OCA slams door on securities class actions involving foreign exchanges

OCA slams door on securities class actions involving foreign exchanges

Following the 2010 Supreme Court of the United States decision in Morrison v. National Australia Bank, there was significant speculation in many quarters that Canada would become the class action haven for internationally scoped securities class actions.

changed the litigation landscape in the U.S. by holding that U.S. courts did not have jurisdiction over claims brought by foreign investors who purchased shares of a foreign issuer on a foreign exchange.

Effectively, investors from outside the U.S. can no longer forum shop and pursue a class action against a foreign issuer in the U.S., even in circumstances where their home jurisdiction does not have a class action regime available. Nor can U.S. investors expand the scope of their claims to encompass those foreign investors.

Since it is well accepted the class proceedings acts in most Canadian jurisdictions permit certification of global classes — and in fact, global classes have been certified in a variety of cases — there was good reason to anticipate our courts would agree to take jurisdiction over claims against foreign issuers, even if the action was commenced by or for the benefit of foreign investors who purchased on a foreign exchange.

So long as the plaintiff could establish some real and substantial connection between the action and the jurisdiction under the Van Breda test, it was anticipated Canadian courts would welcome the foreign investors to pursue their claims here.

A real and substantial connection could include such things as the fact the foreign issuer carries on some form of business, or has a presence in the jurisdiction — for example, Abdula v. Canadian Solar Inc. Or, if the foreign issuer also is listed on a Canadian exchange, and the proposed class action is brought on behalf of both those investors who bought on the Canadian exchange and on behalf of the foreign investors, there is precedent for those foreign investors to be rolled in as part of a global class — for example, the original certification decision in Silver v. Imax.

However, like SCOTUS in Morrison, there has also been judicial resistance to certification of claims asserted on behalf of foreign investors who purchased shares on a foreign exchange, even when the foreign investors’ claims are precisely the same as those that would be asserted against the issuer by class members who purchased their securities on a Canadian exchange.

For example in McKenna v. Gammon Gold Inc., Justice George Strathy (as he then was) refused to include in the class those investors who purchased Gammon shares on a foreign stock exchange. Without providing significant analysis, and without a factual record that expressly addressed foreign investors’ expectations, he held: “The acquisition of those securities in a jurisdiction outside Canada would not give rise to a reasonable expectation that the acquiror’s rights would be determined by a court in Canada” and he excluded from the class all investors (including Canadians) who purchased Gammon securities on a stock exchange outside of Canada.

Accordingly, from 2010 until August 2014, there were conflicting Ontario Superior Court decisions and a great deal of uncertainty about how comprehensive the class might be in securities misrepresentation class actions where the defendant company was listed on foreign exchanges.

However, in mid-August, the Ontario Court of Appeal effectively brought that speculation to a close with its decision in Kaynes v. BP plc (subject, of course, to leave to appeal to the SCC being granted). Kaynes holds that Ontario will not take jurisdiction over the claims of investors who purchase securities on a foreign stock exchange, even if the investor is a resident in Ontario and the defendant company is a responsible issuer under the Securities Act.

Peter Kaynes purchased shares of BP plc on the NYSE. BP has not been listed on the TSX since 2008. However, it has continuing reporting obligations, and fits the definition of “responsible issuer” under the Securities Act.

Kaynes brought an intended class action against BP alleging misrepresentations regarding its spill prevention and recovery programs and misrepresentations after the Deepwater Horizon disaster. Kaynes sought to bring the action on behalf of all Canadians who purchased BP shares, regardless of the exchange on which they were acquired.

BP did not dispute the court’s jurisdiction over it with respect to the claims of shareholders who purchased on the TSX, but challenged the Ontario court’s jurisdiction over the claims of investors who purchased BP securities on foreign exchanges, who made up the vast majority of the intended class.

On appeal from the lower court’s dismissal of BP’s motion, the Court of Appeal concluded Ontario had jurisdiction simpliciter over the claims of the foreign exchange investors since the claim alleged a tort committed in Ontario by a “responsible issuer” under the Securities Act (BP’s release of public documents in Ontario containing the alleged misrepresentations). However, jurisdiction was declined on the second, discretionary branch of the Van Breda test: forum non conveniens.

As a matter of comity, the Court of Appeal took into consideration the securities laws in the U.S. and the U.K. It also noted only a microscopic number of securities had traded on the TSX during the proposed class period, compared to the billions of securities traded on the foreign exchanges.

Unsurprisingly, both the U.S. and U.K. legislation assert jurisdiction over issuers listed on their own exchanges. In fact, the American legislation asserts exclusive authority over securities traded on its exchanges, and the plaintiff, Kaynes bought on a U.S. exchange.

Consistent with Strathy’s conclusion in Gammon, the Court of Appeal concluded: “It would surely come as no surprise to purchasers who used foreign exchanges that they should look to the foreign court to litigate their claims.”

The court therefore declined to take jurisdiction over the plaintiff’s claim or that of any class members who traded on a foreign exchange, based upon what it found to be the prevailing international norm of tying jurisdiction to the place where the securities were traded. The U.S. and the U.K. were determined to be the appropriate forums for adjudication of these claims.

This decision leaves Canadians who purchase securities on a foreign exchange in a difficult situation. Effectively, they have been foreclosed from pursuing a claim in Canada against companies subject to Canadian securities legislation with respect to a cause of action granted to them by Canadian securities legislation. Instead, these investors must now pursue their claims in a foreign jurisdiction, where the laws may be significantly different, and may not provide similar rights of action.

This result seems to be inconsistent with and undermines the very purpose of the responsible issuer duties imposed by, and the statutory rights of action granted under, the securities acts.

While comity is an important consideration in determining whether jurisdiction should be taken over a foreign defendant, when the claim asserted by the class is for a statutory remedy granted under local law with respect to misconduct of the foreign defendant under local law, I would argue the court’s refusal to take jurisdiction placed undue emphasis on the issue of comity, when its focus should have been on the fact that the claim asserted on behalf of Canadian investors was to enforce a right of action granted to them under Canadian laws and hence, the legislation of foreign jurisdictions should not prevail.

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