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In a decision one litigator says has created “real fear out there,” an Ontario court ruled corporate officers, directors and advisers facing a shareholder class action are required to hand over potentially damning non-public information to plaintiffs' lawyers before the lawsuit has even been certified.
The decision, which is the first test of Bill 198, the statute creating U.S.-style investor class actions, comes at a time that the investing public is angry and increasingly looking to hold corporate executives to account.
An Ontario Superior Court judge held that shareholders are allowed very broad cross-examination before the suit gets started and defendants must hand over potentially incriminating information even though it can then be incorporated into the case against them.
Bay Street tinkered with Bill 198 for years before it came into effect in 2005 over concern that Canada not become vulnerable to the type of speculative strike suits that plagued Wall Street. A key defence was making the courts a gatekeeper, requiring plaintiffs to get leave to proceed before a case can go ahead.
Dimitri Lascaris, of Siskind Cromarty Ivey & Dowler LLP, is acting for Imax shareholders
To do that, plaintiffs and each named defendant must file affidavits outlining their position and the material facts on which they intend to rely. There is then cross-examination.
The case in question, Silver v. Imax Corp., has set the bar on how broad that precertification examination will be.
In her decision, Madam Justice Katherine van Rensburg held that the test is whether the information has a “semblance of relevance” to the allegations. That's the threshold used in discovery, where the two sides exchange the facts of their cases – although in traditional litigation it comes once a suit is already well under way.
At trial, the threshold is “relevance.”
Imax's lawyers urged the court to restrict cross-examination to information available on the public record. Shareholders can't normally compel corporations to hand over confidential e-mails and reports that can be used to boost the case against them, they argued.
Judge van Rensburg disagreed, saying shareholders asking for leave to proceed have “special powers” generally not available otherwise.
“The challenge is these are the first proceedings under [Bill 198],” she wrote. “The act provides no guidance as to the interpretation of the threshold test and what type, quality and quantity of evidence a court is to consider.”
In setting the scope, she also held that anyone being cross-examined on a leave application must answer questions that are potentially relevant even if it “might also reveal some other potential issues or wrongdoing not currently contemplated by the statutory claim.”
The decision came out of the Ontario Superior Court in the Toronto suburb of Brampton, where Imax's head office is located, and not from the roll of judges assigned to hear class actions in the commercial court in downtown Toronto.
“People are flabbergasted,” says one Bay Street lawyer. “This is a monumental and tactically important decision. This changes everything. If you want to talk settlement, forget a gun to your head – you're now going to be negotiating with a cannon to your head. There's real fear out there.”
Dimitri Lascaris, of Siskind Cromarty Ivey & Dowler LLP, who is acting for Imax shareholders, says that if the court had ruled differently, shareholder lawsuits would never get off the ground. “As someone who does this type of litigation every day, I can tell you there is only so much information you can gather from the public domain. Defendants are very adept at keeping any kind of incriminating evidence under wraps. They have very capable counsel and advisers.
“This is a powerful demonstration of the cliché ‘Be careful what you wish for.' Defendants militated very strongly for this leave provision for many years. They insisted upon it and they got it. And what they have to live with is that now in the precertification phase they have to disclose evidence relevant to the merits of the case.”
But Alan Lenczner, one of Canada's senior litigators, says the decision goes against the intent of the statute.
“The whole idea was to only let claims that appear to have some merit go through, otherwise we'd have been flooded. The idea was not to allow the plaintiff to go on a fishing expedition to see what the hell else they can discover and then go back and revise their statement of claim,” Mr. Lenczner says.
“The problem is when you lower the test from relevance to semblance of relevance, you're doing exactly that. Semblance of relevance is only that the information might be relevant. That's why this test, in my opinion, is wrong.”
Imax applied for leave to appeal. It was denied.
Paul Steep of McCarthy Tétrault LLP, who is acting for Imax, says allowing broad discovery at the leave stage does exactly what Ontario was trying to avoid, making it extremely expensive for corporations to defend themselves right at the start – presumably, adding pressure to settle.
“No disrespect to the judge, because she was very thoughtful, but I think it was clearly wrong. And I suspect at some point it will be corrected.”
Jim Orr of Kim Orr Barristers P.C., which is defending another Bill 198 claim, says Imax is important “for what it reveals tactically about how these rules can be used.
“At the outset, people thought this gatekeeper rule was going to be a barrier to plaintiffs. But as you can see, given the scope of the cross-examinations and what you can get, if you name a number of defendants, there's a lot of room to get at a lot of documents very early on. So from a plaintiffs' perspective you'd want to name everybody. Name the audit committee, name the senior officers, the board of directors, because you're going to get to examine them all.”
Special to The Globe and Mail
Sandra Rubin is a contributor to Lexpert.
