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Developments in Securities Class Actions Linda Fuerst and Peter A. Stokes Norton Rose Fulbright September 10, 2015

Speakers

Linda Fuerst (Toronto)

Peter A. Stokes (Austin)

September 10, 2015 2

Average Annual New Securities Class Actions (2010 – 2014)

Data Source: NERA Economic Consulting 3

% of Securities Class Actions Asserting Statutory Secondary Market Claims (2010-2014)

Data Source: NERA Economic Consulting 4

Securities Class Actions

Data Source: NERA Economic Consulting

Leave Test Pre-Supreme Court of Canada

BRITISH COLUMBIA: •Round v. MacDonald, Dettwiller and Associates Ltd., 2011 BCSC 1416, aff’d 2012 BCCA 456

•Test intended to do more than screen out clearly frivolous actions. An action may have some merit, and not be frivolous, without rising to the level of demonstrating that the plaintiff has a reasonable possibility of success

QUEBEC: •Theratechnologies Inc. v. 121851 Canada Inc. 2013 QCCA 1256

•More stringent than color of right but less than a preponderance of the evidence

•Not a mini-trial or an in-depth analysis of the evidence; sufficient to show the existence of coherent and legally defensible arguments

ONTARIO: •Green v. CIBC, 2014 ONCA 90 •“a relatively low threshold” / “preliminary low-level merits based leave test”

•equivalent to “plain and obvious” test under s. 5(1)(a) certification test

6 September 10, 2015

Leave Test: Supreme Court of Canada Theratechnologies v. 121851 Canada Inc. Courts have an important “gatekeeping” role more than a “speed bump” but a “robust” screening mechanism “a plausible analysis of the applicable legislative regime and some credible evidence in support of the claim” but leave test should not be treated as a mini-trial and a full analysis of the evidence is unnecessary “…[T]he evidentiary requirements should not be so onerous as to essentially replicate the demands of a trial. … What is required is sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant’s favour”

Green v. CIBC Will the Supreme Court clarify the application of the test in its reasons?


SUCCESSFULLY OPPOSING LEAVE


• Goldsmith v. National Bank

• Coffin v. Atlantic Power Corp

• Western Coal

• Kinross Gold

• Canadian Solar

• Celestica

No Evidence

Fatally Flawed

Evidence

Non Plausible Analysis

Insufficient Evidence

LIMITS ON A PLAINTIFF’S ACCESS TO EVIDENCE


Defendant Not Required to File Evidence

Plaintiff Cannot

Summons Defendant

Motion to Inspect

Documents Cross

Examinations Access to

OSC Productions

Certification of Common Law Claims

Green v. CIBC

Common issues re: common law which advance the litigation claim can be certified alongside statutory claim

The trial judge may order individual trials to determine the issues of reliance and damages

Celestica (Leave Granted) Statutory claim preferable procedure

Kinross (Leave Denied) Denial of leave not automatic bar to certification of common law claim But reliance renders class action not a preferable procedure


Certified Not Certified

Jurisdiction

Canadian courts have not taken a bright line approach as to when classes will include foreign purchasers and/or purchases on a foreign exchange.

In the 2010 U.S. Supreme Court decision in Morrison v. National Bank Ltd. 130 S.Ct 2869 the Court decided that Section 10(b) and Rule 10b-5 apply “only in connection with a purchase or sale of a security listed on an American exchange, and the purchase or sale of any of the security in the United States.”


Jurisdiction / Class Composition Jurisdictional reach of statutory secondary market claims found to include Canadian residents who purchased shares of a “responsible issuer” on NYSE or European exchanges (see Abdula v. Canadian Solar Inc., 2012 ONCA 211 and Kaynes v. BP, 2013 ONSC 580)

Principles of comity, avoiding multiplicity of proceedings and relative volumes of sales on exchanges factors found to favour declining jurisdiction on forum non conveniens grounds for claims of foreign purchasers on foreign exchanges in Kaynes v. BP 2014 ONCA 580

McKenna v Gammon Gold, 2010 ONSC 1591 excluded non-residents who purchased shares outside Canada. See also Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP 2014 ONSC 4118 (leave denied) claims of 56 of 57 non-resident class members lack a real and substantial connection with Ontario

Although the Court in IMAX initially certified class to include non-residents, the Court subsequently amended the class definition to exclude all purchasers of shares on NASDAQ (85% of the class) in favour of U.S. action and settlement: IMAX, 2013 ONSC 1667, leave to appeal denied 2013 ONSC 6751


Other Recent Developments


Summary Judgment?

• Hryniack v. Maudin, 2014 SCC 7 calls for a “shift in culture” and for summary judgment rules to be interpreted broadly, favouring proportionality and fair access to the affordable, timely and just adjudication of claims.

