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Canadian Court Holds That Evidentiary Requirement For Leave To File Securities Class Action Is "Not A Low Bar"

In January of 2016, this blog commented on the Supreme Court of Canada’s decision in the seminal case of Canadian Imperial Bank of Commerce v. Green.  There, the Court held that a prospective plaintiff must move for leave to commence a class action for secondary market misrepresentation before the three-year statute of limitations passes; but if leave is not actually granted within that time period, the Court has jurisdiction to allow leave and backdate it to within the three year period.  Recently, the Ontario Superior Court of Justice in London had its first opportunity to consider the test for leave in the aftermath of Green in Bradley v. Eastern Platinum Ltd. (“Bradley”).  The court’s decision there shed further light on the evidence a plaintiff must proffer to “surpass the leave threshold.”

The prospective class plaintiffs in Bradley alleged that Eastern Platinum Ltd. ("Eastern") committed a secondary market misrepresentation through the release of its production results for Q1 of 2011.  Eastern is platinum mining company, and the press release outlined the operating results from the Crocodile River Mine (“CRM”) for the period ending on March 31, 2011.  The press release indicated that “[t]he traditional slow start in January combined with the introduction of revised support methods resulted in a significant decrease in production for the quarter,” but went on to state that Eastern was “confident that the impact of this is short term and that production will return to anticipated levels.”  The day after the information was released, Eastern’s stock price fell from $1.30 to $1.10 on the Toronto Stock Exchange.

The plaintiffs filed notice of application for leave to commence a class action on June 28, 2011, alleging that Eastern failed to disclose a complete or partial shutdown of operations at the CRM in Q1 of 2011, which resulted in a reduction in production.  The application was amended on June 18, 2012, to further allege that cement grout packs were introduced at the CRM in Q1 of 2011, which take significantly longer to install than C-packs and thus constituted an undisclosed material change due to its impact on the decline of production. Eastern denied this and presented compelling evidence that C-packs, as opposed to cement grout packs, were installed in Q1 of 2011, causing no slowdown in productivity.

Section 138.8 of the Securities Act provides that no securities class action may be commenced without leave of court.  Such leave is granted only where the court is satisfied that (a) the action is being brought in good faith, and (b) there is a reasonable possibility that the action will be resolved at trial in favor of the plaintiff.  The evidence required to show that reasonable possibility was at issue here.

Eastern opposed the application, stating that the action was not brought in good faith and, more importantly, that there was no reasonably possibility that the action would be resolved in favor of the prospective class.  The plaintiffs, meanwhile, argued that they had submitted sufficient evidence to clear what they claimed is the “low reasonable possibility of success at trial standard” necessary for the grant of leave.

Citing extensively from Green, the court considered what standard ought to be applied to the sufficiency of the evidence presented at the application for leave level.  In his decision, Justice Randy concluded that the motions judge must ensure that the leave requirement is more than a “speed bump” in the litigation, and that the plaintiff must show that there is a “reasonable or realistic chance that the action will succeed.”  In effect, this means that a plaintiff must “offer both a plausible analysis of the applicable legislative provisions and credible evidence in support of the claim.”  Upon hearing that evidence, the motion judge must make a “robust, meaningful examination and critical evaluation of the evidence (or the absence of evidence).”  Most importantly, the court held that the standard “is not a low bar.”  Because the plaintiffs’ application was not supported by “the overwhelming weight of the evidence that points to the opposite conclusion,” the application was dismissed.

The Bradley court’s reasoned evaluation of the “reasonable or realistic chance” standard is a good one.  In requiring the prospective class plaintiffs to present more than just speculative evidence, the court took steps to prevent the time and costs associated with frivolous litigation.  The application for leave process was put into place to prevent class action lawsuits brought in bad faith.  The thinking behind the leave requirement is thus best served where the court disposes of applications with little chance of success at an early stage.  That was the case here, where the court noted that there was “very compelling and persuasive evidence” that cement grout packs were not introduced in Q1 of 2011, and where plaintiffs did not present any firm evidence showing that a complete or partial shutdown of CRM even occurred at all.  Absent such evidence, plaintiffs claim was reasonably dismissed before any more time or money could be spent on a claim that was almost certain to fail.

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