Bears v. Bulls: Secondary Market Securities Class Actions In Ontario

• Published date: 12 November 2020
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Financial Services, Commodities/Derivatives/Stock Exchanges, Corporate and Company Law, Class Actions, Securities
• Law Firm: McMillan LLP
• Author: Ms Samantha Gordon, Stephen Brown-Okruhlik and Adam Chisholm

The impact of the COVID-19 pandemic on equity markets has been a topic of endless speculation and debate. Following steep sell-offs in late February and March of 2020, stock prices have come roaring back, fueled by unprecedented liquidity action by central banks and fiscal stimulus. Given the uncertain trajectory of markets, it is wise for companies in Ontario and their stakeholders to understand certain aspects of the province's liability regime for secondary securities market misrepresentation.

Amendments to Ontario's Securities Act¹ (the 'Act') in 2005 created statutory causes of action for secondary market losses. Similar changes were adopted in other provinces. Since addition of the statutory cause of action, the number of securities law class actions has increased. 2019 saw the largest number of Canadian securities class actions filed in any year since the creation of the statutory regimes.²

This bulletin provides a high-level overview of secondary market class actions in Ontario brought under the statutory regime.

The Statutory Regime

Liability under the Act may attach to Ontario reporting issuers or other publicly traded securities of an issuer with a real and substantial connection to Ontario ("Responsible Issuers"). It may also attach to a Responsible Issuer's directors, officers and other parties responsible for their public representations.

Separate causes of action exist for misrepresentations resulting in losses in the 'primary market' (related to security trades offered by the company in a prospectus or offering memorandum) and the 'secondary market' (related to security trades in the public market after the initial offering, including trades on an exchange). The Act rigidly separates liability in the two markets - secondary market claims cannot 'piggyback' onto claims for prospectus misrepresentation.³ The distinction between primary and secondary markets can pose difficulties for claims related to complex securities instruments, including exchange-traded funds (ETFs), whose trades will sometimes have characteristics of both primary and secondary market transactions.⁴

Secondary market claims arise under Section 138.3 of the Act include where:

• a responsible issuer or a person or company with actual implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation;⁵
• a person with actual, implied or apparent authority to speak on behalf of a responsible issuer makes a public oral statement that relates to the business or affairs of the responsible issuer and that contains a misrepresentation;⁶ and
• a responsible issuer fails to make a timely disclosure of a material change;⁷

Similar provisions exist in securities legislation across the country.

Damages are measured between the time of the misstatement or failure to make timely disclosure and the time of its public correction. A public correction can come from the issuer corporation directly or from other sources, such as market analysts, short-sellers, news articles or credit rating agencies.⁸ There must be some connection and shared subject matter between the alleged misrepresentation and the public correction. The correction must be reasonably capable of revealing the existence of the untrue statement or omission of material fact.⁹ The public correction requirement provides a safeguard against frivolous and unmeritorious claims.¹⁰

The statutory causes of action under the Act do not require claimants to prove that they relied upon the relevant misrepresentation or omission. This makes the statutory causes of action much more amenable to class proceedings than traditional claims for common law misrepresentation. At common law, the claimant must prove their reliance on the misrepresentation, which is typically considered an individual issue incapable of being resolved on...