The court upheld $500,000 in costs against the plaintiffs and added a further $75,000 — a penalty lawyers say could deter others from taking on similar cases in the future.
“This decision really kills any kind of real initiative in this kind of securities litigation,” says Peter Roy, a senior litigation counsel at Roy O’Connor LLP who has represented both plaintiffs and defence in class action proceedings.
“The cost consequences to a plaintiff side firm that generally takes this kind of stuff on spec is crushing.”
Roy says that the risk of the cost consequences for plaintiff lawyers in such suits will make it unlikely that firms will take on anything other than the most obvious cases in the future.
“You’ve got to be pretty brave to put your toe in that water,” he says.
The lead plaintiff on the claim, John Mask, alleged Silvercorp had misrepresented the quality of its mineral resources at a mine in China and that this had inflated the company’s share price. The plaintiffs, who were shareholders, then lost money when the price fell after “corrective disclosures” issued by an anonymous Internet poster in 2011, the decision said.
Belobaba, however, ruled that evidence Silvercorp submitted undermined that of the plaintiffs, whose claim was “so weak or has been so successfully rebutted by the defendants that it has no reasonable possibility of success.”
In their appeal, the plaintiffs argued that Belobaba had misapplied the test to grant leave for the action by “weighing the evidence on a balance of probabilities, turning the leave application into a mini-trial.”
They argued that Belobaba’s approach was inconsistent with the purpose and spirit of the Securities Act to screen out only plainly unmeritorious claims.
In the Court of Appeal decision, Chief Justice George Strathy said that scrutiny of the evidence on such a leave application should not be so limited.
“In my view, the ‘reasonable possibility’ requirement of the leave test requires scrutiny of the merits of the action based on all the evidence proffered by the parties,” he wrote.
“Far from undermining the objective of the legislation, such scrutiny of the entire body of evidence is necessary to give effect to the purpose of the screening mechanism.”
Matthew Fleming, of Dentons Canada LLP, says the decision continues a trend in secondary market securities class action claims where defendants are filing extensive evidence in response at the leave stage.
“In particular, they are rebutting what I might characterize as more speculative evidence that is being advanced by plaintiffs,” he says. “And in doing so, they’re making it far more difficult for plaintiffs to succeed at the leave stage.”
Fleming says the decision also confirms that motion judges are entitled to weigh that evidence.
“It’s not simply sufficient for a plaintiff to offer up some credible evidence in support of a claim, particularly where the defendants take on and rebut that evidence directly.”
Garth Myers, a class action lawyer with Koskie Minsky LLP, says it has been increasingly common for defendants to file a significant amount of evidence in these types of motions in order to dispute the claims advanced by the plaintiffs.
“As a result of the court’s increasing scrutiny of these claims at this stage, I think the defendants are encouraged to do so, but the downside of that is simply that it increases the cost and the complexity of these motions,” he says.
The settlement in the U.S. paid out US$14 million to investors who bought Silvercorp shares on the New York Stock Exchange between May 20, 2009 and Sept. 13, 2011.
Myers says it is easier in some ways and harder in others to push similar actions forward in the U.S. One difference is that there is a very different preliminary burden in Canada than in the U.S.
“In Canada, it’s evidentiary. You have to prove that there is a reasonable possibility of success and you do that using evidence,” he says.
“In the [United] States, the preliminary motion is typically a motion to strike. That’s just a pleadings motion and they look at whether the claim is capable of satisfying the pleadings requirements in the States, and that’s done without evidence and then subsequently they’re permitted to get discovery.”