CANADA — In an era where secondary market misrepresentation class actions frequently cross the Canada-US border, concerns with the multiplicity of proceedings and the risk of inconsistent decisions are persistent and palpable. In a recent decision, the Ontario Court of Appeal took a step toward alleviating some of these concerns by holding that Ontario was not the most convenient forum to address the claims of proposed class members who purchased the defendant’s shares on foreign exchanges.
The plaintiff, an Ontario resident, was seeking to certify a class action against the defendant, alleging market misrepresentation under s.138.3(1) of the Securities Act, R.S.O. 1990, c. S.5. The plaintiff purchased the defendant’s American Depository Shares (“ADS”) from the New York Stock Exchange (“NYSE”). The ADS had been listed on the Toronto Stock Exchange (“TSX”), but were delisted in 2008 due to low trading volumes. The defendant’s commons shares were listed on the NYSE, the London Stock Exchange and the Frankfurt Stock Exchange, but had never been listed on the TSX. The proposed class consisted of Canadian residents who had acquired the defendant’s equity securities between May 9, 2007 and May 28, 2010, but excluded purchasers who chose not to opt out of a parallel proceeding underway in the United States District Court for the Southern District of Texas. Both the Ontario and Texas proceedings were based on the same alleged misrepresentations.
The motion judge held that Ontario had jurisdiction over the plaintiff’s claim and rejected the defendant’s argument that Ontario was not the most convenient forum for the litigation.
The Court of Appeal agreed that Ontario courts had jurisdiction over the action, based, in part, on evidence that demonstrated that the defendant clearly knew that its representations would find their way to Ontario and to its Ontario shareholders. However, the Court of Appeal held that Ontario should not exercise its jurisdiction on the basis of the forum non conveniens doctrine.
Canadian Courts must show a degree of respect and deference for the judicial systems in other states and refrain from leaning too instinctively in favour of their own jurisdiction. The Court noted the well established regime in the US governing class actions for secondary market misrepresentation and the fact that there is already a pending class action based on very similar allegations, covering the same period and embracing the claims of all of the defendant’s shareholders, including the Ontario plaintiff, who purchased their shares on a US exchange. The overwhelming majority of the defendant’s Canadian shareholders had purchased their equity shares through foreign exchanges (83,945 on the TSX, 9,000,000,000 on the NYSE and 8,700,000,000 on the LSE). The Court noted that US securities law provides for exclusive jurisdiction over secondary market misrepresentation actions involving US exchanges, and precludes suits relating to transactions on foreign exchanges. Similarly, the regime in the UK asserts jurisdiction over claims relating to exchanges in that jurisdiction.
Having considered the US and UK approaches to market misrepresentation actions, and despite the general deference paid to a motion judge’s forum non conveniens analysis, the Court of Appeal held that asserting Ontario jurisdiction over the plaintiff’s claim would be inconsistent with US and UK law, and contrary to the principle of comity. Further, the Court noted that allowing the plaintiff’s claim to proceed in Ontario would result in a multiplicity of proceedings in relation to the same class of claims, namely: Ontario residents purchasing shares on a US exchange.
The negligible size of the number of shares purchased on Canadian exchanges as compared to those purchased on foreign exchanges undoubtedly influenced the Court’s analysis of the principals of comity and the multiplicity of proceedings, avoiding what the Court described as an “opportunistic and a classic example of the “tail wagging the dog.”” While the Court of Appeal stayed the claim, it remains to be seen whether this decision will be applied more broadly, including where related proceedings are not pending in a foreign jurisdiction or where a substantial portion of the securities have been purchased on Canadian exchanges. Further, leave to appeal to the Supreme Court of Canada has been sought by the plaintiff. For now though, the Court of Appeal has moved toward strengthening the connections between, and the seamlessness of, the Canadian and US securities class action regimes.