A recent decision by the Supreme Court of Canada offers both clarity and further questions on the timing of secondary market misrepresentation claims brought under the Ontario Securities Act (the "Securities Act"). While we are not Canadian attorneys, our reactions to the case may be of interest to institutional investors who transact in Canadian securities subject to the Securities Act.
In 2012, the Canadian securities class action bar was stunned by the Ontario Court of Appeals decision in Sharma v. Timminco. There, the Court held that a cause of action for "secondary market misrepresentation" (discussed below) under the Securities Act was time-barred if leave to bring the action was not moved for and actually granted within the three-year statute of limitations period. This rattled proposed class plaintiffs and counsel, who had generally operated under the assumption that the mere bringing of a statutory cause of action within the three-year limitation period satisfied the statute. Three years later, the Supreme Court of Canada issued its decision in Canadian Imperial Bank of Commerce v. Green (“CIBC v. Green”), which, while clarifying the acceptable time period to move for and obtain leave to commence a statutory action, still leaves several questions unanswered.
Part XXIII.1 of the Securities Act creates a statutory cause of action for "secondary market misrepresentation." Briefly stated, it provides for a cause of action against "responsible issuers" and various related parties for misrepresentations or omissions affecting the price of securities on the secondary market. However, the Securities Act requires prospective plaintiffs to obtain leave of the court to commence an action under the statute, where they must prove to the court that 1) the action is brought in good faith, and 2) the action has a reasonable possibility of success at trial. The Securities Act also requires that such leave be obtained within three years from the time of the alleged misrepresentation.
The Securities Act left unanswered whether the three-year limitation period requires a prospective plaintiff to commence their claim within three years, or if it requires them to commence their claim and actually obtain leave within three years. Without guidance from the legislature or the courts, it was assumed that section 28 of the Ontario Class Proceedings Act (“CPA”) tolled the three-year limitation period by suspending the period if “on the commencement of [a] class proceeding.” In other words, counsel in Ontario believed that they simply needed to bring a class action within three years to survive the statute of limitations.
The Ontario Court of Appeals completely upended this line of thinking in Sharma, where it held that a claim for secondary market misrepresentation is barred by the Securities Act unless leave to commence the action was actually obtained within three years from the date of the alleged misrepresentation.
Only two years later, the same Court took the extraordinary step of overturning its own decision in Sharma through its ruling in CIBC v. Green. There, the Court decided that it had erred in interpreting s. 28 of the CPA. It noted that the purpose of the CPA and the Securities Act was to deter corporate wrongdoing by allowing for a private right of action punishing such wrongdoing; a purpose which would be neutered if prospective plaintiffs, through no fault of their own, could not obtain leave to commence an action in the busy Ontario court system within three years.
On appeal, the Supreme Court of Canada overruled the Appeals Court and concluded that leave to commence an action for secondary market misrepresentation must indeed by actually obtained within three years from the date of the misrepresentation. The majority of the Court concluded that s.28 of the CPA does not obviate the requirement that leave be obtained within three years, as merely commencing an action with the intent to seek leave does not properly “assert” a claim under the statute. However, the majority of the Court also held that the lower courts have the ability under rule 59.01 of the Ontario Rules of Civil Procedure to grant leave nunc pro tunc if leave was applied for, but not actually granted, within the statutory period. In other words, a prospective plaintiff absolutely must move for leave to commence an action before the three-year period passes, but if leave is not actually granted within that time period, the court has jurisdiction to allow such leave and backdate it to within the three year period.
The Court did not offer much guidance on when, exactly, a court ought to exercise its power to backdate leave of court. The majority of the Court noted that the power to do so is wholly discretionary, and that such an order should be granted sparingly. Thus, prospective plaintiffs are left to wonder how to ensure that their motion for leave will be granted if the limitations period has passed. However, the Court’s decision does make clear the necessity of seeking leave to commence these types of claims as quickly as possible. While the Court’s decision does not make the passage of the limitations period an absolute bar to litigation, the best practice appears still to do everything possible to obtain leave to commence an action before the clock on the three-year limitations period runs out.