On December 14, 2009, the Ontario Superior Court released its long-awaited reasons in Silver et al v. IMAX Corporation et al, Ontario Superior Court of Justice, Court File No. CV-06-3257-00 (“IMAX”). IMAX is particularly noteworthy because the Court did the following:
• certified Canada’s first secondary market liability suit for misrepresentations under the Ontario Securities Act civil liability provisions;
• established a relatively low threshold for plaintiffs seeking leave to proceed with a civil action for secondary market liability under the Ontario Securities Act;
• certified a global class consisting of Canadian and non-Canadian shareholders, regardless of whether shares were purchased on the TSX or NASDAQ; and
• accepted, as a common issue for determination at trial, whether reliance can be inferred from purchases made on a stock exchange and whether aggregate damages can be assessed against the defendants.
The facts in brief
IMAX is a case about the restatement of earnings. In February 2006, IMAX issued a news release announcing it had completed a record 14 theatre installations in Q4 2005 and that it expected to meet or exceed its full year earnings guidance. In March 2006, IMAX filed its Form 10-K containing its 2005 annual financial statements and issued a news release announcing its earnings and revenues. In August 2006, IMAX announced that it was in the process of responding to an informal SEC inquiry regarding the timing of revenue recognition, specifically its use of “multiple element arrangement” accounting to recognize revenue on theatre systems that were not yet open. The following day, IMAX’s share price dropped by 40%. In 2007, IMAX restated its 2005 financial statements acknowledging that it had not complied with GAAP in recognizing revenue for theatre systems that were not completely installed.
Less than a month after IMAX announced the SEC inquiry, in September 2006, a proposed class action was filed against IMAX and senior officers in Ontario. It alleged that IMAX misrepresented its 2005 earnings and pursued various common law claims, specifically negligent misrepresentation and negligence. The suit also sought leave to bring statutory misrepresentation claims under the new secondary market misrepresentation liability provisions in the Ontario Securities Act (which had come into force December 31, 2005), including against the entire board of directors. It was the first suit filed seeking to take advantage of the new statutory civil remedy provisions for secondary market misrepresentations.
Statutory claim for misrepresentation under the Ontario Securities Act
Before a statutory claim for misrepresentation can be brought for secondary market liability, the Ontario Securities Act requires a plaintiff to obtain leave of the court. The plaintiff bears the onus under section 138.8 of satisfying the court that: (1) the action is being brought in good faith; and (2) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. Further, the Ontario Securities Act includes a due diligence defence. A defendant will not be liable if: (1) prior to the release of the document containing the misrepresentation, the defendant conducted or caused to be conducted a “reasonable investigation”; and (2) at the time of the release of the document, the defendant had no reasonable grounds to believe that the document contained a misrepresentation.
Holdings in IMAX
The Court in IMAX granted leave to the plaintiffs to proceed with their action under section 138.3 of the Ontario Securities Act and, in so doing, established a “relatively low” threshold to be met by a plaintiff when seeking leave. The Court interpreted the statutory leave test to require the plaintiffs to: (1) establish that they are bringing their action in the honest belief that they have an arguable claim, and for reasons that are consistent with the purpose of the statutory cause of action and not for an oblique or collateral purpose; and (2) lead credible evidence that would permit the Court, after reasoned consideration, to conclude that the plaintiffs had a reasonable possibility of success at trial. The Court also decided that, on a leave motion, the defendants bear the onus of satisfying the court that evidence going to a “reasonable investigation” defence or other statutory defence will foreclose the plaintiffs’ reasonable possibility of success at trial.
The Court also certified IMAX as a class proceeding under the Class Proceedings Act, 1992 for both statutory and common law misrepresentation claims. Significantly, even though there is a pending parallel US proceeding, the Court certified a global class consisting of Canadian and non-Canadian shareholders, regardless of whether they purchased their shares on the TSX or NASDAQ. Moreover, it accepted as common issues for trial: (1) whether class members’ purchases of shares on the TSX or NASDAQ may satisfy the reliance requirement for common law misrepresentation; and (2) whether aggregate damages can be assessed against the defendants. The decision departs from other secondary market decisions in which common law claims for misrepresentation were not certified because of the need for each class member to prove reliance.
Although it is the first decision interpreting the leave requirements for secondary misrepresentation claims under the Ontario Securities Act, IMAX will not be the last word on how the leave requirements should be applied, nor will it be the last word on these certification issues. Apart from appeals, a number of other cases which have already filed seeking leave to bring statutory secondary market misrepresentation claims, and to have statutory and common law misrepresentation claims certified, will provide an opportunity for other judges to reflect and comment upon IMAX. Further, there is no doubt that the decision in IMAX will encourage future plaintiffs to launch similar securities’ claims.
Kelly Friedman, Ogilvy Renault LLP