A recent Ontario court decision has reinforced the Supreme Court of Canada's message that the leave requirement in secondary market securities class actions is much more than a mere "speed bump" for would-be class action plaintiffs. Indeed, Justice Belobaba's July 24, 2015, decision on leave and certification in Coffin v. Atlantic Power Corporation makes it clear that putative securities class actions will be rigorously scrutinized and that the leave test will serve as a cul de sac for unmeritorious secondary market claims.
Atlantic Power involved allegations that the defendants had misrepresented Atlantic Power's ability to maintain its dividend, thereby causing certain shareholders and debenture-holders to sustain losses when the dividend was cut and the company's share price dropped. Claims were advanced under the Ontario Securities Act and at common law.
Leave Test - Statutory Claim
Section 138.8 of the Ontario Securities Act provides that a court must be satisfied that the action was brought in good faith and that "there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff" before leave will be granted to bring a statutory secondary market claim. There being no suggestion that the action was not brought in good faith, Justice Belobaba focused his analysis on whether there was a reasonable possibility that the action would be resolved in favour of the plaintiffs at trial.
Referencing the Supreme Court's decision in Theratechnologies v. 121851 Canada Inc., Justice Belobaba noted that the leave threshold must be more than just a "speed bump" and that it is there to ensure that "cases without merit are prevented from proceeding." The question he considered, therefore, was whether "after considering all of the evidence presented by the parties, does any part of the plaintiffs' case have a reasonable or realistic chance of success at trial? Or is the plaintiffs' case so weak or has it been so successfully rebutted by the defendants that it has no reasonable possibility of success?"
After a careful review of the evidence presented by the parties, including more than 14,000 electronic records produced by the defendants, Justice Belobaba concluded that "[t]here were no misrepresentations by assertion or omission, and no material changes that were not disclosed. There is no reasonable possibility the plaintiffs can show otherwise at trial". He reached those conclusions notwithstanding multiple emails, written long before the dividend cut was announced, in which Atlantic Power employees discussed the likelihood and imminence of a dividend cut. The plaintiffs took the position that these emails demonstrated that the company knew or should have known that the dividend would be cut long before the public was notified. Justice Belobaba disagreed. He found that employees were entitled to their own views but the evidence was uncontroverted that the board of directors did not make a decision to cut the dividend until the day that it announced its decision. He also concluded that there had not been a "material change", as neither the reduction in the dividend nor the events that led to the reduction of the dividend could properly be considered to be a change in the company's "business, operations or capital".
Common Law Claims
Justice Belobaba also declined to certify the plaintiffs' common law misrepresentation claims.
His analysis, buttressed by the Court of Appeal's statement in Bayens v. Kinross that "generally, common law negligent misrepresentation claims in securities cases are not suitable for certification", focused on the individualized nature of reliance-based claims. He concluded that the Court of Appeal had closed the door, correctly in his view, to any further use of the American-based efficient market/fraud on the market theory to establish inferred reliance in a common law negligent misrepresentation claim. Further, Justice Belobaba observed (again quoting Bayens) that "[t]o allow common law claims where corporate and shareholder protections set out in the OSA lave provision are not available would render the [statutory] remedy and the protective leave provision redundant".
He also found that the denial of leave for the statutory claim was a relevant factor in determining whether the preferable procedure requirement for certification was satisfied. Because the common law claims rested on the same evidentiary foundation as the statutory ones, it followed that these claims also had no reasonable prospect of success. On this basis, Justice Belobaba concluded that "[e]ncumbering the parties and the courts with a complex class action that is destined to fail promoted neither judicial economy nor access to justice. Therefore, a class action is not a preferable procedure."
The decision in Atlantic Power continues an important trend of positive decisions for issuers, directors and officers in respect of secondary market claims. Those decisions demonstrate the seriousness with which Canadian courts are taking their gate-keeping function in screening out unmeritorious claims. Atlantic Power also highlights the usefulness, in appropriate cases, of defending leave motions with substantial responding evidence, thereby permitting the court to give effect to the Supreme Court of Canada's direction in Theratechnologies that the leave test should serve as a "robust deterrent screening mechanism."