Court clarifies role of public correction in secondary market misrepresentation claims

In a recent case, the Ontario Court of Appeal clarified the role of public correction in secondary market misrepresentation claims after the lower-court judge denied a shareholder’s motion for leave to seek remedy under the Securities Act.

In Baldwin v. Imperial Metals Corporation, 2021 ONCA 838, the appellant, Claire Baldwin, acquired shares of the respondent, Imperial Metals Corporation. In August 2014, Imperial issued a press release, reporting that the tailings storage facility (TSF) at its Mount Polley mine in British Columbia had been breached, thereby releasing an “undetermined amount of water and tailings.” Imperial lost about $500 million in market capitalization and its share price declined by 40 per cent.

To seek remedy under s. 138.3(1) of the Securities Act, the appellant filed a motion for leave. Section 138.3(1) provides that “a person or company, who acquires or disposes of an issuer’s security between a document’s release and public correction of a misrepresentation in the document, has a right of action for damages, without regard to the person or company’s reliance on the misrepresentation.” In short, it creates a cause of action for misrepresentation in the secondary securities market. But no action may be commenced without leave of the court.

In her statement of claim, Baldwin alleged that Imperial was negligent in the design, construction and operation of the TSF. She further alleged that Imperial’s disclosure documents contained misrepresentations and the press release constituted a public correction of the misrepresentations.

The judge dismissed the appellant’s motion for leave. He ruled that the appellant must allege not only a specific misrepresentation, but also a discrete and identifiable public correction. He further ruled that the press release could only have served as a public correction if the earlier misrepresentation had indicated that “the TSF is built to be failproof, and will never, ever fail.” He concluded that the required public correction had not been established. The appellant filed an appeal.

In its decision, the Court of Appeal allowed the appeal and remitted the leave motion to the Superior Court for determination.

“The most significant point is that the court did not deviate from a well-settled line of caselaw that recognized the centrality and importance of public correction as an element of the cause of action,” says Lawrence Thacker, who acted for Imperial along with Aoife Quinn and Kathleen Glowach.

“The plaintiff argued that public correction is not an element of the cause of action, and the court did not agree and did not overturn or deviate from case law that says public correction is a required element,” says Thacker, a litigator at Lenczner Slaght LLP. “Instead, they looked at how the motions judge in this case assessed whether a public correction had occurred. And even then, the focus of the court was on the manner in which the motions judge determined that issue, which was to assume that there is a misrepresentation and then go on to determine if there had been a public correction.”

“And what the court said is that assumption, while it can be made in rare cases, generally, the evidence as to whether a misrepresentation has occurred has to be considered to provide context for determining whether a public correction was made.”

The court found the lower-court judge had erred in law by imposing “an unduly onerous standard for establishing public correction.” The central issue for the purpose of the leave motion is “whether the alleged public correction was reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement,” said the court. The court found the judge set the bar too high by requiring that the public correction be express and directly linked to a specific misrepresentation.

The court said that most of the secondary market misrepresentation claims before Canadian courts have involved express public corrections. But that does not prevent any claimant, such as the appellant, from asking the court to infer a correction based on something other than an express statement by the company, coupled with the market’s response, the court said.

The court determined that the public correction need not be a “mirror-image” of the alleged misrepresentation. There need only be some connection between the alleged misrepresentation and the pleaded public correction, which would assist the judge in determining how the alleged corrective disclosure would be understood in the secondary market, the court said.

The court explained that “the modest role of public correction in the statutory cause of action is consistent with s. 138.5(3) of the Securities Act. . . which places the onus on defendants to prove that some or all of the plaintiffs’ damages are attributable to a change in the market price of securities that is unrelated to the misrepresentation.”

Focusing on the market’s understanding of the alleged correction would encourage fair and accurate disclosure by issuers, the court said. “Permitting an issuer to escape liability by making vague or general disclosures. . . would undermine confidence in the securities market and deprive shareholders of compensation.”