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Silver v. IMAX Corporation et al. [2009] O.J. Nos. 5573 and 5585 (S.C.J.)

Simon Bieber and Jennifer Imrie

On December 14, 2009, Justice van Rensburg of the Ontario Superior Court of Justice handed down two related rulings in the Silver v. IMAX Corporation litigation. The first (the “Leave Decision”) granted the plaintiffs leave to proceed with their class action against IMAX Corporation and certain individual respondents (collectively, the “IMAX Defendants”) under section 138.8 of Ontario’s Securities Act (“OSA”), while the second (the “Certification Decision”) certified the action, including both statutory and common law claims, as a class proceeding.

The Leave Decision is the first to consider the leave requirements for a statutory misrepresentation claim under the secondary market liability provisions in Part XXIII.1 of the OSA, while the Certification Decision appears to accept the “efficient market” (or “fraud on the market”) theory for common law misrepresentation claims. Justice van Rensburg permitted certification despite the defendant’s argument that the claim as pleaded is deficient for not alleging individual reliance by each member of the proposed class and accepted the plaintiffs’ argument that certification should extend to a global class of plaintiffs consisting of all persons who acquired securities of IMAX Corporation (“IMAX”) during the defined “Class Period” of February 17, 2006 to August 9, 2006 and who continued to hold some or all of those securities at the close of trading on August 9, 2006.

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In response to last summer's British Columbia Court of Appeal (BCCA) decision in Shapray v. British Columbia (Securities Commission), the British Columbia Securities Commission (BCSC) has announced the rescission of BC Instrument 15-501 Disclosure of Investigation Information and its related policy, while also deleting section 2.6(d) of BC Policy 15-601 Hearings. In its place, the BCSC has announced a new BC Instrument 15-501 Disclosure of Investigation Information, which provides consent to disclose "any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined under section 143, 144 or 145 of the Securities Act."

In Shapray, the petitioner commercial litigation lawyer argued that section 148(1) of the British Columbia Securities Act, which restricted disclosure of information and evidence obtained pursuant to an investigation by the BCSC, was unconstitutional. Mr. Shapray claimed that the provision made it impossible for him to adequately defend allegations of misconduct under the Securities Act or to properly prepare witnesses. Section 148(1) of the Act, which is similar to provisions found in the securities laws of other provinces, states:

Without the consent of the commission, a person must not disclose, except to the person's counsel, any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined...

Ultimately, the BCCA struck down s. 148 of the Act as unconstitutional, but delayed the order of invalidity for a year so as to allow the Legislature to consider alternatives. The instruments and policies recently revoked, meanwhile, provided the BCSC's consent for the disclosure of investigation information under prescribed circumstances. The new instrument provides for a broader consent, effective December 3, 2009, until the earlier of July 8, 2010 and the date the legislature repeals section 148.

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On October 16th, the Ontario Securities Commission (OSC) granted relief on an application by CMC Markets U.K. and its Canadian affiliate allowing CMC Canada to distribute contracts for difference and foreign exchange contracts (collectively, CFDs) to Ontario investors without having to file a prospectus. CFDs are derivative products that "allow clients to obtain exposure to markets and instruments that may not be available directly, or may not be available in a cost-effective manner."

In granting the relief, the OSC stated that the requested relief would "substantially harmonize the Commission's position on the offering of CFDs to investors in Ontario with how those products are offered to investors in Quebec" under the Derivatives Act (Quebec). Under the QDA, such products may be offered through the distribution of a standardized risk disclosure document rather than a prospectus. The OSC noted that it had previously recognized that similar disclosure may be better suited for such products than a prospectus.

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Jonah Mann and David Weinberger | PDF Version |  Version française

On September 1, 2009, the Ontario Securities Commission (OSC) released the full Reasons for its decision to deny an application to cease trade a second shareholder rights plan (or tactical plan) implemented by Neo Materials Technologies Inc. (Neo) in the face of a hostile partial bid by Pala Investments Holdings Limited (Pala). Prior to the expiry of the Pala bid, the tactical plan was approved by 81.24% of shares voted (excluding shares held by Pala) at an annual and special meeting of Neo’s shareholders.

