Ontario Court of Appeal clarifies breadth of takeover bid liability

Plaintiffs in a claim for misrepresentation in a takeover bid circular in Ontario must choose between an action for rescission or an action for damages; however, an action for damages can be against both the offeror and its directors, among others. In Rooney v. ArcelorMittal S.A.,  the Ontario Court of Appeal reversed a lower court decision that required plaintiffs in an action for damages to choose between suing either the bidder or its directors, but not both. The decision also confirms that a claim against an offeror is only available to securityholders who tendered to the bid.

Background and the court’s analysis

The plaintiffs in Rooney were former securityholders of Baffinland Iron Mines Corporation, which had been acquired in a successful hostile takeover bid. The plaintiffs had commenced a class action on the basis of misrepresentations in the bidders’ takeover bid circular, relying on Section 131 (the “Takeover Liability Provision”) of the Securities Act (Ontario) (the “Act”). The defendants sought to strike the claim, including on the basis that the Takeover Liability Provision precluded the plaintiffs from proceeding against both the offerors and their directors.

In reviewing the lower court’s decision, the Court of Appeal applied the “modern principle” of statutory interpretation adopted by the Supreme Court of Canada in Rizzo & Rizzo Shoes Ltd. (Re:).  The modern principle still relies on consideration of the plain meaning of the relevant words of the statute, but only with reference to the context in which those words appear and the scheme and objectives of the relevant act. The Court of Appeal found that the lower court had relied too heavily on the plain meaning of the words, failing to take into sufficient consideration the context of the Takeover Liability Provision within the Act and its role in the Act’s scheme and objectives. In particular, the Court of Appeal considered the similarity of provisions relating to liability for misrepresentations in prospectuses and offering memorandums that appear in the same part of the Act, the fact that the plain meaning of the provision, though ambiguous, allowed for an inclusive interpretation of who could be sued and the fact that allowing plaintiffs to sue both an offeror and its directors for damages would be consistent with the Act’s purpose of protecting investors.

The Court of Appeal also confirmed that the regime establishing secondary market liability should be available to shareholders who sold their shares in the public market in this case, but that those shareholders should not be entitled to make a distinct and parallel claim under the Takeover Liability Provision, which is designed to protect those who tender to a takeover bid.

Why does this decision matter?

This decision is of particular note to offerors making a bid subject to the Act. Other provincial legislatures, while sharing the concept of bidder liability for misrepresentation in a takeover bid circular, have worded the relevant provisions differently. In British Columbia, for example, Section 132 of the Securities Act (British Columbia) is clear that while a plaintiff that is sent a takeover bid circular must choose between a claim for rescission and a claim for damages, the claim for damages can be against any or all of the offeror, its directors, those who signed the circular and certain experts.

In Ontario, the relevant provision is “not as clearly expressed as it could be,” leading the lower court to decide that, unlike in British Columbia, plaintiffs could seek damages against either the offeror itself or its directors, but not both. That misalignment has been remedied; claimants in Ontario are now entitled to claim for damages for misrepresentation in a takeover bid circular against the same classes of person as in British Columbia.

For investors, the decision confirms that the statutory action for misrepresentation in a takeover bid circular is not available to those who sold their shares in the market instead of tendering to the bid. Those investors must rely on the provisions enacted specifically to establish secondary market liability.

Please contact any member of our Corporate Finance and Securities Group if you wish to discuss this decision or any other aspect of securities law.