The Supreme Court’s new leave threshold for securities class actions has bite

The Supreme Court of Canada’s decision in CIBC v Green¹ was heralded by many defendants as raising the bar for obtaining leave to commence an action under Part XXIII.1 of the Ontario Securities Act. Unfortunately, the Supreme Court’s relatively cursory discussion of applying the test left in question how much effect the decision would have going forward.
The Ontario Superior Court of Justice’s recent decision in Bradley v Eastern Platinum Ltd.² suggests the Supreme Court’s interpretation of the test for leave will in fact discourage the initiation of securities class actions that lack a firm foundation, confirming that the leave requirement for commencing an action under Part XXIII.1 is a robust hurdle that should be applied to weed out proposed actions based upon speculation or suspicion rather than evidence.
 

Background

Eastern Platinum, or Eastplats, was a Vancouver-based platinum mining company that operated a platinum producing mine in South Africa. In April 2011, Eastplats issued a press release disclosing that production had declined in Q1 2011 as compared to both the prior quarter and Q1 2010. The day following the press release, Eastplats’ stock price fell from $1.30 to $1.10 on the Toronto Stock Exchange.

The applicant sought leave to commence an action pursuant to the secondary market liability provisions in Part XXIII.1 of the Ontario Securities Act, alleging Eastplats had failed to disclose a complete or partial shutdown of operations in Q1 2011, which resulted in decreased production. In the alternative, he alleged that in Q1 2011 the company had commenced using cement grout packs, a type of mine support, that this had caused a reduction in production and that it was an undisclosed material change that ought to have been disclosed.

At the hearing of the application, the timing of Eastplats’ introduction of cement grout packs was a contentious issue. The applicant relied upon ambiguously worded statements in the press release, transcripts of teleconferences (which did not explicitly refer to using cement grout packs), an analyst’s report that recorded a suspicion of a work stoppage at the mine, and evidence of an expert on mine supports who assumed Eastplats used cement grout packs.

Eastplats responded with a strong record of evidence from fact witnesses who deposed that there had been no mine shutdown nor any introduction of cement grout packs in Q1 2011. Rather, the loss of production had been caused principally by unforeseen rock falls.
 

Threshold for leave

The applicant submitted that he had led sufficient evidence to satisfy what he called the “low reasonable possibility of success at trial standard” and there was an evidentiary conflict that could not be resolved at the leave stage.

The court disagreed both with his analysis of the facts and of the law. Justice Rady repeated the instruction in CIBC v Green that the plaintiff must show there is a “reasonable or realistic chance that the action will succeed” and must “offer both a plausible analysis of the applicable legislative provisions and credible evidence in support of the claim.” He interpreted this as requiring the court to undertake “a robust, meaningful examination and critical evaluation of the evidence (or the absence of evidence)” to ensure the action has some merit, much like a court does on a motion for summary judgment. While noting the respondent was not required to file evidence, the court observed that, “It may be a risky venture not to do so.”

The court carefully reviewed all the material filed on the motion and found the applicant’s interpretation of the press release and other public documents was simply not supported by the “overwhelming weight of the evidence” pointing in the other direction. Accordingly, there was no reasonable prospect of success at trial and the motion for leave was dismissed.
 

Conclusion

Like the results in Kinross,³ Atlantic Power,⁴ and Silvercorp Metals,⁵ Eastern Platinum demonstrates that a strong, evidence-based response at the application for leave stage can shut down a securities class action before certification. The court’s robust interpretation of the holding in CIBC v Green signals a willingness to use the leave requirement as a real check on proposed actions that are based upon suspicion, speculation and unsupported inference. This is welcome news for defendants.
 

Footnotes

¹ Canadian Imperial Bank of Commerce v Green, 2015 SCC 60, described in our previous legal update.
² Bradley v Eastern Platinum Ltd., 2016 ONSC 1903.
³ Musicians' Pension Fund of Canada (Trustee of) v Kinross Gold Corp., 2013 ONSC 6864, aff’d 2014 ONCA 901.
⁴ Coffin v Atlantic Power Corp., 2015 ONSC 3686.
⁵ Mask v Silvercorp Metals Inc., 2015 ONSC 5348.