In Drywall Acoustic Lathing and Insulation (Pension Fund, Local 675) v. Barrick Gold Corporation, 2024 ONCA 105, the Ontario Court of Appeal affirmed the lower court’s decision denying in part the motion for leave to commence a secondary market misrepresentation class action against Barrick Gold and provided clarification on the scrutiny that motion judges should apply to the evidentiary record.

Background

A plaintiff seeking to bring a claim under section 138.3 of the Ontario Securities Act (“Act”) that an issuer made misrepresentations in its public disclosure must first obtain leave from the court. Section 138.8 of the Act states that, in order for leave to be granted, the court must be satisfied that:

• the action is brought in good faith; and
• there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

In this case, the plaintiff (“Drywall”) alleged that Barrick Gold (“Barrick”) made material misrepresentations about a gold mine in Chile. The alleged misrepresentations concerned the mine’s accounting, including its capital expenditure (“capex”) budget, as well as its production schedule. Following a five-day hearing, for which over 30,000 pages of materials were filed and multiple affiants were cross-examined, the motion judge:

• dismissed the motion for leave to bring claims relating to alleged accounting misrepresentations and most of the capex budget and production scheduling misrepresentations; but
• granted the motion for leave with respect to Drywall’s claim that Barrick misrepresented the capex budget and production scheduling forecasts in its Q4 and 2011 year-end report issued on February 16, 2012, and in its Annual Information Form (“AIF”) for the year ended December 31, 2011.

The motion judge also decided that Barrick’s subsequent disclosures on May 2, 2012, and July 26, 2012, were possible public corrections, but that Drywall had not established that it had a reasonable possibility of establishing at trial that later disclosures were also interpreted by investors as corrections of the alleged misrepresentations. Drywall appealed that aspect of the decision as well as the motion judge’s dismissal of leave with respect to alleged misrepresentations in Barrick’s Q3 report issued on October 27, 2011. Success on either of these points would have enlarged the potential plaintiff class.

The Court of Appeal Decision

In Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 106, the Supreme Court of Canada stated that the leave requirement is a robust screening mechanism intended to screen out, early in the process, “strike suits” and unmeritorious litigation against issuers. In Ontario and other provinces, the issue of how robust a screening mechanism the leave motion should be has been a matter of continuing debate.

On appeal, Drywall argued that the motion judge erroneously evaluated and failed to act on certain evidence before the court. With respect to the motion judge’s refusal to grant leave for certain alleged misrepresentations prior to Barrick’s Q4 and 2011 year-end report and AIF, Drywall argued that the motion judge improperly weighed and rejected credible evidence, conducted a mini-trial, and failed to consider or trivialized major evidentiary gaps.

The Court of Appeal (the “Court”) rejected these arguments and dismissed Drywall’s appeal. In doing so, the Court has provided clarity with respect to the level of rigour to be applied by motion judges at the leave stage.

Applicable evidentiary principles on leave motions

The Court set out three evidentiary principles applicable to the judge’s role on a motion for leave.

1. The motion judge has a robust and important gatekeeping role

The Court reiterated that motion judges have a robust and important gatekeeping role in conducting the leave hearing, which includes determining whether there is sufficient evidence to support a reasonable or realistic chance that the action will be resolved in the claimant’s favor. The Court held that this requires a “qualitative evaluation of the proposed action.” It is not enough to show that there is a triable issue or a “mere possibility of success”.

2. Interplay between requirement to show credible evidence and that there be a reasonable or realistic possibility of success

In Theratechnologies and CIBC v. Green, 2015 SCC 60, the Supreme Court of Canada stated that, on a leave motion, the plaintiff must “offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the [plaintiff’s] claim.” In this recent decision, the Court made clear that while the plaintiff must satisfy these conditions:

“[they] do not alone express the leave standard. These conditions must be satisfied plus the record before the leave judge must demonstrate that there is a realistic or reasonable chance that the action will succeed.”

The Court clarified the interplay between the requirement to show credible evidence and that there be a reasonable or realistic possibility of success:

“[A]t times, Drywall proceeded as if the entire standard for obtaining leave is the ‘some credible evidence’ standard. It attempted on a number of occasions to identify ‘credible evidence’ favoring its case and then submitted on this basis that the motion judge should have granted leave. However, … to be sufficient, evidence must be credible, but even credible evidence may not be sufficient to show that there is a realistic or reasonable chance that a claim will succeed.”

