Canada as litigation haven for U.S. shareholders? Not so fast…

September 5, 2013

The high point, at least so far, of securities class action filings in Canada was in 2011, when, according to NERA Economic Consulting, shareholder lawyers filed 15 new class actions. In 2012, the number of new filings declined to nine. And unless there’s a surge in class action complaints in the next few months, 2013 will show a steep decline even from last year’s total, NERA’s Bradley Heys told me Thursday.

That’s a very different trend from what we saw from 2005 through 2011, and it’s a bit of a surprise. Canadian securities class actions are, in certain critical ways, easier on investors than litigation in the United States. Shareholders are entitled to discovery earlier in Canadian cases than those in the United States, for instance. And petitioners (as plaintiffs are known in Canada) needn’t show that a defendant intended to deceive shareholders or that investors relied on the supposed misstatements. Non-Canadian investors, moreover, are welcome to bring global shareholder class actions in at least some Canadian provinces. In the peak year of 2011, when I reported on new class actions stemming from fraud at Sino-Forest, the Chinese lumber company traded on the Toronto stock exchange, I quoted a Canadian shareholders’ lawyer who called his country’s court system “a dream jurisdiction for securities class action lawyers.” (Sino-Forest investors went on to obtain a record $117 million settlement last December with Sino-Forest auditor Ernst & Young.)

So why the fall-off in filings? Heys told me NERA isn’t exactly sure, though one explanation could be that petitioners’ firms in Canada are simply too busy with the class actions they’ve already filed to bring new ones. In its report on 2012 class actions, the Canadian defense firm Osler, Hoskin & Harcourt discussed setbacks for class action petitioners at the pleading stage in cases in Ontario and British Columbia, including an Ontario appellate ruling that established a defense-friendly interpretation of the time bar for class actions.

But whatever the reason for the decline in filings, a ruling Wednesday by Judge David Collier in Superior Court in Quebec is another speed bump for Canadian securities class actions, at least in Quebecois litigation against companies that aren’t based or listed in Canada. Collier dismissed a shareholder class action against Facebook and the underwriters on its 2012 initial public offering. The judge found that investors couldn’t show a substantial connection between Quebec and the petitioners’ allegations that Facebook and its underwriters made false or incomplete representations about the IPO. And even shareholders had managed to show such a connection, Collier said, he would have declined to exercise his “tenuous jurisdiction” in favor of the consolidated Facebook IPO litigation under way before U.S. District Judge Robert Sweet in Manhattan. “The New York district court appears to be the natural forum to hear the actions against the respondents, and Quebec shareholders appear to have no advantage in proceeding by way of a duplicative and costly action in this province,” he wrote. “There is no reason to believe that their interests would be less well protected in the New York litigation than they would be here.”

The Quebec case, according to Collier, asserted only the weakest of links to the province. Facebook and the underwriters are all based in the United States, the IPO offering documents were filed with U.S. regulators, and the stock is traded on the NASDAQ, not on a Canadian exchange. The only supposed tie between the alleged fraud and Quebec, Collier said, is losses suffered by Quebecois investors. But Collier held that under the province’s appellate precedent, petitioners must show that events beyond the mere recording of losses must have taken place in Quebec to establish his jurisdiction. In this case, he said, no material events or activities had actually occurred in Quebec.

I don’t want to overstate the significance of Collier’s decision. For one thing, Quebec is the only province in Canada to operate under civil law rather than common law, so its precedents are limited. For another, according to Heys of NERA, the Facebook IPO class action is one of very few Canadian cases brought against a company without at least a cross-listing on a Canadian exchange. In a contrary 2012 decision, an Ontario appeals court in a securities class action against Canadian Solar – whose stock, like Facebook’s, is not listed in Canada – held that investors could proceed with their class action, but that decision reasoned that because Canadian Solar has a headquarters in Ontario, it is a “responsible issuer” under the province’s securities laws. Presumably that ruling wouldn’t apply to U.S.-listed companies based in the United States (or, for that matter, companies traded on other non-Canadian exchanges and without significant Canadian operations).

There’s little evidence, in other words, that U.S. investors barred from suing foreign-listed companies by the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank have been trying their luck in Canada – and even fewer indications that any such class action would succeed.

Petitioners’ counsel Anthony Merchant of the Merchant Law Group said Thursday that his firm would press on with three shareholder class actions it filed against Facebook in Ontario, British Columbia and Saskatchewan. “The decision in a civil law jurisdiction does not affect what we think will happen in those common law jurisdictions,” he said. Merchant also questioned whether there’s been a slackening in Canadian class actions, though he conceded that judges have shown hesitation. “They’re feeling their way carefully,” Merchant told me. “They’re not as enthusiastic about embracing securities class actions as U.S. courts were.”

Facebook Canadian defense lawyer Silvana Conte of Osler declined to comment.

(Reporting by Alison Frankel)

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