On Aug. 9, 2006, IMAX Corp. announced it was responding to an informal inquiry of the U.S. Securities and Exchange Commission. The following day, the company’s stocks, traded on both the Nasdaq exchange in the United States and the Toronto Stock Exchange in Canada, dropped 40 per cent. In 2007, IMAX restated its financial position for the previous years acknowledging it had erred by recognizing revenue for theatre systems not completely installed. According to court documents, the company also acknowledged it had not adhered to generally accepted accounting principles by prematurely recording theatre system revenues in 2005.
Lawsuits were brought against the company, including one by Ontario-based shareholders Cliff Cohen and Marvin Neil Silver. The pair allege misrepresentation because the 2005 financial results as reported were not according to GAAP, therefore the actual value per share according to those documents was also misrepresented. The statutory claim in Ontario law allows shareholders to sue a reporting issuer and directors and officers when there has been a misrepresentation in its secondary market disclosure.
The liability for such an action follows proof of misrepresentation — void of statutory defences. Reliance does not need to be proven. For its part, IMAX is relying on the principal defences of “reasonable investigation” and “expert reliance.” The onus of proof of such defences is on the defendant.
In December 2009, the Ontario Superior Court of Justice certified Silver v. IMAX Corp. as a class proceeding. The court also granted the plaintiffs leave to pursue a claim under the secondary market disclosure civil liability provisions, making it the first of its kind to be certified under s. 138 of the Ontario Securities Act. These provisions came into force Dec. 31, 2005, and have since been copied by several other Canadian provinces.
While many on the defendant’s side consider the threshold for the leave to proceed has been set relatively low through the decision, there are others who believe the ruling merely reflects where the law had already been placed. “It is not really lowering [the threshold], because to me it was already lowered by virtue of the statutory provision, because it sets a very low bar,” says Joseph D’Angelo, chairman of the litigation group at Lang Michener LLP. On certifying the action as a class proceeding, D’Angelo says it is here that Superior Court Justice Katherine van Rensburg has moved common law to be closer to the securities statute.
Under the Ontario Securities Act, reliance is assumed and even though the plaintiffs had not argued reliance, the mere fact the information reported on by the company is seen to have had an impact on the stock prices was enough to show reliance. “[The court] is really moving the threshold for common law misrepresentation very close to the statutory cause of action where reliance is already deemed to have taken place,” says D’Angelo.
Since the certification and leave to pursue the case was handed down, lawyers for IMAX have said they intend to appeal the ruling. However, like many issues surrounding the case, it remains unclear at which court an appeal would be heard. If it is a final ruling then it would go straight to the Ontario Court of Appeal, if not, leave to appeal must be granted by the Divisional Court.
In an e-mail to Canadian Lawyer InHouse, Paul Steep of McCarthy Tétrault LLP, the law firm representing IMAX, wrote: “We are seeking leave to appeal to the Divisional Court and at the same time have appealed to the Court of Appeal. We have taken two approaches to the appeal because the law is unsettled as to whether [there] is an automatic right of appeal to the Court of Appeal from a decision denying leave. The plaintiffs have moved to quash the appeal to the Court of Appeal. Either way it is being appealed.”
For corporate lawyers watching the events unfold in Ontario and wondering if Canada is bracing for these types of securities class actions more common of its southern neighbours, they can take some solace. While the values of securities class actions in Canada in the past year are above $14.7 billion, a total of $10 billion is from the CIBC class action related to the sub-prime mortgage fiasco in the United States. Even though the court has certified its first secondary market class action, there hasn’t been an avalanche of similar cases.
One of the key factors in IMAX was a section of the legislation that forced the court to anticipate something never before seen in Canadian law: the idea that at the leave stage the plaintiffs had to prove the case had, what the legislation calls, a “reasonable” chance for success at trial.
This provision was a key ingredient Ontario used to whip up amendments to the Securities Act — a desire to prevent strike suits. Sometimes considered legal blackmail, strike suits are where a plaintiff or group of plaintiffs launches a claim prompting a company to settle out of court, rather than going to trial.
The specific section states: “No action may be commenced under s. 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: the action is being brought in good faith; and there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.” The second part, wrote van Rensburg in the IMAX ruling, is entirely unique in Canadian law. “The phrase ‘a reasonable possibility that the action will be resolved at trial in favour of the plaintiff’ does not appear to have any direct antecedent in Canadian legislation.”
Lawyers for both plaintiffs and those who traditionally represent corporations say van Rensburg walked an interesting line when deciding the “reasonable chance.” With little direction and less law to go on, she decided “reasonable” would be at least greater than a de minimis chance of success, or else the law would have used the word mere. From the Latin phrase de minimis non curat lex, meaning the law does not concern itself with trifles, the test is often used to decide whether a criminal case is important enough to go forward.
In this context, greater than de minimis means the suit has merit, and in walking the line the judge had to make sure she wasn’t pre-supposing the case. Simply put, just because the case has merit doesn’t mean the plaintiffs are going to win.
“In undertaking this evaluation the court must keep in mind that there are limitations on the ability of the parties to fully address the merits because of the motion procedure. There is no exchange of affidavits of documents, no discovery [although affiants may be cross-examined], and witnesses cannot be summoned,” said the ruling. “The credibility of a witness’ evidence given by affidavit in a motion, irrespective of how searching an out-of-court cross-examination may be, can only be fully determined when it is tested in open court.”
Dimitri Lascaris, the Siskinds LLP partner who heads the IMAX class on the plaintiffs’ side, agrees such a merit test whereby a plaintiff must prove they have at least a reasonable chance for success is completely unique in Canada. However, he doubts the courts could have done anything to change it. “I don’t know that there is anything a court can do about that because the legislation has required plaintiffs to induce evidence without the benefit of full discovery that is sufficient to the statutory threshold, there is no other class action in Canada that confronts this barrier.”
Lascaris doesn’t believe the merit test needs to be there, saying Canada has always had a remedy against such suits in the loser pays system, giving plaintiffs pause before launching frivolous actions. Therefore, he has never agreed with the addition of the provision to prevent strike suits.
Interestingly, the legislation also allows for individual defendants to show there is no chance for success against them at trial. In IMAX, two of the members of the board were released from the case on this provision.
This, says David Kent, a partner at McMillan LLP in Toronto, means defendants might now consider doing everything they can to prove they have a positive defence to any actions being brought at the time of the application for leave. “There is this unusable obligation in the Securities Act on each party, on each defendant, both company and individuals to file affidavit setting out the material facts on which they rely. It is not very common to have a positive affidavit setting out facts. There is some obligation there, if you were a defendant, in particular if you were an individual defendant, you’d want to put your best foot forward at this point if you thought you could make out one of the defences, whether it is the expert reliance defence, the investigation defence, one of those things.”
Ogilvy Renault LLP partner Jeremy Devereux says even though some of the defendants were let off the hook through this provision, the case could still go forward because “[van Rensburg] wasn’t satisfied that they foreclosed the possibility of the plaintiff succeeding at trial.” Still, the court had to acknowledge the reason why the statutory provisions were created in the first place, requiring the plaintiff “to show [the suit] is not being brought for some improper or collateral purpose.”
Lascaris says in IMAX the court has attempted to articulate the legislation. Those who represent publicly traded companies, to no one’s surprise, wanted a “more burdensome threshold,” while Lascaris believes the standard set by the court in the IMAX ruling to be appropriate because pursuing such a case is “a quite burdensome affair for a plaintiff.”