With respect, the Court of Appeal erred in overturning Perell’s decision. This interpretation of the interplay between the tolling provision and the secondary market claim for misrepresentation did not take into account the purpose of the s. 138.8 leave provision, the realities concerning the lengthy and complex motions for leave under the Securities Act, and the limitations of the judiciary devoted to class proceedings in Ontario. What remains is a highly problematic application of the secondary market misrepresentation that largely undercuts its purpose, namely, the healthy and transparent functioning of capital markets in Canada.
In Sharma v. Timminco Ltd., the representative plaintiff Ravinder Sharma commenced a proposed class action in May 2009 pursuant to the statutory cause of action for misrepresentation provided by s. 138.3 of Part XIII.1 (secondary market disclosure) of the Securities Act. This provision, added to the Ontario Securities Act in December 2005, allows persons who purchased securities on the secondary market (such as the Toronto Stock Exchange) to advance claims for misrepresentations in ongoing disclosure documents, such as financial statements and annual reports. Sharma claimed that misrepresentations in public documents affected the value of his shares in Timminco.
Secondary market claims under the statute are circumscribed by several limitations, two of which were relevant to these proceedings. First, s. 138.8 of the Securities Act provides that no action may be commenced under the secondary market liability provision without leave from the court. Second, pursuant to s. 138.14, secondary market liability claims may not be commenced three years after the date on which the document containing the misrepresentation was released.
In this case, the misrepresentations were alleged to have started on March 17, 2008 and continued until Nov. 11, 2008. Around the end of February 2011, Sharma and his lawyers recalled that the three-year anniversary of the earlier misrepresentations was approaching. In response, Sharma moved for an order declaring that the three-year limitation period in s. 138.14 was suspended pursuant to s. 28(1) of the CPA. On the commencement of a class proceeding, s. 28(1) suspends any limitation period applicable to a cause of action “asserted” in favour of putative class members.
At the motion, Sharma contended that the word “assert” in s. 28(1) meant this section would suspend the limitation period associated with the secondary market claim, even if leave to pursue the claim had not yet been granted. Therefore, the limitation period would have been suspended on May 14, 2009 when Sharma commenced the proposed class action. The defendants countered that s. 28(1) did not protect the cause of action, since it could not have been “asserted” within the meaning of s. 28(1) until leave was granted.
Perell agreed with Sharma’s argument, holding that the existence of a leave requirement is a distinction without a difference to the operation of s. 28(1), and granted his motion for an order declaring that the limitation period was suspended.
Justice Stephen Goudge overturned Perell’s decision, holding that a secondary market liability cause of action could not be “asserted” within the meaning of s. 28(1) of the CPA and its limitation period could only be suspended once leave had been granted. Since leave had not yet been granted and three years had expired since the alleged misrepresentations had been made, the Court of Appeal ruled Sharma’s claims were out of time.
The leave requirement was designed to serve the gatekeeper purpose of barring frivolous and abusive claims, not to remove Part XXIII.1 causes of action from the operation of s. 28(1). The Court of Appeal failed to appreciate the purpose of the leave requirement and instead focused on a literal interpretation of the wording of the Securities Act.
The appeal court’s decision also did not address any of the practical consequences that flow from its interpretation — a significant oversight given their severity. Until leave is granted, there is nothing that can be pleaded that would trigger the operation of s. 28(1), notwithstanding the many interlocutory motions the plaintiff might face before a leave motion can even be scheduled, and the extensive time and detailed preparation that is necessary for a motion for leave under s. 138.8.
Further, the Court of Appeal failed to appreciate that the limited judicial resources devoted to class proceedings in Ontario will not necessarily be able to accommodate lengthy and complex leave motions under the time restraints mandated by this decision.
Finally, this decision also fails to consider the time it takes for a motions judge to release his or her leave decision. For example, in Silver v. Imax Corp., the allegations related to misrepresentations between Feb. 17, 2006 and Aug. 9, 2006, the action was commenced in September 2006, and the motion was heard in December 2008 with additional attendances and written submissions in May and July 2009. The motions judge released her decision on Dec. 14, 2009. If the approach in Timminco was applied, it was possible that the claim would be entirely statute-barred, even though the action was commenced approximately one month after the discovery of the claim.
The Court of Appeal’s decision has the unfortunate result of greatly limiting the scope of the secondary market liability cause of action. The Securities Act provides that its purposes are to protect investors from unfair, improper, or fraudulent practices and to foster fairness, efficiency, and confidence in capital markets. The Court of Appeal’s decision may undermine these purposes.