Court of Appeal for Ontario clears way for misrepresentation lawsuit against directors and officers arising from take-over bid circulars

Shareholders alleging that an offeror made a misrepresentation in a take-over bid circular can – in Ontario – sue both the offeror and the offeror’s directors and signatories personally, rather than having to choose to sue one or the other, the province’s appeal court suggested in a recent decision.

In a decision released Aug. 17, the Court of Appeal for Ontario ruled partly in favour of shareholders of Baffinland Iron Mines Corporation in a class action lawsuit. The court overturned part of a 2015 ruling by the Ontario Superior Court of Justice. The result of the appeal is that Peter Rooney and Archie Leach can proceed with a class-action lawsuit – under Section 131 (1) of the Ontario Securities Act – against both the offeror and signatories of a take-over bid circular.

Another result is that shareholders who sold their stock in the secondary market and who want to claim misrepresentation in a take-over bid circular would have to sue under Part XXIII.1 of the Securities Act, not Section 131 (1). This upholds a finding in a 2015 ruling by Madam Justice Helen Rady of the Ontario Superior Court of Justice.

Justice Rady initially ruled that Section 131 (1) allows plaintiffs to sue either an offeror – or an “offeror’s directors and other individuals who signed or approved the take-over bid circular” – but not both. She was overruled on this point.

The Court of Appeal for Ontario ruled against the plaintiffs in finding that shareholders who sold their shares in the secondary market cannot use Section 131 (1) of the Securities Act to “bypass” the leave requirement and liability caps in Part XXIII.1 of the Securities Act, which came into force in 2005. Section XXIII.1 essentially creates a statutory cause of action for shareholders alleging that the corporation (or individual directors and officers) misrepresented the company’s financial state.

Rooney and Leach are representative plaintiffs in a class-action lawsuit against several corporate and individual defendants. They were shareholders of Oakville, Ont.-based Baffinland, which mines iron ore on Baffin Island.

In March, 2011, Baffinland was publicly traded. Then a majority of shareholders agreed on a plan of arrangement in which 1843208 Ontario Inc. would acquire Baffinland. The numbered firm was 70% owned by Luxembourg-based steel maker ArcelorMittal S.A.

In September, 2010, “Baffinland was the target of a hostile take-over bid by a group” headed by Jowdat Waheed, Mr. Justice William Hourigan of the Court of Appeal for Ontario noted in the Aug. 17 ruling, cited as Rooney v. ArcelorMittal. Waheed is one of the 10 individual defendants being sued. ArcelorMittal (whose holdings include Hamilton-based Dofasco) is one of the seven corporate defendants.

Rooney and Leach started a class action lawsuit, alleging that takeover bid circulars “failed to disclose material information and that the information that was disclosed in the circulars was materially misleading and replete with misrepresentations about the business and affairs of Baffinland,” Justice Hourigan wrote. “They sued the persons and companies who signed and filed the circulars, alleging that, as a consequence of the defendants’ conduct, they received less for their Baffinland securities than they otherwise would have.”

The allegations have not been proven in court.

Section 138.3 (1) of Part XXIII.1 of the Securities Act “creates a statutory cause of action for misrepresentation in the secondary securities market in favour of any person who acquires or disposes of the securities of an issuer between the time the document containing the representation was released and the time the misrepresentation was corrected,” wrote Mr. Justice George Strathy – then of the Ontario Superior Court of Justice and now chief justice of Ontario – wrote in a separate ruling in 2012.

In Rooney vs. ArcelorMittal, Justice Hourigan noted that Part XXIII.1 of the Securities Act would let shareholders sue on the basis of alleged misrepresentations in “a take-over bid circular, an issuer bid circular, a directors’ circular, a notice of change or variation in respect of a take-over bid circular, issuer bid circular or directors’ circular”.

However, the focus of Section 131 (1) “is a security holder’s decision whether to tender to a bid, not a security holder’s decision whether to trade on the secondary market,” Justice Hourigan noted.

“It is highly unlikely that the legislature would enact a redundant right of action,” he added.

Concurring were Madam Justice Eileen Gillese and Madam Justice Janet Simmons.

The defendants in Rooney vs. ArcelorMittal argued that the plaintiffs’ “reliance on s. 131 in the context of trades in the secondary market is nothing more than an attempt to bypass the leave requirements, liability caps, and other elements of Part XXIII.1 included by the [Ontario] legislature as part of the balance struck in creating statutory secondary market liability for misrepresentations,” Justice Hourigan wrote.

Individual defendants in Rooney v. ArcelorMittal include Lakshmi Mittal, chairman and CEO of ArcelorMittal, Aditya Mittal, the firm’s group chief financial officer and Daniella Dimitrov, former vice-chair of Baffinland, among others.

Section 131 (1) of the Ontario Securities Act states:

“Where a take-over bid circular sent to the security holders of an offeree issuer as required by the regulations related to Part XX, or any notice of change or variation in respect of the circular, contains a misrepresentation, a security holder may, without regard to whether the security holder relied on the misrepresentation, elect to exercise a right of action for rescission or damages against the offeror or a right of action for damages against,

(a) every person who at the time the circular or notice, as the case may be, was signed was a director of the offeror;

(b) every person or company whose consent in respect of the circular or notice, as the case may be, has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by the person or company; and

(c) each person who signed a certificate in the circular or notice, as the case may be, other than the persons included in clause (a).”

In Rooney v. ArcelorMittal, both the plaintiffs and defendants agree that Section 131 (1) “requires a security holder to choose between suing the offeror for rescission and suing the offeror for damages, since the Act treats these as mutually exclusive causes of action.”

But they disagreed with whether the law also prohibits them from suing both the offeror and parties listed in clauses (a) to (c).

The Court of Appeal for Ontario took into account the legislative intent, finding that “the plain meaning of ‘or’ can be either inclusive or exclusive.” To interpret the word “or” as giving mutually exclusive options “puts the security holder in an untenable position,” Justice Hourigan wrote. “If the security holder elects to sue the offeror, there is a risk that the offeror might go bankrupt before the security holder can recover. If the security holder elects to sue the offeror’s directors and signatories, there is a risk that the individual defendants might make themselves judgment-proof. Neither scenario advances the cause of investor protection.”