The IMAX Decisions: Expanding the Scope of Securities Class Actions

The first decision on the leave requirement for a statutory misrepresentation claim under Ontario's statutory secondary market liability regime1 was released in December 2009, together with the companion decision on the certification of that proceeding as a class action. In the decisions in Silver v. IMAX Corporation,2 the court has established a framework that will make it relatively easy for shareholders to pursue class actions against public companies for misrepresentations in their disclosure, through the Securities Act regime or through the certification of common law misrepresentation claims.

Background to the IMAX Decisions

The IMAX case involved alleged misrepresentations made by IMAX in press releases about its 2005 fourth quarter and year-end financial results, and in its 2005 year-end financial statements. The alleged misrepresentations relate to IMAX's reported revenues for 2005, compliance with accounting standards in recording and reporting those revenues, and the number of theatre systems installed by the company. The alleged misrepresentations relate specifically to when the company recognized the revenue from theatre installations. The company was eventually required to restate its 2005 results, and the audit opinion that had been provided by the company's auditors was withdrawn.

The plaintiffs in IMAX sued the company and a number of its officers and directors in a proposed class action, seeking leave to proceed with the claim under the Securities Act regime, and asserting common law misrepresentation claims in respect of IMAX's financial disclosure. The motions for leave to pursue the claim under the Securities Act regime and for certification of the action as a class action were argued together in December 2008, and the court's decisions were released one year later.

The court granted leave to the plaintiffs and in its leave decision established a relatively low threshold for leave to pursue a claim under the Securities Act regime. The low threshold reflects a primarily compensatory approach to the Securities Act regime rather than the primarily deterrence approach intended to encourage better continuous disclosure. The Court also certified common law misrepresentation claims relating to the company's continuous disclosure, making it easier for plaintiffs to pursue securities class actions based on common law claims. If the certification decision in IMAX is upheld on appeal, or followed by another court, it may have the effect of rendering the Securities Act regime superfluous, and expanding the scope of securities class actions.

The Leave Decision

In order for leave to be granted to proceed with claims under the Securities Act regime, a proposed action must be brought in good faith, and must also satisfy a merits test in that there must be a reasonable possibility of success for the plaintiff. The leave requirement is set out in s. 138.8(1) of the Securities Act:

No proceeding may be commenced under section 138.3 without leave of the court granted upon motion to each defendant. The court shall grant leave only where it is satisfied that,

the action is being brought in good faith; and there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. The Securities Act regime was implemented following studies, consultation and recommendations that Ontario securities law create statutory civil liability for continuous disclosure misrepresentations that were similar to the civil liability that already existed for misrepresentations in a prospectus or other offering document.3 The leave requirement was included in the Securities Act regime as a balancing measure as part of the expansion of civil liability. The regime includes measures that assist plaintiffs, and measures that provide balance for the benefit of defendants. The regime includes, for example, a provision that deems reliance on a misrepresentation which, as discussed in the next section of this article, was intended to facilitate class actions – to allow class action plaintiffs to overcome obstacles that prevented common law misrepresentation claims relating to continuous disclosure from being certified as class actions. In addition, defendants can be held liable for a misrepresentation on a negligence standard, as opposed to the more stringent fraud standard required in the parallel U.S. statutory regime. To provide protection to defendants against unmeritorious claims, the Securities Act regime included the leave requirement, and measures such as a cap on the damages payable by defendants where a misrepresentation is the result of negligence.

The rationale for implementing a secondary market civil liability regime was to improve the quality of continuous disclosure, in furtherance of the twin goals of the Securities Act: promoting investor protection, and fostering fair and efficient capital markets and confidence in capital markets.4 Discussing the rationale for their 1998 proposal for a secondary market...