The question of when domestic securities laws provide remedies for investors who purchased their shares in foreign companies on foreign exchanges vexed U.S. courts for years until the U.S. Supreme Court sorted out the issues in Morrison v. National Australia Bank [an enhanced version of this opinion is available to lexis.com subscribers]. But while the U.S. courts now have the bright line standards of the Morrison case, the courts in Canada are still struggling to develop consistent principles to define when their securities laws should apply to foreign securities purchases. The results so far involve decisions in different Canadian provinces that seem to reach opposite conclusion s on the jurisdictional issues.
As discussed in an October 30, 2013 Financial Post article entitled “Canadian Courts Grapple With Jurisdiction in Securities Class Suits” (here), “a schism is forming between Ontario and Quebec courts over the extent to which they will entertain lawsuits for breaches of securities laws when shares are purchased on foreign exchanges.”
The article compares the September 4, 2013 decision of the Quebec Superior Court in the securities class action lawsuit filed by a Facebook IPO investor (about which refer here), in which the court concluded that it did not have jurisdiction, with the October 9, 2013 decision by the Ontario Superior Court, in which the Court rejected BP’s attempts to stay Ontario proceedings with regard to the Canadian-based BP shareholders who had purchased their shares on non-Canadian exchanges (about which refer here).
As the Financial Post article states, in the Facebook case, the Quebec court “seems to have closed the door on such suits,” while in the BP case, the Ontario court “is taking an open-door approach.”
As the article notes, the courts are struggling to determine whether or not there is a basis for the exercise of jurisdiction in these cases. The jurisdictional question requires the court to determine whether or not there is a “real and substantial connection” between the dispute and the court.
As discussed here, in the Facebook case, the Quebec court held that the claimant’s brokerage account records did not show where her Facebook share transactions had occurred or where she paid for the shares. The court said that “nothing in the record indicates that the sales transactions occurred in Quebec,” adding that under Quebec statutory principles, “the Facebook shares would have been notionally delivered either at the NASDAQ exchange in New York or at Facebook’s head office in California.” On this basis, the court concluded that the claimant’s alleged loss would have occurred in the United States. The court said that “there is no basis to conclude that a real and substantial connection exists between the alleged facts of her motion and this Court,” and so the Court lacked jurisdiction.
The Quebec court when on to say that even were there jurisdiction, the court would have declined the jurisdiction (“a tenuous jurisdiction at best”) in favor of the Southern District of New York, under the principles of forum non conveniens. The court noted that the consolidated New York actions raised the same allegations; that the putative class in the consolidated action included the claimant and the class of Quebec purchasers she purported to represent; that New York law would govern the claims; that the underwriting defendants are domiciled in New York; and that any judgment would have to be executed in the United States.
As discussed here, in the BP case, the Ontario court, by contrast, concluded that “there is nothing in the wording of the Act that restricts the cause of action to investors who purchased their shares on an Ontario exchange.” The court reasoned that if it were to adopt BP’s reasoning and to decline jurisdiction over the claims of the BP investors who purchased their shares outside of Canada, the court would be “imposing a limitation in the Act where none exists.”
The Ontario court went on to note that the relevant statutory provisions allowed shareholders to bring secondary market misrepresentation claims without having to prove reliance. The court reasoned that “if a responsible issuer makes a misrepresentation and the Act deems the Ontario investor to have relied on the misrepresentation when he purchased shares of that issuer, the statutory tort must be considered to have been committed in Ontario.” The court went on the say that it “cannot agree” that the location of the statutory tort “is to be determined, in each case, by the location of the exchange on which the action share purchase occurred.”
The Ontario court also rejected BP’s attempt to have the case stayed as to the non-TSX purchasers on the grounds of forum non conveniens. BP had argued that the TSX trading volume was negligible and should not serve as a basis to bring the claims of Canadian BP shareholders who purchased their shares in the U.S. and the U.K. into the Ontario courts. BP argued that U.S. and U.K. were more appropriate forums in which to litigate those claims.
In rejecting these arguments, the Ontario court said that in her view, “BP is seeking to restrict and fragment the proposed class at this early stage of the proceedings,” and the outcome BP sought would “result in this potential claim …being litigated in three different jurisdictions. That is not convenient, cost-effective or efficient.” She noted that no class has yet been certified in the U.S. action, and that even if certified, a NYSE purchaser who opted-out would not be able to participate in the Ontario action if stayed. Meanwhile, U.K. purchasers would be required to bring individual actions and seek to have their actions consolidated. “I cannot,” she said, “see how that would be a clearly more appropriate forum for their claims.”
The Ontario court expressly rejected BP’s argument that Canadian courts should adopt the kind of bright-line, exchange-based test that the U.S. Supreme Court adopted in Morrison v. National Australia Bank.
The Ontario court’s ruling in the BP case follows a March 30, 2012 Ontario Court of Appeal ruling in the Canadian Solar case (about which refer here). Canadian Solar’s shares traded only on NASDAQ. Its shares did not trade on any Canadian exchange and its principle place of business is in China. However the company is registered as a Canadian federal corporation with registered office and executive offices in Ontario. The Court of Appeals held “there is a sufficient connection between Ontario and Canadian Solar to support the application of Ontario’s regulatory regime.” The Court also noted that the claimant was an Ontario resident who placed his order in Ontario for shares in a corporate based in Ontario, and therefore could “reasonably expect that his claim for misrepresentation on documents released or presented in Ontario would be determined by an Ontario court.”
The Financial Post article quotes plaintiffs attorneys as saying that a narrow, exchange-based test like that adopted in Morrison does not make sense in a financial marketplace characterized by global electronic trading. Defense lawyers, by contrast, argued that corporations “need certainty” and that the application of too broad of a test that would subject non-Canadian companies to the jurisdiction of Canada’s courts is a “very vexing problem.” The defense counsel asked whether companies will be “potential liable to every securities regulator and subject to every securities regime around the world?” adding that “that is a troubling prospect for public issuers.”
These jurisdiction questions become even more complex when there are competing cases on opposite sides of the borders. The lawyers involved must struggle to avoid overlapping or conflicting case resolutions.
The article concludes with a statement from a defense attorney that “the reality is that we are still grappling in our lower courts with very preliminary issues associated with these types of actions. We’re a bit surprised by how long and arduous the process is.”
One thing that the Financial Post article does not address is whether or not there are differences between Quebec laws or procedural requirements and Ontario laws or procedural requirements that might explain the differences in outcome.
Towers Watson Releases 2013 D&O Insurance Survey: As D&O insurance practitioners know well, the annual Towers Watson D&O Insurance survey is one of the important information tools to which we all refer and on which we all rely. Towers Watson makes the survey results available for free to the entire industry. But as is the case with any survey, the survey results are only as meaningful as the level of survey participation. The more respondents that participate in the survey, the more helpful the survey results will be. For that reason all of us have a stake in trying to make sure that as many companies as possible participate in the survey.
Towers Watson has released the survey form for the 2013 D&O Insurance Survey. The survey form can be found here. Because we all have a stake in having as many companies as possible participate in the survey, it behooves all of us to try to get as many companies as we can to respond. The more companies that respond, the more useful the survey report will be. Please consider providing the survey link to your clients and customers.
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.
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