Canadian Securities Class Action Lawsuit Filings Hit Record in 2011

Canadian Securities Class Action Lawsuit Filings Hit Record in 2011

Securities class action lawsuit filings in Canada hit record levels in 2011 according to a new report from NERA Economic Consulting. The January 31, 2012 report, entitled "Trends in Canadian Securities Class Actions: 2011 Update" (here) concludes that the persistent growth in Canadian securities class action lawsuit filings "is not a transient phenomenon."

According to the report, in 2011, there were 15 new securities class action lawsuit filing in 2011, more than in any previous year. The 2011 filings bring the total number of pending and unresolved Canadian securities class action lawsuit filings to 45.

The growth in securities lawsuit filings in Canada is largely a result of the growth in new filings under Bill 198, the Ontario legislation that amended the Ontario securities laws with regard to issuer's continuous disclosure obligations. The report notes that there have been a total 35 Bill 198 cases since the Act became effective at the end of 2005, including nine in 2011. The Bill 198 cases account for more than two-thirds of all of the suits filed between 2008 and 2011. The other claims filed in 2011 include, among other things, one prospectus claim; one related to a takeover bid; two related to investment fund management; and two related to Ponzi schemes.

Just as was the case with 2011 securities lawsuit filing in the U.S, a significant driver in the 2011 Canadian filings was the rise in filings against Chinese companies whose shares trade on North American exchanges. Among the highest profile case in Canada was the lawsuit involving Sino-Forest, whose shares trade on the Toronto stock exchange. (As noted here, U.S. investors recently have attempted to bring a class action in U.S. federal court against Sino Forest alleging violations of NY state law.) At least three of the other new 2011 filings involve Chinese companies.

Interestingly, the report notes that one Chinese company involved in a 2010 Canadian securities lawsuit filing did not have shares listed on a Canadian exchange, but did have shares listed on Nasdaq. So far, the case, involving Canadian Solar, has been permitted to proceed.

Canadian companies with listings on U.S. exchanges also face a securities class action litigation risk. The report notes that in 2011, five Canadian domiciled companies were named as defendants in six securities class action lawsuits in the U.S. At least one of these companies was also named in a securities class action lawsuit in Ontario. Since 1987, Canadian-domiciled companies have been named in 74 securities lawsuits in the U.S. Of these, 21 had parallel actions in the U.S., although most of these parallel actions were filed after the enactment of Bill 198.

Historically, class action lawsuit filings in Canada have been concentrated in the financial sector, as well as the energy and minerals sectors. In 2011, five of the Canadian filings involved companies in the minerals sector and four involved companies in the finance sector.

Only two cases settled in 2011, involving total payments of $58.6 million. Of the ten settlements so far of Bill 198 cases, the average settlement amount is $10 million and the median settlement is $6.2 million. The report notes that given the small number of settlements to date, "it is unclear whether these are indicative of the size of settlements that should be expected in the future."

The report concludes that the upward filing trend is likely to continue in 2012 and beyond. The report's authors cite a number of factors in support of their conclusion that "we are likely to continue to see an increasing number of new cases filed," including the growth in the Canadian securities class action bar; the track record that has been established with the certification of global classes (in the IMAX and Arctic Glacier cases) and with plaintiffs being given leave to proceed in Bill 198 cases; the success of counsel in achieving large settlements (and obtaining large fees); and the barriers in the U.S. under the Morrison decision to investors who purchased shares outside the U.S. proceeding in U.S. courts.

Discussion

Although the number of securities class action lawsuit filings in Canadian courts remains well below the number of filings in the U.S., both the growth in the filings and the indicated trends suggest that Canadian securities class action litigation could be increasingly important.

The report's comment about the growth in the size of the Canadian plaintiffs' securities bar may be the most telling point. Clearly, the plaintiffs' attorneys sense that there is an opportunity. As non-U.S. investors search for alternative ways to pursue claims in the wake of the U.S. Supreme Court's decision in Morrison, Canada may be emerging as one of the most attractive alternatives. The Canadian courts' willingness to certify global classes in the IMAX and Arctic Glacier cases suggests the opportunity for investors to pursue their claims in Canadian courts.

Among the many very interesting comments in the NERA study of Canadian securities litigation was the comment about the action that is pending in Canada against Canadian Solar, Inc. The case has been allowed to proceed so far, even though the company's shares did not trade on a Canadian securities exchange but did trade on Nasdaq. Although there undoubtedly is more to the story, it is interesting to note that the investors chose to file their action in Canada. The company has also been sued in a separate action in the U.S. (refer here), but the circumstances do suggest the possibility of an emerging jurisdictional competition.

The sense of a jurisdictional competition is reinforced with the filing of the state law class action filed by Sino-Forest in the U.S. The same circumstances were also the subject of a separate action in Canadian court.

The emergence and growth of significant securities class action litigation outside the U.S. is one of the most interesting developments in recent years, and the U.S. Supreme Court's holding in the  Morrison case has added increased importance to the issue. It could be increasingly important to watch developments in Canada and elsewhere.

Special thanks to NERA for providing me with a copy of their report.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.