The latest from the Ontario Court of Appeal on the interplay between statutory limitation periods and the tolling effect of s. 28 of the Class Proceedings Act, 1992 was delivered in February 2012 in the case of Sharma v. Timminco Ltd. This decision effectively put the last nail in the coffin for class action plaintiffs looking to s. 28 as a lifeline to extend the time for commencing proceedings after the time for an individual to commence an action had expired.

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.

The Supreme Court doesn’t just decide those fancy, beloved by the press Charter of Rights cases about civil liberties, police powers, and other headline-grabbing stuff. It still resolves, for example, dull tax disputes between the taxpayer and his avaricious government. It still deals with traditional constitutional fights between different levels of government (there is a surprisingly large number of these cases — they’re almost the court’s bread and butter). Sometimes these apparently tedious decisions, easy to overlook, go to the heart of the country’s economic and business fabric.

One such case is Copthorne Holdings Ltd. v. Canada. Decided last December, Copthorne is about the Income Tax Act’s General Anti-Avoidance Rule, known to tax aficionados and legal geeks as GAAR. (Please try to stay awake.) GAAR is intended to stop abusive tax-driven transactions technically permitted by the Income Tax Act but whose primary purpose is to avoid taxation. Bad boy Copthorne Holdings had engaged in naughty transactions of this sort, but the tax department wasn’t having any of it, invoked GAAR, and denied Copthorne the tax benefits it had anticipated. Copthorne challenged the ruling, but lost in the courts below. The Supreme Court affirmed the lower courts in a unanimous and clear judgment delivered by Justice Marshall Rothstein on behalf of a nine-member panel.

The director of the Canada Revenue Agency has said the decision will not have much of an effect on how the CRA goes about its business. Most tax practitioners are skeptical and expect beefed-up CRA use of GAAR. After all, although recognizing GAAR’s limitations, in Copthorne the Supreme Court strongly endorsed the rule and its application. Tax probity was affirmed. You can bet that the CRA will be vigorously using all the tools at its disposal, including this one.

Copthorne is quite different from Lipson v. Canada, a GAAR case decided by the Supreme Court in 2009. When Lipson was handed down, Canadian tax guru Vern Krishna called it “the most significant tax decision in 70 years.” In a 4-3 decision, petulant judges divided philosophically over tax policy and took bad-tempered swipes at each other. Some judges (the bare majority) favoured GAAR and the government. The rest did not apply the rule and stood in solidarity with the taxpayer. But now, in Copthorne, the Supreme Court seems to have got its act together. The judges are all rowing in the same direction. The philosophical divide has magically disappeared.

Copthorne, unanimous, clear, and

balanced, trumped Lipson. Reaction to the decision was favourable. The Supreme Court seemed attuned to reasonable business practice and gave clear guidance to the financial and tax community. But good feelings about the court lasted less than a week. That was because Reference re Securities Act, another unanimous nine-judge decision, released a few days after Copthorne, was as bad a decision as Copthorne was good. Nine judges got it right in Copthorne. The same nine got it wrong in the reference.

For a long time, those involved in Canada’s capital market have yearned for a single national securities regulator to replace the absurd patchwork quilt of 13 sets of rules administered by 13 separate regulators, one for each province and territory. In 2006, the federal government produced a draft Canadian Securities Act intended to establish a single regulator. The draft act did not unilaterally impose a unified system, but allowed provinces and territories to opt in. The expectation was that, sooner or later, they would all embrace a national system, driven by irresistible logic and by the imperative of an increasingly international capital market.

There was, of course, the inevitable whingeing from some of the provinces, particularly Quebec and Alberta. For political cover, the government of Canada asked the Supreme Court for an advisory opinion on whether the proposed act fell within Parliament’s general power to regulate trade and commerce. The government argued that the securities market had evolved from a provincial matter to a national matter affecting the country as a whole. As a consequence, it said, the federal trade and commerce power now gave Parliament legislative authority over all aspects of securities regulation. Alberta, Quebec, Manitoba, and New Brunswick argued that the proposed scheme infringed the provincial power over property and civil rights.

