A steeper hill for securities class actions

A steeper hill for securities class actions
The plaintiff’s securities class action bar takes on substantial risk when they bring a claim seeking leave under Part XXIII.1 of the Ontario Securities Act. Often, all counsel knows is there has been some wrongdoing at a company that has led to a dramatic decline in the price of a share. The diligent counsel reviews the company’s historic public disclosure, wherein the company’s health has been, without fail, viewed through rose-coloured glasses. Once the corrective disclosure occurs, the security’s value tumbles down to earth and investors are left holding the bag.

The putative plaintiff has few means at its disposal to paint a fulsome picture in advance of the motion for leave. Because the test for leave requires a plaintiff to show a “reasonable chance of success,” public disclosure and a general odour of wrongdoing may not provide sufficient evidence for the matter to proceed. Class counsel’s job becomes that much harder when we consider the fact the defendant may cherry-pick whatever evidence it chooses to place in front of the court at this stage.

Justice Edward Belobaba’s recent decision in Mask v. Silvercorp Metals Inc. bolsters this limited (or no) discovery principle in advance of leave, and will result in a steeper hill for plaintiffs to climb at the outset of a securities class action.

In Silvercorp, the plaintiff is a former shareholder of the defendant mining company alleging misrepresentations were made about the mineral resources in the defendants’ mines in China. The defendants filed affidavits opposing the leave motion.

The plaintiff served a request to inspect documents under Rule 30.04(2) of the Rules of Civil Procedure, asking to review hundreds of documents referred to in the defendants’ affidavits before they were to cross-examine. The defendants refused to produce the documents.

Belobaba put the issue the following way: “[C]an a putative plaintiff who is seeking leave under Part XXIII.1 of the OSA use Rule 30.04(2) to obtain a large volume of confidential corporate documents from the defendant before cross-examination and before the leave motion has been decided?”

His response is “no.”

The defendants took the commonly held defendant’s position that the plaintiffs are scrambling to build a case, and as a result are embarking on a fishing expedition.

Belobaba focused on the fact Rule 30.04 only applies to “parties.” Before leave has been granted under Part XXIII.1 of the Securities Act, his honour pointed out that the putative plaintiff is not yet a party. Forcing a defendant to produce documents to a non-party does not accord with the Rule.

In addition, Belobaba held the documents referred to in the defendants’ affidavits were not sufficiently specific to give rise to the obligation to disclose them under the rules. He also held that the requests ran afoul of proportionality, privilege, prejudice, and timeliness.

The court then moved on to address policy concerns. This was the first time a Canadian court had been asked to consider whether an investor with a “draft” OSA claim can use the request to inspect documents rule to force a public issuer to divulge confidential corporate documents so the moving party can look for evidence to support their case.

The judge held that the request to inspect documents rule may be available in those circumstances, however, it should be limited in its application to accord with the goals, objectives, and overall policy of the OSA leave motion provisions. He referenced the oft-cited fear of “strike suits” in the drafting of the OSA and the need to avoid using Rule 30.04 as a “fishing rod.”

He then cited the recent Green v. Canadian Imperial Bank of Commerce decision where the Ontario Court of Appeal, in his opinion, lowered the bar for leave, creating less of a need for discovery at that stage in securities class actions.

While the door is not completely closed on documentary disclosure prior to certification, it appears a plaintiff’s request to inspect documents must be principled, concise, and limited if it will ever be granted. Such a course of action will be difficult at best, especially in light of Belobaba’s recent decision.

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