Ontario Court Certifies Imax Corporation Class Proceeding

Securities Class Actions in Ontario are on the up. In a recent Ontario Superior Court decision in the case of Marvin Neil Silver et al. v. Imax Corporation et al., the court granted leave and class certification giving the green light for the action to proceed to trial as a class proceeding.

This case marks the first time Section 138.3 of the Securities Act has been grappled with by a court in Ontario.  In effect, this section creates sweeping  liability against security issuing companies and/or their officers and directors where these companies themselves or other entities purporting to act on behalf of these companies release public information which creates a market misrepresentation.  As a result, a security holder who tries to sell shares in the company during the misrepresentation period, or a buyer who acquires such shares during this period will be able to maintain an action against the company, its officers, and directors without the need to prove reliance on the representation itself. The misrepresentation period is based on the time period the misrepresentation was made until the time it is publically corrected.

In the case at issue, the plaintiffs alleged that Imax released materially false and misleading information in its February 17, 2006 press release which stated the company had successfully completed 14 theatre system installations in the previous quarter, being a record for a single quarter. On August 9, 2006 nearly 6 months after its first press release, it issued a second press release, which stated that of the 14 theatres it claimed to have previously “completed”, 10 had not opened, and the screens for 7 of these had not even been installed.

Given the serious liability imposed by section 138.3 without the need for misrepresented shareholders to prove they relied on the misrepresentation, the Securities Act lays out some procedural safeguards, which require that for an action to be commenced under section 138.3, it must have leave of the court. This leave requirement means that the court must be persuaded that the action is brought in good faith and that a reasonable possibility of success is possible if it were to proceed. In the court’s decision, it held that, “There is no reason to read in a ‘high’ or ‘substantial’ onus requirement for good faith in this type of proceeding” as this would undermine the deterrent factor of section 138.3. This decision clearly seems to take an interpretive approach that will favour plaintiffs into the future.

The purpose of having section 138.3 was to make it easier for shareholders to sue those who misrepresent or omit to include material information in public documents.  After all, information is truly the lifeblood of trading on the securities market. However, it was not clear how high of a burden on plaintiffs the courts would create in allowing such actions to proceed. Clearly, the direction the courts have taken will please plaintiff counsel.

Leave and certification are two thresholds plaintiffs must overcome in class proceedings of this nature and it seems as if the new changes to the Ontario Securities Regime will serve as launching pad of opportunity for more securities class actions to come.

 
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