The “Modest” Role of Public Corrections in Secondary Market Misrepresentation Claims

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[co-author: Michael Iankilevitch - Articling Student]

The Ontario Court of Appeal recently released its decision in Baldwin v Imperial Metals Corporation, 2021 ONCA 838 [Imperial Metals] and provided additional guidance on the role public correction plays in secondary market misrepresentation claims under the Ontario Securities Act.

Background

The claim in Imperial Metals involved a press release issued by Imperial Metals Corporation (Imperial), a reporting issuer. The press release disclosed that the storage facility at the company’s gold and copper mine was breached and released an undetermined amount of water and tailings. This news was followed by a sharp decline in Imperial’s share price.

As a result, a shareholder of Imperial brought a motion to the Ontario Superior Court for leave to commence a class claim under Part XXIII.1 of the Securities Act—Ontario’s statutory securities regime for secondary market misrepresentation claims. With leave of the court, this regime provides a civil cause of action to anyone who acquires or disposes of an issuer’s securities during the period between the time the issuer releases a document that contains a misrepresentation and the time those misrepresentations are “publicly corrected.”

In her motion for leave, the plaintiff shareholder claimed that Imperial was negligent in the design, construction and operation of the storage facility, and that the company’s public disclosures contained misrepresentations (including by omission) related to the facility. The plaintiff also alleged that Imperial’s subsequent press release about the storage facility breach publicly corrected those misrepresentations.

The motion judge dismissed the shareholder’s motion for leave, holding that the shareholder failed to establish a “discrete and identifiable” public correction. That correction, it was held, must be reasonably capable of revealing to the market the existence of an untrue statement of material fact or an omission to state a material fact. The motion judge held that Imperial’s press release was not a public correction because it merely described the breach and subsequent company action. In other words, it did not amount to a “correction” of anything that was previously stated.

The motion judge commented that, in the circumstances, the press release could have only served as a correction if the earlier misrepresentation had stated that “the [storage facility] is built to be fail-proof, and will never, ever fail.” As a result, the motion judge did not find it necessary to determine whether Imperial’s public statements about the safe design, construction, or operation of the storage facility contained misrepresentations.

The Ontario Court of Appeal’s Decision

The Court of Appeal held that the motion judge set the bar for what constitutes a public correction too high. In addition, without an examination of the evidence about the alleged misrepresentations or omissions, the Court of Appeal found it would be impossible for the motion judge to determine whether the alleged public correction was reasonably capable of being understood in the market as correcting what was misleading in the impugned statement. In short, the motion judge applied an incorrect framework for his analysis.

The Court of Appeal therefore allowed the appeal and remitted the motion for leave back to the lower court.

The Role of Public Corrections at the Leave Stage

As it did in its previous decision, Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v Barrick Gold Corporation, 2021 ONCA 104 [Barrick] (which the Court of Appeal relied on a great deal in making its findings), the Court of Appeal left open the question of whether public correction is an element of the statutory cause of action. The Court of Appeal did reiterate that public correction is nevertheless a “necessary part of the statutory scheme,” though clarified that it only plays a “modest” role in that scheme (at least at the leave stage).

At the leave stage, the Court of Appeal held that the overarching question concerning a public correction is “whether the alleged public correction was reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement.”

A proper analysis of a public correction in this regard requires going beyond just the text of the alleged correction—it requires examining (1) the surrounding context in which the alleged correction was made; and (2) how the alleged public correction would have been understood in the secondary market.

Public Corrections Need Not Mirror a Specific Misrepresentation

The Court of Appeal found that to meet this standard, “there need not be facial symmetry between the public correction and the alleged misrepresentation or omission.” Rather, there only needs to be some linkage or connection between the pleaded public correction and the alleged misrepresentation.

While the majority of secondary market misrepresentation cases in Canada may involve express public corrections, this does not preclude the plaintiff from asking the court to infer a correction based on something other than an express statement by the company, along with the market’s response.

Alleged Public Corrections Cannot be Analyzed in a Vacuum

Unlike common law misrepresentation claims, the Securities Act removes the need for a plaintiff to plead or establish causation, by deeming reliance. Consequently, the Court of Appeal confirmed that the misrepresentation element does “the heavy lifting” in the statutory cause of action.

Misrepresentations “are the wrong at issue” and form part of the surrounding context for a public correction. As a result, in most cases, trial or motion judges must consider (1) the alleged misrepresentation; (2) the alleged public correction; and (3) the context of both to determine whether to grant leave. Indeed, the Ontario Superior Court recently followed this framework to deny leave in Poirier v Silver Wheaton Corp, 2022 ONSC 80.

Under the framework, the Court of Appeal noted “it will remain open to the defendant to establish that the drop in the share price was caused by general market conditions, or by a specific development in the issuer’s business or the industry that was not a consequence of the inadequate disclosure.” This may inform the surrounding context and show that an alleged correction is in fact not a correction at all.

Policy Considerations

The Court of Appeal described the purposes of Part XXIII.1 of the Securities Act in its decision, finding “it was aimed at deterring corporate non-disclosure, protecting investors, and incentivizing accurate and timely disclosure by public issuers, while avoiding the American experience of predatory “strike suits”” (based on the recommendations of the Allen Committee in 1997).

The Court of Appeal remarked that its decision to place the focus on the market’s understanding of an alleged public correction accords with the purpose of incentivizing accurate and timely disclosure. According to the Court of Appeal, permitting issuers to escape liability by making vague or general disclosures could undermine confidence in the securities market.

Implications of the Decision

The Court of Appeal’s decision in Imperial Metals (and Barrick) creates a more expansive approach to defining a public correction in secondary market misrepresentation claims. While many decisions will remain clear cut and involve express public corrections, plaintiffs may ask the court to infer less than express corrections more often.

In these cases, the battleground over alleged public corrections as between plaintiffs and defendants will likely shift focus to disputes over the misrepresentation itself, the surrounding context of an alleged correction (including the cause of share price movement) and the market’s understanding of it.

Key Takeaways:

  1. While public correction is a necessary part of the statutory scheme in secondary market misrepresentation claims under the Securities Act, its role, at least at the leave stage, may be more modest than originally believed.
  2. Alleged public corrections cannot be analyzed in a vacuum. Rather, judges must consider the alleged misrepresentation, the alleged public correction (and how it would have been understood by the market), and the surrounding context of both.
  3. There need not be an express and direct link between an alleged public correction and an alleged misrepresentation. Rather, something less than a direct linkage or connection between the alleged public correction and the alleged misrepresentation is sufficient.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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