Time’s up for limitations periods in securities class actions
- Subtitle: Trials & Tribulations
The decision provides good guidance to class counsel regarding the diligence with which they must pursue potential claims, and it delivers much needed certainty to corporations regarding the duration of their potential exposure to a class proceeding.
In Sharma, the plaintiff commenced a proposed securities class action in May 2009, with respect to alleged public misrepresentations that took place between March 17 and Nov. 11, 2008. The plaintiff asserted common law claims in negligence and negligent misrepresentation. In addition, the claim stated that the plaintiff would be seeking an order granting leave to assert the statutory claim for misrepresentation provided under s. 138.3 of Part XXIII.1 of the Ontario Securities Act.
This section of the Securities Act came into force Dec. 31, 2005, and is meant to overcome the challenges of pursuing a class action for negligent or fraudulent misrepresentation by a public issuer. At common law, the plaintiff must establish reliance as one of the constituent elements of a misrepresentation claim. This has proven difficult to establish on a common basis, depending on the nature of the claims alleged. Recognizing the difficulties that plaintiffs in class actions were facing to certify a common issue arising from issuer misrepresentations, the legislature enacted s. 138.3 OSA. This section includes a deemed reliance provision:
“Where a responsible issuer . . . releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,
(a) the responsible issuer . . .”
Prior to the Court of Appeal’s decision in Sharma, typically class counsel would commence the class action and include a clause asserting the plaintiff’s intent to seek an order granting leave to assert the s. 138.3 claim. A commonly held view was that the inclusion of this language in the statement of claim would be sufficient to meet conditions for commencing a claim within the three-year limitation period set by s. 138.14 of the act, and/or that a pleading that the plaintiff was going to pursue the s. 138.3 claim would trigger the suspension of limitations periods established by s. 28 of the Class Proceedings Act.
Section 28 of the CPA suspends the running of limitation periods applicable to the causes of action asserted in a class proceeding, and sets out the circumstances under which the limitation may resume:
“28. (1) Subject to subsection (2), any limitation period applicable to a cause of action asserted in a class proceeding is suspended in favour of a class member on the commencement of the class proceeding and resumes running against the class member when,
(a) the member opts out of the class proceeding;
(b) an amendment that has the effect of excluding the member from the class is made to the certification order;
(c) a decertification order is made under section 10;
(d) the class proceeding is dismissed without an adjudication on the merits;
(e) the class proceeding is abandoned or discontinued with the approval of the court; or
(f) the class proceeding is settled with the approval of the court, unless the settlement provides otherwise.
(2) Where there is a right of appeal in respect of an event described in clauses (1) (a) to (f), the limitation period resumes running as soon as the time for appeal has expired without an appeal being commenced or as soon as any appeal has been finally disposed of.”
Having asserted in the statement of claim that the plaintiff intended to seek leave to commence the s. 138.3 Securities Act claim, it was thought that the claim was, in fact, adequately commenced to meet the three-year s. 138.14 limitation period, and, in any event, the tolling effect of s. 28 of the CPA would stop the time from continuing to run. The plaintiff could then proceed in the ordinary course to proceed to certification and have the s. 138.3 leave motion heard at the same time. For example, in both Silver v. Imax Corp. and Dobbie v. Arctic Glacier Income Fund, class counsel brought the certification and s. 138.3 leave motions contemporaneously.
The Court of Appeal’s decision in Sharma has brought an end to that notion. In Sharma, the appeal court interpreted the relevant provisions of the OSA to mean that no action is “commenced” under s. 138.3 until leave is granted under s. 138.8.
Section 138.8 states:
“No action may be commenced under section 138.3 without leave of the court granted upon motion with notice to each defendant. The court shall grant leave only where it is satisfied that,
(a) the action is being brought in good faith; and
(b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.”
Until leave is granted, the three-year limitation period continues to run. Issuing a statement of claim in which the intent to seek leave is asserted does not “commence” the s. 138.3 claim to trigger the tolling effect of s. 28 of the CPA. There is no s. 138.3 claim commenced until the court, in fact, grants leave. The Court of Appeal drew the distinction between “asserting,” i.e. making allegations, in a statement of claim, and “commencing” the action in which the allegations are asserted.
“Without leave having been granted, a s. 138.3 cause of action cannot be enforced. It cannot be invoked as a legal right. Section 138.14 says as much. Thus giving the suspension provision in s. 28(1) of the CPA its ordinary meaning, the s. 138.3 cause of action cannot be said to be asserted in the [plaintiff’s] class proceeding since no leave has been granted. . . . without leave being granted, the cause of action cannot be said to be asserted in a class proceeding.”
The result of Sharma is that all securities class actions that seek to rely on the s. 138.3 deemed reliance provisions for secondary market purchasers will have to be pursued on a fast track. The plaintiff only has three years from the date of the corrective disclosure to gather a sufficient record to meet the evidentiary burden of s. 138.8(b), and to obtain the order granting leave of the court to commence the s. 138.3 claim. (Before leave is granted, the court must be satisfied that “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff,” according to Imax.)
Since the claim is not commenced until that court order is made, there will be significant time pressures on class counsel. They will have to schedule the leave motion allowing sufficient time for a reserved decision, which means pursuing the motion and disclosure expeditiously.
It remains to be seen whether this will result in lowering the evidentiary burden on plaintiffs for the leave motion because of the limited time they will have to independently investigate the claim and marshall the relevant evidence on the merits, or whether class counsel will become more aggressive in seeking early discovery from the defendants through cross-examination.
In my view, there should be no need for the plaintiff to undertake a substantial pre-discovery to prepare for the leave motion. This is contrary to the intent of the legislation, and would place undue burdens on the parties before the claim is even out of the box.
is a senior partner at Paliare Roland Rosenberg Rothstein LLP in Toronto. She has a varied advocacy practice including a broad range of complex commercial and shareholder litigation, professional liability cases, class actions and appellate advocacy. She can be reached at email@example.com.
Column: Trials & Tribulations