In its Reasons, the OSC reiterated that it has broad discretion to determine whether to exercise its public interest jurisdiction in a given matter and the scope of this jurisdiction must be interpreted in the context of the purposes of the Securities Act as a whole. While it will not hesitate to exercise its public interest jurisdiction in appropriate circumstances, it is also mindful that a degree of deference is owed to the decision of the board of directors. In determining whether to exercise its public interest jurisdiction, the OSC will examine all of the circumstances surrounding the establishment of a shareholder rights plan, including whether informed shareholder approval was given, and the context of that approval. While the Reasons put considerable emphasis on shareholder approval as a relevant consideration, the OSC was also careful to note that shareholder approval does not necessarily mean that a shareholder rights plan is protected from the OSC’s public interest jurisdiction.

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On August 28, the Ontario Court of Appeal released its decision in Taub v. Investment Dealers Association of Canada, a case respecting the jurisdiction of the Investment Dealers Association, (now merged with Regulation Services to form the Investment Industry Regulatory Organization of Canada (IIROC)), to discipline former members. The IDA's rules and bylaws, by which members agreed to be governed, specified that the IDA had jurisdiction over former members for the purposes of discipline for five years after one's membership ended. In this case, the IDA brought disciplinary procedures against Taub a year after he ceased being a member of the association. Taub challenged the IDA's jurisdiction over former members, but was unsuccessful before the association's hearing panel in this regard. On review, the Ontario Securities Commission agreed that the IDA had jurisdiction over Taub. The Divisional Court, however, overturned the findings of the IDA panel and the OSC. In doing so, the Divisional Court found that section 21.1(3) of Ontario's Securities Act made no provision for the regulation of former members which, therefore, limited the reach of the IDA's jurisdiction to current members.

In the immediate appeal, the Ontario Court of Appeal found that the OSC's reasons were clear and understandable and that they justified the result reached by the Commission. The Court of Appeal disagreed that the language of s. 21.1(3) limited the jurisdiction of the IDA and ultimately set aside the decision of the Divisional Court.

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On August 26, the Ontario Securities Commission released a decision refusing to intervene in a case where the TSX allowed a private placement of units of a real estate investment trust without unitholder approval. The application to review the TSX decision was brought by NorthWest Value Partners, which objected to, among other things, the placement proceeding without being put to a vote of unitholders. The placement represented approximately 49% of outstanding units of InterRent Real Estate Investment Trust.

The OSC noted that it was entitled to intervene in cases where (i) the TSX proceeded on an incorrect principle; (ii) the TSX erred in law; (iii) the TSX overlooked material evidence; and (iv) new and compelling evidence was presented to the OSC that was not presented to the TSX. It stated, however, that it would do so "only in the rare case" where an applicant met the "heavy burden of proving such intervention is justified" in accordance with the above principles or some other acceptable ground. In the immediate case, the OSC found that the TSX considered all the relevant information, assessed relevant considerations, followed the appropriate process and carefully articulated its reasons. As such, the application to review the decision was dismissed.

The OSC ruling was released on an expedited basis and full reasons are expected in the near future.

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On August 25, the Alberta Securities Commission (ASC) dismissed the application filed by TransAlta Corporation requesting that the ASC cease trade a shareholder rights plan implemented by Canadian Hydro Developers, Inc. TransAlta's application to the ASC stemmed from its unsolicited bid for the outstanding common shares of Canadian Hydro. 

Pursuant to its bid circular dated July 22, 2009, TransAlta offered to acquire all of the issued and outstanding common shares of Canadian Hydro (together with associated rights) at a price of $4.55 per common share. The bid is set to expire today, August 27, 2009, and is conditional upon the board of Canadian Hydro redeeming all outstanding rights, waiving application of the rights plan or the plan being cease traded or its application otherwise prohibited or prevented by a relevant governmental entity. The shareholder rights plan was approved by shareholders of Canadian Hydro on April 24, 2008 and allows for certain types of takeover bids that qualify as “permitted bids” under the terms of the plan. A "permitted bid" requires, among other things, that such a bid be made on certain prescribed terms and conditions.

