In an important new ruling with national implications, the Supreme Court of Canada has denied leave to appeal from the Ontario Court of Appeal’s watershed decision in Sharma v. Timminco Limited, thereby establishing Sharma as the governing law for the statutory limitation period for secondary market securities class actions in Ontario, and possibly throughout Canada. Read together with Justice Strathy’s recent decision in Green v. Canadian Imperial Bank of Commerce, these decisions are likely to impose a new regime upon the conduct of secondary market class actions.
Pursuant to s. 138.8 of the Securities Act, and the analogous provisions in other provincial securities legislation, “no action may be commenced” for improprieties in an issuer’s secondary market disclosure under Part XXIII.1 of the Securities Act without leave of the court. However, s. 138.14 of the Securities Act also provides that “no action shall be commenced” under Part XXIII.1 more than three years after the date when the misrepresentation or lack of timely disclosure occurred.
In Sharma, which we discussed in a previous post, the Court of Appeal decided that the tolling provision in s. 28 of the Class Proceedings Act, 1992 would not suspend the running of the s. 138.14 limitation period on behalf of class members merely because a statement of claim is filed in a putative class action expressing an intention to seek leave. Rather, the limitation period will only be suspended once leave has actually been obtained and an action commenced. Accordingly, Sharma has the result of preventing plaintiffs from commencing any action under Part XXIII.1 if they do not first obtain leave within the three-year limitation period.
Green reinforced this conclusion by deciding that plaintiffs cannot escape the operation of the applicable limitation period by resorting to the doctrine of “special circumstances”. Justice Strathy reasoned that Part XXIII.1 of the Securities Act provides a complete code governing the statutory remedy of civil liability for secondary market disclosure. Accordingly, he found that it would be improper to read in the prospect of extending the limitation period provided by the statute. In turn, Green made clear that plaintiffs will be held to the three-year limitation period even if they were unaware of it prior to the decision in Sharma.
The Supreme Court’s refusal to hear an appeal in Sharma signals the advent of an important change in the case management of secondary market securities actions. Justice Strathy alluded to this limitation-driven dynamic in Green:
As I have observed, until the release of Timminco, the Securities Act limitation period had not been raised as an issue in this proceeding, either between counsel or at a case conference. Had it been raised, the parties might have considered a tolling agreement. Had the parties not reached an agreement, I would have considered whether the hearing could be scheduled at an early date or whether some other order could be made to prevent potential injustice. The lack of prejudice to the defendants and the irreparable prejudice to Class Members as a result of the loss of their cause of action would have militated strongly in favour of some action. (Green, at para. 539)
These comments in Green make it likely that plaintiffs will henceforth alert the case management judge of the date by which they must obtain leave to commence a class action. The judge may then accommodate the limitation period, insofar as possible, by advancing the hearing of the leave motion. Where this occurs, Justice Strathy suggests the defendant will be faced with two choices: (1) accede to the expedited timetable for a leave hearing; or (2) sign a tolling agreement to extend the period in which leave may be obtained. Although left unmentioned by Justice Strathy, there may also be a third option available to defendants. If the plaintiff delays in seeking leave, and the leave hearing is expected to be complex, the defendant might contest the fairness of an expedited timetable. This approach is most likely to be successful where the defendant could show that the plaintiffs failed to seek leave at the earliest opportunity, or otherwise failed to take the necessary steps to bring their leave motion to a hearing. In the event that the case management judge nonetheless forces the defendant to proceed to the leave hearing on an expedited schedule, the defendant could potentially seek to appeal that decision on the basis of natural justice.
It will be interesting to see whether Sharma will cause plaintiffs to resile from the practice of seeking certification at the same time as leave. This strategy has the effect of increasing the stakes for the defendant in the hope of forcing a settlement. However, the joinder of a certification motion slows the leave motion, and it is conceivable that courts will split leave and certification if asked to decide leave on an expedited timetable.
It will also be interesting to see whether plaintiffs attempt to avoid the implications of Sharma by resorting to common law claims, which are not subject to the strict limitation period in s. 138.14 of the Securities Act. In Green, Justice Strathy declined to certify common law negligent misrepresentation claims by secondary market investors given the difficulties which class members would face in establishing the tortious element of “reliance” on a common basis at trial. Leitch J. recognized the same concern in Dobbie v. Arctic Glacier Income Fund, where she granted the defendants leave to appeal the troublesome question of whether reporting issuers owe secondary market investors any duty of care at all. These recent decisions suggest a reluctance to certify common law misrepresentation claims, and it is likely that the viability of such claims will now become a major battleground in future secondary market securities class actions.
In any event, the foregoing makes clear that Sharma should not be taken as an indication that the secondary market securities regime is broken or somehow in need of legislative reform. Rather, as Strathy J. recognized in Green, the new dynamic in case management will simply require better communication on the part of the plaintiffs to ensure that the limitation period is brought to the attention of the case management judge in a timely fashion.
The only wrinkle is raised by the lingering question of whether the running of the limitation period in s. 138.14 can be tolled by consent of the parties. If, as is suggested in Sharma there is simply no cause of action unless leave is granted in a timely fashion, it may be irrelevant that the defendant is estopped from relying on the limitation period. This is an issue that will doubtless come before the courts as the conduct of secondary market securities actions continues to evolve.
SCC Court File No.: 34774
Date Leave Denied: August 2, 2012