• McDonald v. Brookfield Asset Management Inc. 2015 ABQB 281 - action dismissed on summary judgment

Forward Looking Statements

• Trustee of the Millwright Regional Counsel of Ontario Pension Trust Fund v. Celestica Inc., 2014 ONSC 1057

• Statutory secondary market liability provisions interpreted to allow for misrepresentation claims based on estimates to be actionable, subject to statutory defence

Core Documents

• Abdula v. Canadian Solar Inc., 2014 ONSC 5167 (leave denied 2015 ONSC 4322)

• “core document” has the same meaning in claims against reporting issuers and responsible issuers and is not restricted to documents required to be issued under Canada securities law.

Circular Misrepresentation

• Rooney v. ArcelorMittal S.A., 2015 ONSC 3457 (under appeal)

• secondary market sellers cannot bring circular misrepresentation claims under s. 131 of the OSA

• Their only statutory recourse is under Part XXIII.1

• Section 131 claimants must elect whether to bring a right of action against offeror or its directors/signatories to bid circular.

Triggers for US Rule 10b-5 class actions


Pleading Hurdles for 10b-5 Class Actions Tellabs, Inc. v. Makor Issues & Rights, Ltd. (scienter) Allegations must support “cogent and compelling” inference of fraud Inference of fraud must be “at least as strong” as any competing inference Allegations must be assessed “holistically” Well-pled allegations taken as true but conclusory allegations discounted Result: About 50% of dismissal motions are granted No discovery until complaint survives motion to dismiss

Dura Pharmaceuticals Inc. v. Broudo (loss causation) Complaint must identify corrective disclosure where leakage of “truth” about prior misstatement caused stock price to fall Subsequent lower-court decisions have held that “partial” disclosures can suffice and that loss causation need not be pled with particularity


Omissions and Opinions Matrixx Initiatives, Inc. v. Siracusano (materiality) Omissions actionable if company fails to disclose material facts that would render an affirmative statement misleading Materiality judged from standpoint of reasonable investor, not management No bright-line “statistical insignificance” exception for contrary facts

Omnicare Inc. v. Laborers District Council (opinions) No liability for “pure” opinions that are “sincerely held” by speaker But… Embedded facts in statements of opinion can be actionable if untrue Opinions can trigger Matrixx-style omissions liability If opinion conveys impression that it was based on reasonable inquiry, speaker can be liable if it did not perform such inquiry Mere fact that speaker knew of facts “cutting the other way” will not create liability unless it would render opinion misleading to reasonable investor


Application to Financial Guidance US case study: In re Aeropostale (S.D.N.Y.) Retailer ordered new clothing line that fared poorly with

customers and created inventory backlog Provided guidance without disclosing that it had pre-ordered

three additional quarters of poor-selling designs Created impression backlog being cleared faster than it was Dismissal denied because company “failed to disclose historical

and existing material facts” about inventory problem Even “puffery” actionable if omitted facts render it misleading;

executives “knew that their half-true expressions of optimism were both overly rosy and highly unlikely”

Company paid $15 million to settle


Item 303: Disclosure of Known Trends Courts have split over whether Item 303 omission can support Rule 10b-5 liability Item 303 of Reg. S-K requires issuers to disclose “any known trends and uncertainties” expected to have a material unfavorable impact on revenues or income from continuing operations

In re NVIDIA Corp. (9th Cir.) Because plain language of Section 10(b) does not countenance pure omission claims,

Stratte-McClure v. Morgan Stanley (2d Cir.) Because Item 303 is “obligatory,” nondisclosure conveys affirmative representation that the issuer knows of no adverse trends Affirmed dismissal for lack of scienter, but opens door to Item 303 claims


Internal Control Weaknesses as Basis for Liability Accounting restatements and internal control deficiencies are traditionally insufficient to support Rule 10b-5 liability

• In re Magnum Hunter (2d Cir.): No strong inference of scienter despite auditor dismissal, accounting restatement and 14 material weaknesses

But arguments about false SOX and auditor certifications are gaining traction in US courts • In re OSG Securities (S.D.N.Y.): Inaccurate auditor “opinion” on tax liability held to be actionable misstatement under Section 11

• In re Symbol Technologies (E.D.N.Y.): Restated SOX certifications found to support 10b-5 fraud claim


Impact of Halliburton Ruling


Halliburton v. Erica P. John Fund, Inc., 134 S. Ct. 2398 • Supreme Court preserved “fraud-on-the-market”

presumption (the “glue” that allows classwide adjudication), but held defendants could contest price impact at class certification stage

• District court issued mixed certification ruling on remand from Supreme Court

US Merger Litigation: The “Delaware Tollbooth”

95% of US public company transactions trigger shareholder litigation

Most cases are dismissed or settled for disclosures plus attorneys’ fees

Many companies have adopted Delaware exclusive-venue bylaws

Delaware courts have criticized “strike suit” settlements but have issued large awards to plaintiffs challenging majority-shareholder and interested-party transactions

In re Dole Food Co.: $148 million award against CEO and GC for alleged misrepresentations to special committee

In re Southern Peru Copper: $2 billion award over ineffective special committee


Questions: How to Contact Us

Linda Fuerst Toronto, Ontario

+1 416. 216 2951

[email protected]

Peter A. Stokes Austin, Texas

+1 512. 536 5287

[email protected]


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