As a result of the decision of the ASC, the plan remains in force. This decision represents the third of its kind to refuse to cease trade a shareholder rights plan in the face of an unsolicited bid and follows on similar decisions made by the ASC in Re Pulse Data Inc. (2007) and the Ontario Securities Commission in the matter of NEO Material Technologies and Pala Investment Holdings Limited (decision rendered on May 11, 2009 with full reasons to follow). While the ASC did not release reasons at the time of its decision, full reasons are expected in the near future.

Update: The reasons have now been released.

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On July 8, the Court of Appeal for British Columbia found the prohibition contained in section 148 of the British Columbia Securities Act that restricts disclosure by any person, except to his or her counsel, of "any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined" pursuant to an investigation by the British Columbia Securities Commission (BCSC) to be unconstitutional. The petitioner in the case, a Vancouver commercial litigation lawyer, argued that the provisions made it difficult to adequately defend allegations of misconduct under the Securities Act or to prepare a witness to give evidence. While the provisions allow for disclosure with the consent of the BCSC, the Court of Appeal found that the prohibition, which is similar to the one found under section 16 of Ontario's Securities Act, infringes on the right to freedom of expression enshrined in the Canadian Charter of Rights and Freedoms. The order of invalidity, however, was delayed for a year. Whether new provisions are drafted that pass constitutional muster, or whether other provinces are affected by the persuasive force of the decision, remains to be seen.

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The U.S. Court of Appeals for the Eighth Circuit recently released its opinion in Gallus v. Ameriprise, a case considering the scope of a mutual fund adviser’s fiduciary duties under section 36 of the Investment Company Act of 1940 (ICA). The Circuit Court found that while the Gartenberg v. Merrill Lynch case provided a “useful framework for resolving claims of excessive fees”, the size of the fee was not the only factor in considering an alleged violation of the ICA and that the adviser’s conduct during negotiation should also be considered. “[W]e read the plain language of § 36(b) to impose on advisers a duty to be honest and transparent throughout the negotiation process.”

In reversing the Minnesota District Court's decision, the Eighth Circuit found that the lower court should have compared the fees charged to institutional and mutual fund clients. “Indeed, the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts is particularly strong in this case because the investment advice may have been essentially the same for both accounts.” Further, the District Court should have considered the defendants’ conduct “independent of the result of the negotiation” and specifically whether the defendants misled the plaintiffs with respect to the discrepancy in fees.

As such, the Eighth Circuit reversed the decision of the District Court granting the defendants summary judgment and remanded the case for further consideration.

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On March 25, 2009, the Supreme Court of Delaware released its decision in Lyondell Chemical Company v. Ryan, a case where the defendant directors of Lyondell were accused of breaching their fiduciary duties in conducting the sale of the company in July 2007. The plaintiffs claimed, among other things, that the directors did virtually nothing to develop a strategy for maximizing shareholder value once they became aware of the buyer’s filing of a Schedule 13D with the SEC in May 2007, which indicated that the company was “in play”. Since the company charter provided directors protection for breaches of their duty of care, this case turned on whether the directors breached their duty of loyalty by failing to act in good faith. The opinion of the Delaware Supreme Court was issued with respect to the defendants’ appeal of the decision of the Court of Chancery (memorandum opinion of July 29, 2008 and letter opinion of August 29, 2008) denying them summary judgment.

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The Delaware Court of Chancery recently released its Opinion in the case of In re Citigroup Inc. Shareholder Derivative Litigation, a derivative action initiated by shareholders of Citigroup against current and former directors and officers of the company. The plaintiffs claimed that the defendants breached their fiduciary duties by not adequately overseeing and managing the risks associated with the company’s involvement in the subprime lending markets. The plaintiffs maintained that the defendants ignored numerous “red flags” that indicated problems in the real estate and credit markets. The plaintiffs also alleged that the directors of the company were liable for corporate waste for, among other things, approving a letter agreement providing a multi-million dollar payment and benefits package for the company’s CEO upon retirement in November 2007. The defendants, meanwhile, brought a motion to dismiss the action, since the plaintiffs did not make a pre-suit demand to the company's directors to pursue litigation. The plaintiffs countered by pleading that demand would have been futile.

