1. Canada Business Corporations Act
The 2001 amendments to the CBCA that came into force on November 24, 2002 changed the regime of joint and several liability among co-defendants to modified proportionate liability regime with respect to certain financial information of a CBCA corporation. Under the CBCA, subject to some qualifications, a defendant who is found responsible for a financial loss that arises out of an error, omission or misstatement in financial information that is required by the CBCA is liable to the plaintiff only for the portion of damages corresponding to the defendant’s degree of responsibility for the loss.
The proportionate liability scheme in the CBCA is limited in several ways. First, the 2001 amendments apply only to misconduct in relation to the CBCA, and accordingly not to securities law breaches. Secondly, joint and several liability continues to apply in cases of fraud. Third, in situations where one of the defendants (such as the issuer company) is insolvent, financially limited or unavailable, there is a provision for the court to apportion that defendant’s liability to the other co-defendants up to a cap equal to 50% of the amount originally awarded against the co-defendant.
Certain plaintiffs are specifically excluded from the proportionate liability regime, including Crown corporations, certain charitable organizations, unsecured trade creditors in respect of goods and services that the creditor provided to the corporation and individual plaintiffs whose investment is less than $20,000. These individuals or organizations may not or do not have the wherewithal to make well-reasoned risk assessments or investment decisions or may suffer unduly from financial loss. Such plaintiffs can continue to collect under the joint and several liability scheme. Finally, courts have the option to award joint and several liability where it is just and reasonable to do so.
What are the advantages and disadvantages of the CBCA model to liability?
Is the exception for fraud reasonable?
What is the appropriate role of judicial discretion in apportioning liability?
Is the policy rationale for excluding specifically enumerated plaintiffs from the liability regime sound?
2. Ontario Securities Act
On December 31, 2005, the Ontario Securities Commission amended its Securities Act to create new statutory causes of action in favour of the “secondary market” against directors, officers and “experts” for misrepresentation and failure to comply with disclosure obligations. The statutory civil liability provisions provide for damages to be limited in three ways. First, the damages must be calculated in accordance with the formulae set out in the Securities Act. Second, the court is required to fix the proportionate share of those damages payable by each defendant found liable, recovery against each defendant being limited to its respective share of the total damages assessed for all plaintiffs. Third, the amount payable by each particular defendant found liable may be further limited, provided that they did not have knowledge of the misrepresentation or fail to make timely disclosure of a material change, to various liability limits specific to each category of defendant.
A company’s liability may not exceed the greater of $1 million and 5% of its market capitalization. The liability of an individual (other than an expert) is limited to the greater of $25,000 and 50% of his or her total compensation from the company and its affiliates during the preceding 12 months (including the value of any options, pensions benefits and stock appreciation rights granted during that period). An expert’s liability is limited to the greater of $1 million and the fees earned by the expert from the company and its affiliates during the preceding 12 months.
The liability limits and the proportionate liability provisions do not apply to a defendant (other than the company) if the plaintiff proves that the defendant knowingly authorized, permitted or acquiesced in the making of the misrepresentation or the failure to make timely disclosure of a material change. In such cases, defendants are jointly and severally liable for the full amount of damages assessed in the action.
In addition to the new statutory scheme for secondary market liability, the common law cause of action of misrepresentation continues to be available to plaintiffs. Under the common law, joint and several liability still exists and there are no caps on damages. Similarly, the joint and several liability regime continues for prospectus misrepresentations under the Securities Act.
Participants at the Roundtable suggested that, although the reforms under the Ontario Securities Act took a number of years to enact, the practical effects were modest. A number of procedural restrictions are built into Part 23.1 of the Securities Act, which are seen to favour defendants; most significantly, the requirement to obtain leave or assert a cause of action.
In order to satisfy the requirement for leave, an evidence-based merits test must be met. In cases where a plaintiff must prove fraud or negligence, meeting this requirement may be difficult given the lack of access to information by the plaintiff. Moreover, given the number of potential defendants contemplated by the Securities Act, there is a concern that the number of affidavits that will be filed and the process of cross-examination that must be met before the leave application will be reviewed, creates a lengthy and costly process, which may be unnecessary. For example, under the capped-proportionate liability scheme, if a defendant is an expert and therefore liable up to a limit of $1 million, it may not be economically prudent to spend upwards of $2 million on leave applications and weeks of cross-examining each director when the most it will cost is $1 million. These procedural restrictions, in addition to what was regarded by one participant as ineffectively low liability limits, means that the practical effects of the changes to the Securities Act were modest at best.
a) Trends in Canadian Securities Class Actions
Since the enactment of the secondary market liability regime in Canadian securities regulation, there have been an increasing number of securities class actions. Most notable in 2009 are the decisions of the Ontario Superior Court of Justice certifying three securities class actions, and the decision in Silver v. IMAX Corp.(“IMAX”) granting leave for the plaintiffs to pursue claims under Part XXIII.1 of the new OSA. The IMAX decision is the first ruling on an application to proceed with claims under the new secondary market liability provisions of the provincial Securities Acts.
A 2009 report by NERA Economic Consulting suggests that, although the new statutory civil remedies for secondary market misrepresentations are expected to make it easier for class actions to proceed, the statutory limits on damages provide an incentive for plaintiffs to simultaneously plead common law negligent (and/or reckless and/or fraudulent) misrepresentation.
The report also notes that as of January 2010, there were more than $14.7 billion in outstanding plaintiffs’ claims in Canadian securities class actions. Settlements in 2009 were significantly below the $890 million in total settlements observed in 2008. In 2008, there were a number of settlements involving payments of more than $20 million: Portus Alternative Asset Management Inc. ($661 million), Biovail ($141 million), Hollinger ($46 million), and Atlas Cold Storage ($40 million). By contrast, the largest settlement in 2009 was the Aurelian settlement for $15.6 million.
Six cases were settled in 2009 for approximately $51 million in total payments by defendants. This is an average of approximately $8.5 million per settlement, and a median settlement of $9 million, which is roughly the median settlement amount for securities class actions in the U.S. The 2009 settlements averaged 13.7% of the total amount of damages claimed by plaintiffs (excluding punitive damages).
As at the end of 2009, there were 23 pending cases representing more than $14.7 billion in claims.&