufficient to establish the real and substantial connection.
The motion judge held that Ontario did not have jurisdiction over the proposed class action and that, even if it did have jurisdiction, Ontario was not the appropriate forum. The motion judge dismissed the statutory misrepresentation claims brought under the OSA and stayed the related common law claims. Mr. Yip appealed.
In dismissing Mr. Yip’s appeal, the Court of Appeal’s principal concern was that adopting the plaintiff’s interpretation of “responsible issuer” would lead to Ontario becoming the default jurisdiction for issuers around the world whose securities were purchased by Ontario residents. The Court of Appeal reviewed the legislative history of Part XXIII.1 of the OSA and concluded that this was not an intended result of the legislation.
Rather, the Court of Appeal found that the inclusion of the words “real and substantial connection” in the definition of “responsible issuer” was intended to mirror the Canadian common law test for jurisdiction simpliciter and to avoid jurisdictional overreach. The Court of Appeal was not persuaded that an issuer who knows or ought to know that its investor information is being made available to Canadian investors has, for that reason alone, a securities regulatory nexus sufficient to establish a real and substantial connection to Ontario.
In particular, in applying the common law test, the Court of Appeal held that the defendant could not be said to be “carrying on business in Ontario” simply because an investor could access a non-reporting issuer’s disclosure information using their home computer in Ontario. The Court of Appeal agreed with the motion judge that this did not point to any real relationship between the subject matter of the litigation and Ontario. Where such a weak connection exists, the Court of Appeal found that it would not be reasonable to expect that the defendant would be called to answer proceedings in the jurisdiction. The Court of Appeal held that there is no irrebuttable presumption of jurisdiction.
Further, regarding the most convenient forum for secondary market litigation, the Court of Appeal commented that the most appropriate jurisdiction will often favour the forum of the exchange where the plaintiff purchased the securities at issue. Such is consistent with principles of comity and prevailing international standards.
As technology continues to evolve, connecting Canadian investors with markets around the world, questions regarding the correct jurisdiction and appropriate forum for investor litigation will continue to arise. The Court of Appeal’s guidance in this case provides a strong starting point for issuers seeking to resist litigation commenced by Ontario-based investors concerning securities listed only on exchanges outside of Canada, and where there is otherwise no compelling connection between the securities at issue and Ontario. The Court of Appeal found that there was no legislative intention to create a universal jurisdiction for Ontario courts over secondary market liability claims, but that the OSA does not bar such claims provided that the issuer’s connection to Ontario can be shown to be real and substantial. This is to be distinguished from the U.S., where the Supreme Court has determined that U.S. securities legislation applies extraterritorially only where such application is explicit in the statute’s wording.
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