In 2002, Part XXIII.1 was added to the Ontario Securities Act. It established a statutory cause of action for investors damaged by secondary market misrepresentations disseminated by publicly traded corporations or their officers and directors.
This amendment to the legislation was enacted following years of study and debate during which it was recognized that Canadian capital markets would achieve enhanced public confidence if investors had a viable means of pursuing private causes of action for misrepresentations in public disclosure documents.
The genuine risk of civil liability layered on top of the risk of OSC enforcement was anticipated to have a significant deterrent effect on corporate misconduct.
The new statutory cause of action does away with the traditional, common law requirement that an injured investor prove that she actually relied upon the misrepresentation when making her investment. To counterbalance this simplified means of establishing liability, Part XXIII.1 also incorporates a gatekeeper mechanism that is intended to sieve out unmeritorious “strike claims” before they get off the ground causing unwarranted strife to a blameless issuer who properly made corrective disclosure. This is the leave test established by s. 138.8 of the act.
Section 138.8 requires a plaintiff to obtain leave of the court before he or she may proceed with the statutory cause of action. To obtain leave, the plaintiff must satisfy the court 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.
Meeting the first part of this test has not been particularly contentious. However, under part (b), the level of scrutiny to which the merits of the claim is to be subjected on the leave motion has been a hotly contested issue.
Plaintiffs’ counsel have argued that the leave motion is no more than a bump in the road, intended only to weed out the most obviously unmeritorious claims. Defence counsel have argued that “a reasonable possibility of success” means substantially more than that. The plaintiff must (and the defendants may) file an evidentiary record; there may be examinations and cross-examinations. Given the fact that the court will be given a fulsome record, defendants have argued that the court should undertake a meaningful and robust assessment of the merits.
Generally, the courts have trended towards the plaintiff-side interpretation of the leave test, finding the threshold onus to be low.
The Ontario Court of Appeal spoke on the issue twice in 2014. First, on the combined appeals before a five-judge panel in Green v. CIBC, Silver v. IMAX, and Trustees v. Celestica, and again in Bayens v. Kinross Gold Corp., released Dec. 17, 2014. Leave to appeal to the Supreme Court of Canada has been granted in Green.
Among the issues the SCC will address is the nature of the merits-based leave test under s. 138.8.
In Green, starting at paragraph 83, the appeal court concluded the clause “reasonable possibility that the action will be resolved at trial in favour of the plaintiff” in s. 138.8(1)(b) is analogous to “no reasonable prospect of success,” which is how the test applied under s. 5(1)(a) of the Class Proceedings Act, 1992 and under Rule 21 motions to strike has been articulated by the SCC.
The court is therefore to apply the same test under s. 138.8 as on a motion to strike a claim for disclosing no reasonable cause of action. This will result in weeding out hopeless claims; which the Ontario Court of Appeal concluded is the intent of s. 138.8(1)(b).
The appeal court suggested that applying the same test also results in a procedural advantage, particularly if the leave motion is heard first, since a loss on the leave motion brings the proceeding to an end, and a win means the s. 5(1)(a) CPA criteria have been met and need not be re-argued.
Of course, the same would be equally true if a higher threshold is applied to the leave test. Absent leave, the claim cannot be pursued, and if leave is granted, then the claim will have been found to disclose a reasonable cause of action, as well as having a reasonable possibility of success (assuming these are not one and the same).
As a follow-up to Green, in Bayens, Justice Eleanore Cronk (who sat on the Green panel) elaborated on the leave test as articulated by the Ontario Court of Appeal in the earlier case. She explained that the test under s. 5(1)(a) of the Class Proceedings Act, Rule 21 and s.138.8 of the Securities Act, each employ phrases that are synonymous — “a reasonable prospect,” “a reasonable chance,” and “a reasonable possibility” — therefore the meaning to be accorded to the phrases must be the same. As the SCC explained in Hunt v. Carey, this is a low threshold.
The critical difference between the test under the CPA and that under the OSA is the nature of the evidentiary record. Under s. 5(1)(a) and Rule 21, the facts pleaded are deemed to be true for the purposes of the motion. That is the “evidentiary record” for those motions. Hence on certification, the plaintiff’s case will be at its strongest. However, under s. 138.8, there is affidavit and transcript evidence filed with the court, and the court will scrutinize the possibility of success in the context of the evidence put before it. Hence, the plaintiff is being put to a higher standard of proof than on a motion to strike or to certify the claim, since there will be a critical examination of the merits of the action, based upon the real, as opposed to deemed, evidentiary record.
However, the appeal court confirmed the level of scrutiny to be given to the claim is not as high as on a motion for summary judgment, since the leave motion is brought at a preliminary stage, prior to discoveries and document production.
Nonetheless, the plaintiff must show there is some evidence to support the claim, and that it is not purely speculative, i.e. “the court must assess the evidentiary record. . . . and measure that evidence against a substantive but low threshold test of probity.” But, if the defendant adduces evidence that clearly establishes that there is “no there, there,” i.e. that the claim has no chance of success, the plaintiff will not be granted leave to proceed.
Whether the SCC agrees with the test the Ontario Court of Appeal has established will be known when it releases its decision in Green. However, it will always stand defendants in good stead to put in evidence if it can entirely debunk the allegations that are asserted in a Securites Act s. 138.8 claim, or to challenge parts of a claim, if there is no foundation for some of the allegations in the claim, since the court will be taking a hard look at the evidence, and if it can be convinced that some or all of the claim cannot possibly succeed, the courts are not reticent in denying leave, as occurred in Bayens.