CANADA – In an earlier post we discussed the implications of the Ontario Superior Court decision of Coffin v. Atlantic Power Corp. (“Coffin“) on secondary market securities class actions. We observed that the decision reiterated a higher threshold for secondary market misrepresentation class actions under the Ontario Securities Act (“OSA”), stating that the test for leave under the OSA was intended to be a “robust deterrent screening mechanism” to help “weed out hopeless claims”.

Coffin was decided, in part, in reliance on the Ontario Court of Appeal’s decision in Green v. Canadian Imperial Bank of Commerce, which was on appeal to the Supreme Court of Canada along with two other decisions of the Ontario Court of Appeal (Silver v. IMAX Corporation and Trustees of the Millwright Regional Council of Ontario Pension Trust Fund v. Celestica). On December 4, 2015, the Supreme Court of Canada released its decision in this trilogy of cases (the “CIBC Trilogy”).

Canada’s highest Court has approved the more stringent test for leave to proceed with the certification of statutory secondary market misrepresentation class actions and has rejected the “efficient market” theory to establish reliance in the common law misrepresentation claims, which tend to accompany statutory claims under the OSA. In a unanimous decision, the Supreme Court held that the test for leave should function as a gate-keeping mechanism, barring claims with a limited chance of success, and protecting issuers from coercive and costly litigation that is not likely to succeed.

The statutory basis for a secondary market securities class action exists under section 138.8 of the OSA and requires leave to proceed. In order to obtain such leave, a plaintiff must show that (i) the claim is being brought in good faith; and (ii) there is a reasonable possibility that the plaintiff will succeed at trial. In the CIBC Trilogy, the Supreme Court focused on the latter branch, reiterating that a claimant must “offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.”

In the CIBC Trilogy, the Supreme Court also made two important determinations with regards to the common law tort of negligent misrepresentation. First, the Supreme Court considered the defendants’ argument that a common law misrepresentation claim cannot exist simultaneously with a statutory claim under the OSA. The defendants’ argument was decisively rejected. Second, the Supreme Court turned its attention to the need to demonstrate that the plaintiffs relied on the alleged misrepresentation. The Court rejected the “efficient market” theory of reliance, which is the argument that the price of every publicly traded security incorporates all related disclosure and so reliance should be automatically inferred. Each class member will need to prove actual reliance, a daunting and likely cost-prohibitive exercise in a securities class action of even modest scale.

This decision represents a victory for issuers by adding a greater degree of case scrutiny at the front-end which should serve to better filter those cases that are destined to fail.