Appeal court refuses to reconsider shareholder class action certification
The Divisional Court has recently denied the Imax Corporation and certain of its directors leave to appeal a lower court decision that gave a green light to a class action lawsuit by certain of IMAX’s former shareholders.
The plaintiffs in Silver v. IMAX allege that several of the company’s continuous disclosure filings contained misrepresentations because they prematurely recognized revenue associated with the installation of certain IMAX theatres. The plaintiffs further allege that these misrepresentations under the Act were only corrected by a subsequent restating of IMAX’s financial statements and they seek damages caused by the drop in the value of their shares that occurred when IMAX’s misstated financial results were corrected. In other words, the plaintiffs claim they bought their IMAX shares at an inflated price based upon an inaccurate picture of the company’s revenue at the time of their purchase.
One of the causes of action pled by the plaintiffs was a statutory cause of action under the Securities Act for misrepresentations on the secondary securities market (i.e., stock market). The Securities Act provides that before a plaintiff can advance such a cause of action, it must obtain leave of the court. In order to obtain leave, the plaintiffs must satisfy the court that the action is brought in good faith and there is a reasonable possibility that the action be resolved at trial in favour of the plaintiff.
In addition to the statutory cause of action, the plaintiffs asserted several common law causes of action, including the common law tort of negligent misrepresentation.
At the first instance, Justice van Rensburg granted leave to the plaintiffs to assert a statutory cause of action, and certified the statutory and common law claims against IMAX as a class action. Justice van Rensburg’s decision is discussed in more detail here: http://www.thelitigator.ca/index.php/2010/02/05/the-imax-case-superior-court-certifies-first-ever-ontario-shareholder-class-action-for-misrepresentations-on-the-secondary-market/ . Justice van Rensburg’s decision is noteworthy because it is the first judicial consideration of the leave test for pursuing a statutory cause of action for misrepresentations on the secondary securities market.
The defendants sought leave to appeal Justice van Rensburg’s decision to the Divisional Court. On February 14, 2011, Justice Corbett, sitting as a judge of the Divisional Court, denied IMAX’s motion for leave to appeal.[1]
On the leave motion, the defendants argued that Justice van Rensburg applied too low a threshold for granting leave on the statutory cause of action. The test that she prescribed, the defendants argued, was too lenient and did not achieve the “gatekeeper” function contemplated by the legislature.
Justice Corbett held that the IMAX case was not a close call that turned on the test chosen by the motions judge. On the facts of the case, leave would have been granted even on a stricter test. Taking both the merits of the plaintiffs’ case and the difficulties with the possible defences that could be raised by the defendants, Justice Corbett found that the plaintiffs had a good arguable case that is worthy of moving forward. Accordingly, Justice Corbett denied the defendants leave to appeal the decision to the Divisional Court.
In addition to denying leave with respect to the statutory cause of action, Justice Corbett also denied leave to appeal Justice van Rensburg’s decision to allow the common law misrepresentation claim to stand and to certify the class action. Justice Corbett held that the complaints raised by the defendants concerning the common law misrepresentation claim (namely whether a duty of care existed and whether the plaintiffs needed to prove detrimental reliance in order to succeed with their claim) were better resolved on a full trial record as opposed to on an interlocutory motion.
It is noteworthy that Justice Corbett did not expressly endorse the test chosen by Justice van Rensburg with respect to granting leave to pursue the statutory cause of action. It will be interesting to see whether subsequent decisions abide by Justice van Rensburg’s “lenient” standard for leave, or whether Justice van Rensburg’s standard for leave will be revisited by other judges in the future.
