December 7, 2015 by Canadian Underwriter
A recent Supreme Court of Canada decision, on the interpretation of Ontario’s Securities Act, is “generally a good development” for directors’ and officers’ liability insurers, a lawyer representing Insurance Bureau of Canada suggested Monday, despite that fact that the court ruling paves the way for shareholders’ lawsuits against former executives of the Canadian Imperial Bank of Commerce and two other firms.
Section 138.3 (1) of Part XXIII.1 of Ontario’s Securities Act “creates a statutory cause of action for misrepresentation in the secondary securities market,” wrote Mr. Justice George Strathy – then of the Ontario Superior Court of Justice – in a decision released in 2012.
In order to start an action for misrepresentation under the Ontario Securities Act, plaintiffs must obtain leave of the court.
Justice Strathy – now the Chief Justice of Ontario – ruled in 2012 that a shareholders’ lawsuit against CIBC was time-barred because of a three-year statute of limitations. His ruling was overturned on appeal.
Four individuals – former CEO Gerald McCaughey, former chief financial officer and chief risk officer Tom Woods, former CIBC World Markets CEO Brian Shaw and former chief risk officer Ken Kilgour – were named as individual defendants in that suit.
On appeal, the Court of Appeal for Ontario ruled that the plaintiffs’ lawsuit is not time-barred.
CIBC appealed that ruling to the Supreme Court of Canada, which dismissed CIBC’s appeal, in a divided ruling released Dec. 4.
Seven Supreme Court of Canada judges from heard CIBC’s appeal – and two separate cases – Feb. 9, 2015.
The judges issued three separate rulings.
One of those rulings was written by Madam Justice Andromache Karakatsanis on behalf of herself, Mr. Justice Michael Moldaver and Mr. Justice Clément Gascon.
Another was written by Madam Justice Suzanne Côté on behalf of herself, Chief Justice Beverley McLachlin and Mr. Justice Marshall Rothstein, who retired Aug. 30.
The seventh judge hearing the appeals – Mr. Justice Thomas Cromwell – wrote a third decision on behalf of himself.
Where all seven judges agreed was on the threshold test to obtain leave of an Ontario court to commence an action for misrepresentation in the secondary securities market.
In order to obtain leave, the Securities Act stipulates that there must be “a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.”
Justice Strathy “interpreted this statutory language as establishing a relatively low threshold according to which leave will be denied only if, ‘having considered all the evidence adduced by the parties and having regard to the limitations of the motions process, the plaintiffs’ case is so weak or has been so successfully rebutted by the defendant, that it has no reasonable possibility of success,'” wrote Justice Côté of the Supreme Court of Canada.
This interpretation was upheld by the Court of Appeal for Ontario.
CIBC argued before the Supreme Court of Canada that this interpretation “failed to give proper effect to the Legislature’s intent that there be a meaningful assessment of the merits at the leave stage.”
Related: Three-year limitation period suspended in shareholders’ misrepresentation lawsuit against bank: Supreme Court of Canada
Insurance Bureau of Canada, which had intervener status in CIBC’s appeal, argued that the “threshold for granting leave cannot be the same as the threshold for determining that a pleading discloses a cause of action.”
IBC suggested in its factum that with the Ontario Securities Act, there was a “legislative intent” to “create a robust screening mechanism” in shareholders’ misrepresentation lawsuits.
CIBC cited a case involving Theratechnologies Inc., a pharmaceutical firm facing a class action lawsuit. The Supreme Court of Canada issued its ruling in Theratechnologies last April.
In that ruling, the court “stated that for an action to have a ‘reasonable possibility’ of success” under Quebec securities legislation, “there must be a ‘reasonable or realistic chance that [it] will succeed,'” Justice Côté wrote. “Claimants must “offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.'”
Justice Côté’s added there is “no difference” between the wording of that section of the Quebec Securities Act and Section 138.8 of the Ontario Securities Act.
“Accordingly, the threshold test under s. 225.4 QSA articulated in Theratechnologies applies in the context of s. 138.8 OSA,” Justice Côté wrote on behalf of herself, Chief Justice McLachlin and Justice Rothstein.
“The reasonable possibility of success threshold test articulated by this Court in Theratechnologies applies to a motion for leave under s. 138.8 of the OSA,” Justice Karakatsanis wrote on behalf of herself, Justice Moldaver and Justice Gascon.
In its arguments supporting CIBC, IBC “took the position that the test for granting leave should be an onerous, rigorous test so that only cases with merit should be allowed to proceed to the starting line in Ontario, and on that point, the Supreme Court of Canada agreed with us,” said Alan D’Silva, a partner with law firm Stikeman Elliot, in an interview with Canadian Underwriter. Stikeman Elliot represented IBC as intervener.
For insurers writing directors’ and officers’ liability, the Supreme Court of Canada’s decision “is generally a good development,” D’Silva added.
In the lawsuit against CIBC case, Howard Green and Anne Bell are representative plaintiffs alleging that in 2007, CIBC officials failed to disclose its exposure to the U.S. residential mortgage market. Those allegations have not been proven in court.
The Supreme Court of Canada’s Dec. 4 ruling also applied to a lawsuit against Toronto-based electronics equipment manufacturer Celestica Inc and a lawsuit against motion picture firm IMAX Corp. IBC did not have intervener status in those appeals.
Justice Cromwell would have dismissed CIBC’s appeal – as would Justices Karakatsanis, Moldaver and Gascon – but for different reasons. Justices Karakatsanis, Moldaver and Gascon ruled that the shareholders’ lawsuit against CIBC was not time-barred.
Chief Justice McLachlin, as well as Justices Cromwell, Côté and Rothstein – said the lawsuit was time-barred. However, Justice Cromwell ruled that he would grant the plaintiffs leave nunc pro tunc and would therefore dismiss CIBC’s appeal.
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