November 1, 2010 by Jay A.R. Cassidy
Franklin Delano Roosevelt once spoke of the “tragic errors of ostrich isolationism.” Although he was speaking of a tyranny much greater than that inflicted by the plaintiffs’ class action bar, many in Canada have for years taken the approach that the experiences of corporate directors and officers and the companies they lead south of our border would never find their way into Canada. At this point, even the most ardent of ostriches have pulled their heads out of the sand.
The legal liability of directors and officers of publicly traded companies in Canada has increased with the passage of Bill 198 and similar legislation. In fact, it has become more closely akin to the liability confronting directors and officers of publicly traded companies in the United States. The last 18 months specifically have seen enormous challenges within the financial industry, largely driven by the credit crisis, which has resulted in a surge of securities class action filings south of the border. Canada has also seen an increasing number of class actions.
Shareholders in Canada have commenced multiple class action lawsuits since 2006, invoking the secondary market civil liability amendments to provincial securities legislation and claiming hundreds of millions of dollars in damages. According to court documents, there have been at least 24 “Bill 198” actions since its inception. Damages claimed are between Cdn$16 million and Cdn$1.7 billion, with the average amount in the hundreds of millions of dollars.
Silver v. IMAX Corporation, which commenced in Ontario in September 2006, is the first case to consider the leave to proceed and class certification tests set forth in Bill 198. In IMAX, Ontario Superior Court Justice Katherine van Rensburg set a low standard for plaintiffs to pass the two-prong test for leave, ruling that plaintiffs only have to show there is a reasonable possibility for the action to succeed and that it is brought in good faith.
In terms of class certification, in IMAX, Justice Van Rensburg allowed for a global class of investors to be captured by the Ontario proceeding. This has caused great debate as to whether Canada — and specifically Ontario — will now become a venue of choice for plaintiffs’ attorneys.
IMPORT OF IMAX
It should be noted IMAX is appealing this decision. That said, at a recent industry event, a lead U.S. plaintiffs’ attorney said he thought Canada was likely to become the next major business expansion area for plaintiffs’ firms. This was in part due to IMAX, and also because of the recent Morrison decision from the United States Supreme Court, which made it harder to sue extraterritorial companies.
There has been a great deal of discussion on IMAX, but we shouldn’t place too much importance on it. It is only one decision — the first of its kind in a novel area of law. It is nave to think it will forever be the standard by which these cases are judged. The law is a living tree, ever growing and changing. Many more decisions will come on secondary market liability.
Aside from IMAX, most actions are at a preliminary stage; they have yet to receive court approval to proceed or even argue the application for leave. Still, consider some early settlement figures in proposed secondary market liability cases (all figures are in Canadian currency unless otherwise noted):
• a mining organization with a $320-million claim settled for $15.5 million;
• a mining organization with a $16-million claim settled for $2.1 million;
• a pharmaceutical company with a $110-million claim settled for $7.1 million;
• a natural and organic food company with a US$110-million claim settled for US$11.3 million;
••a mining organization with a $55-million claim settled for $2.2 million;
• a mining organization with a $210-million claim settled a global class action for $28 million; and
• a consumer goods company with a $500-million claim tentatively settled for $22.5 million.
Given the small sample size, it is difficult to give much significance to the numbers above. However, it will be interesting to see if the settlement range as a percentage of the amounts claimed — about 8% on average in the above examples — holds true. Settlement averages are somewhat valuable to a defendant, but the real number that can drive settlement behaviour is the cost of defence, which at times can mirror the actual settlement amount. Complicating the matter further are the added defence costs if the case is multi-jurisdictional, as well as the fees associated with electronic discovery, which alone can run in the millions of dollars.
Only one case has proceeded to the test for both certification and leave to proceed. But two other decisions related to procedural matters are of concern.
PEEKING AT D&O LIMITS
In both Sharma v. Timminco Limited et. al. and Szuszkiewicz v. European Minerals Corporation et al. (known as “Orsu Metals”), the courts allowed potential plaintiffs to view the companies’ directors and officers (D&O) liability insurance policy at very early stages in the proceedings — in both cases, before either was granted leave to proceed.
Plaintiffs’ firms understand that D&O policy limits are important considerations in evaluating litigation. The problem with early policy production is that it arguably sets a number for the floor in settlement negotiations, before there is any evaluation of the merits of the case.
Imagine from the perspective of a defendant, your directors and officers are distracted from their regular jobs in order to focus on litigation. There is a prospect they may be deposed, which can prove perilous for both the individual and the company. The prospective plaintiff is allowed to see what level of insurance money you may have available before being declared an actual plaintiff. Your stock is already down in value, which is what brought on the class action in the first place.
You would probably be asking yourself at this point: How much worse will it get if you let it drag on for years, all the while paying millions of dollars in defence costs? You might be tempted to say to defence counsel: “Just give them the insurance money and make it go away now.” This is a legitimate response, but it can cause high-level tension between the insurance company and the insured, which in theory are supposed to be on the same side.
The profitable nature of class actions has led to competition between plaintiffs’ firms for carriage of the action. A novel concept in Canada, this leads to concerns about the ability of a successful defendant to seek costs against the unsuccessful plaintiff if the is in fact indemnified by a party outside Canadian jurisdiction and without commensurate costs provisions. Furthermore, it is interesting to note the law firm that prevailed in the Timminco case is being backed by a well-known and well-funded plaintiffs’ firm in the United States.
Recently, a pre-eminent plaintiffs’ firm in Canada spoke of how it “reverse engineers” class action litigation to find out if the cases are worth pursuing. Counsel spoke of looking to financials and the insurance available, among other variables, as determining factors in whether the firm would pursue a class action.
BIG BUSINESS OF CLASS ACTIONS
Counsel didn’t mention shareholders. Plaintiffs’ firms are much more cavalier today in speaking about their true intentions for bringing forth a securities class action. Gone are the references to the alleged wrongful acts, the damage to capital markets or to individual shareholders and the need to protect the small individual investor. Rather, plaintiffs’ counsel speak about increasing the size of settlements and adjusting their business models to maximize their firms’ returns in an ever-changing environment.
Moreover, with the U.S. pla
intiffs’ bar creeping into Canada, and given its stated intention to stay, perhaps it is time for the courts to revisit the all-apparent truth behind securities class actions. This is a business for the plaintiffs’ attorneys, not some glamorized version of a David-versus-Goliath struggle of Erin Brockovich legend from toxic tort cases.
With this in mind, the courts may want to turn their attention to whether a better balance is needed between the applications of rules for disclosure and the intent of the leave test under the secondary market legislation. Unfortunately, until this happens, plaintiffs’ firms will continue to view class action litigation as a very profitable business — which for them will remain booming.
Recently, a pre-eminent plaintiff’s firm in Canada spoke of how it “reverse engineers” class action litigation to find out if the cases are worth pursuing.
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