Most observers thought the Supreme Court reference was pretty much pro forma. A national securities regulator was obviously an idea whose time had come. Surely a few provincial politicians playing to the gallery couldn’t derail a scheme endorsed by everybody who knew something about finance and business. The Supreme Court, it was widely assumed, would recognize reality.

But it didn’t. In an awkward unanimous judgment, the court decided that the draft Securities Act was unconstitutional. It agreed that “what the Act seeks is comprehensive national securities regulation, with the aim of fostering fair and efficient capital markets and contributing to the stability of Canada’s financial system.” But, said the court: “federalism demands that a balance be struck, a balance that allows both the federal Parliament and the provincial legislatures to act effectively in their respective spheres. Accepting Canada’s interpretation of the general trade and commerce power would disrupt rather than maintain that balance. Parliament cannot regulate the whole of the securities system simply because aspects of it have a national dimension.”

To reach this conclusion, the court used an antiquated division-of-powers approach and applied hoary precedent (it cites a case from 1881, the Parsons decision, as a leading relevant authority on the scope of the trade and commerce power). As for the argument that the securities market has been so transformed as to make the day-to-day regulation of all aspects of trading in securities a matter of national concern, the court simply rejected it.

What a bad decision! It doesn’t reflect modern business and fiscal reality. It doesn’t deal with crucial policy issues. It used a very traditional form of constitutional analysis when other approaches were available that could have led to a better result. Just when things were looking good, out comes the rug from under our feet.

Philip Slayton has been dean of a law school and senior partner of a major Canadian law firm. His latest book is Mighty Judgment: How the Supreme Court of Canada Runs Your Life. Visit him online at philipslayton.com.

Increasingly, what used to be U.S.-only experiences in law are creeping north. The differences between Canadian and U.S. systems were discussed on several panels during the Association of Corporate Counsel annual meeting in Denver this past October.

One session in particular, on the U.S. Securities and Exchange Commission’s new whistleblowing legislation, drew a packed room with standing room only. The topic is getting a lot of attention and rightfully so, especially from Canadian in-house counsel as it may be moving into Canada, complete with financial incentives.

The Ontario Securities Commission announced Oct. 21 it was looking at a number of new enforcement initiatives including the prospect of introducing a whistleblower program, under which incentives and/or protection from retaliation might be provided to those who have information about marketplace misconduct. If implemented, it would be a first for securities regulators in Canada. There are big question marks around how it would be funded and whether legislative change would be required.

The SEC’s whistleblower program provides significant incentives to bypass internal reporting mechanisms. It stipulates that if people voluntarily provide original information to the SEC that results in successful enforcement and monetary sanctions of more than $1 million, the whistleblower would be eligible to receive between 10 and 30 per cent of the amounts recovered. That’s a significant incentive to report to the SEC and not internally first.

So what are companies to do? David Kohlenberg, deputy general counsel, corporate development and finance law with TransCanada PipeLines Ltd., speaking on an ACC panel in Denver about Canadian securities regulations, noted many companies have invested in code of ethics hotlines for employees to use, but what else can be done internally to get people to report to them first? The U.S. model provides greater incentives to bypass any internal reporting mechanism.

Another aspect of all of this, Kohlenberg pointed out, is that the SEC whistleblower program includes foreign private issuers, such as TransCanada.

Kohlenberg says it comes down to setting the tone at the top of the organization that misconduct is not condoned. At TransCanada, there are seven ways an employee can make contact in an organization to deal with misconduct. There is also an annual certification program to provide training around corrupt practices and security regulation matters. Each employee who takes the program is required to say they understand the conduct policy and they aren’t aware of any misconduct that should have been reported.

In developing an internal program, Kohlenberg says set it up so you can show you have the engagement of executives and directors; that you’ve done risk assessments and due diligence, and you have built trust in your employees so they feel comfortable coming to you. They have to feel some bond to the organization to report on any perceived misconduct.

Do the work now. Don’t wait for the OSC to make it more attractive for employees to call them first.