In its decision dismissing the oversight claims (for failing to adequately plead demand futility), the Court expounded on the business judgment rule and its application in the present case, where the plaintiffs framed their allegations as Caremark (failure of oversight) claims, when, in fact, the plaintiffs were “attempting to hold the director defendants personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company” (emphasis added). With respect to the corporate waste claim, the Court found that without further information regarding the additional compensation received by Citigroup’s CEO as a result of the letter agreement and the real value of various restrictive promises provided by him, there was reasonable doubt as to whether the compensation provided by the letter agreement was unconscionable. As such, the motion to dismiss this particular claim was denied.

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Silver v. IMAX Corporation, [2008] O.J. No. 2751 (S.C.J.) and Ainslie v. CV Technologies Inc., [2008] O.J. No. 4891 (S.C.J.)

Alan D'Silva and Simon Bieber |  PDF Version | Version française

The interpretation of several key provisions under Part XXIII.1 of the Ontario Securities Act (OSA) was recently considered by the Ontario Superior Court of Justice in the context of proposed secondary market securities class actions in Silver v. IMAX Corporation (IMAX) and Ainslie v. CV Technologies Inc. (CV Technologies).

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The Supreme Court of Canada has just released its reasons in the case of BCE Inc. v. A Group of 1976 Debentureholders. The Supreme Court's judgment, without reasons, was previously released on June 20, 2008.

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Deer Creek Energy Ltd. v. Paulson & Co., Inc., June 13, 2008 | 2008 ABQB 326 (Court of Queen's Bench).

Andrew Cunningham

Alberta judge holds market valuation soundest basis for deciding fair value of dissenters’ shares; dissenters not permitted to take advantage of spike in market price after first stage of two-step transaction. Court also rejects dissenters’ claim for far higher valuation based on future possibilities, even though some of these had been touted by company in its marketing efforts.

In this long‑anticipated ruling, Madam Justice Romaine of Alberta’s Court of Queen’s Bench found that “market value” was the primary consideration in valuing the shares of dissenting shareholders of Deer Creek Energy Ltd., an ABCA corporation involved in an oil sands pro­ject near Fort McMurray, Alberta.

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CSX Corporation v. TCI and 3G Fund, June 11, 2008 | 08 CV 02764, U.S. District Court (S.D. N.Y.).

Alex Colangelo

U.S. Court deems hedge fund beneficial owners of shares due to arrangements designed to avoid disclosure obligations. The Court, however, finds itself constrained from ordering remedy sought by target company.

In a somewhat empty victory for the plaintiff railroad company, the U.S. District Court for the Southern District of New York found that the defendant hedge funds employed surreptitious means to avoid disclosure requirements while accumulating shares of CSX. Despite its findings, the District Court found itself restrained by precedent from preventing TCI and 3G Fund from exercising the votes associated with the shares they acquired during the time they were offside disclosure obligations. The plaintiff, therefore, had to settle for an injunction inhibiting the defendants from any future violations of disclosure obligations.

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The HA2003 Liquidating Trust v. Credit Suisse Securities LLC, February 20, 2008 | No. 06-3842 (U.S. Court of Appeals for the 7th Circuit)

Alex Colangelo

Contract between parties set out terms of engagement and the defendant did not have a duty to go beyond its mandate.

This case takes us back to the heady days of the dot-com boom. Back in the 1990s, HA-LO In­dus­tries was in the business of making logo-bearing promotional products that companies could use to market themselves. In 1999, the company decided it needed to join the e-commerce bandwagon and subsequently agreed to purchase Starbelly.com for $240 million in cash and shares. While Starbelly.com was a young start-up with a negligible track record, its e-commerce system was attractive to HA-LO.

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Adrian C. Lang and Andrew Cunningham

The Supreme Court of Canada has upheld the Ontario Court of Appeal's ruling in this much-anticipated decision, released on October 12, 2007.  While the Supreme Court largely followed the Court of Appeal's reasoning, the Court narrowed the application of the business judgment rule, held that there is an implied statement of reasonable belief with respect to forecasts, and narrowly interpreted "material changes" in the securities context.  Surprisingly to some, the Court also awarded costs against the unsuccessful class plaintiff. 

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