Accordingly, on leave, a court is not meant to conduct an isolated review of only the evidence that supports the plaintiff’s theory. Instead, it should review all evidence adduced by both parties to ascertain whether there is a reasonable or realistic chance that the action will succeed.

If the evidence relied upon by the defendant is so compelling that there is no reasonable possibility that the appellant would succeed at trial, leave may be denied. If critical evidence offered by a plaintiff is shown by other evidence to be “completely undermined by flawed factual assumptions”, a motion judge may choose not to act on that evidence.

3. Avoiding an improper mini-trial

As noted by the Court, an oft-repeated admonition has been that the leave motion should not be a “mini-trial”, but it has not always been clear what constitutes a mini-trial. The Court provided guidance as to when the evidentiary assessment bleeds into an improper “mini-trial.” To avoid an improper mini-trial, the motion judge should not:

• assess the case at the leave stage against the ultimate burden (balance of probabilities), but against the relatively low merits-based threshold applicable at this stage;
• attempt to resolve realistic and contentious issues arising from conflicting credible evidence; and
• fail to consider what evidence is not before them (i.e., the motion judge should not treat the evidence before the court as the “full” evidence for and against the claim).

However, the motion judge may assess the credibility and reliability of the evidence, including with reference to cross-examinations on affidavits, or the comparative strength of competing evidence: “a s. 138.8 motion judge cannot be found to have engaged in a mini-trial simply because their decision turned on considerations of the credibility and reliability or weight of the evidence.”

Affirming the motion judge’s assessment of the evidence

Drywall alleged that Barrick’s disclosure regarding its capex budget and production schedule were misrepresentations when they were made in October 2011 and again in February 2012. The motion judge concluded that there was no evidence in the record to suggest that, in October 2011, Barrick had any reason to be concerned about the accuracy of these statements and no other reason to believe its forecasts were inaccurate. Therefore, the motion judge concluded that there was no realistic or reasonable possibility that a trial court would find that, in October 2011, Barrick was making actionable misrepresentations rather than expressing reasonably mistaken conclusions.

In contrast, when these statements were made after October 27, 2011, and before February 16, 2012, Barrick had acquired information that exposed its capex budget and production schedules as unreasonable, rendering its statements with respect to the same capex budget and projected production schedule on February 16, 2012, and March 27, 2012, potential misrepresentations.

The Court noted that Drywall did not identify any direct evidence establishing that Barrick knew prior to its October 27, 2011, disclosure that its capex budget was inaccurate or that its own capex budget forecasts were fundamentally unreliable. Drywall argued that these conclusions could be inferred from Barrick’s own documents, which were in evidence before the motion judge. The motion judge did not take issue with the credibility of this evidence but held that there was no realistic or reasonable chance that the inferences advanced by the plaintiff would be drawn at trial. As such, it was inaccurate for Drywall to suggest that the motion judge had weighed and disregarded credible evidence because, in the Court’s view, she “found as she was entitled to do, that on the record as a whole, there was no realistic or reasonable possibility that this claim would succeed”.

The linkage test for a potential public correction

Drywall argued that statements made in November 2012 through June 2013 addressed the same subject matter (capex budget and production schedules) as the alleged misrepresentations, and therefore, satisfied the “linkage test” at the leave stage for a potential public correction. The Court rejected this argument:

“…a mere coincidence in subject matter is not enough on its own to establish a sufficient linkage or connection.”

To establish a sufficient linkage or connection, the alleged public correction must be “reasonably taken as correcting the alleged misrepresentation”. The Court dismissed the appeal from the motion judge’s conclusion that Barrick’s disclosures on July 26, 2012 would have been a complete correction of the alleged misrepresentations, such that subsequent disclosures were not reasonably capable of being understood as corrections.

Key Takeaways

Drywall provides a detailed articulation of the applicable evidentiary principles on a leave motion. Counsel may find guidance in the Court’s reasoning when considering the appropriate evidentiary record to advance for a leave motion and the scope of a motion judge’s assessment of competing fact and expert evidence. In particular, the Court’s reasoning as to when a leave motion may become an improper mini-trial and when an alleged public correction has a sufficient linkage or connection to an alleged misrepresentation will be helpful to counsel in understanding the parameters of the evidentiary analysis on leave.

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