Today, capital markets are essentially borderless. Stock exchanges with physical trading floors have become an anachronism. Electronic transactions are the norm. With the click of a button, Canadian investors can buy and sell securities of foreign companies on foreign stock exchanges.
But what happens when a Canadian investor loses money on their investment because the foreign company did not give them proper disclosure of facts that impact the value of the company’s securities? Are they entitled to sue in Canadian courts relying on remedies under Canadian law? Or must they look to foreign courts for redress and, if so, is an effective remedy available to investors under the laws of those foreign countries?
These questions often arise for consideration in securities class actions. Over the years, Ontario courts have generally addressed these sorts of jurisdictional issues in the context of motions for class certification. However, in recent years, there has been an emerging trend of defendants to proposed securities class actions bringing pre-certification motions to challenge the jurisdiction of the Ontario courts to adjudicate the claims of some or all of the class members.
These motions generally raise one or more of the following issues:
- Does the Ontario court have jurisdiction simpliciter over the claims being asserted in the class action (which typically turns on the question of whether the claims have a real and substantial connection to Ontario)?
- Even if the Ontario court does have jurisdiction simpliciter over the claims, should the Ontario court decline to exercise that jurisdiction on the basis of the doctrine of forum non conveniens because there is some other more appropriate forum for the adjudication of the claims?
- Is the issuer defendant a “responsible issuer” under the statutory secondary market liability regime in Part XXIII.1 of the Ontario Securities Act (“OSA”), such that it is amenable to suit under the statutory liability regime? A “responsible issuer” under the statute is a reporting issuer or “any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded”.
This article surveys a number of cases in which these questions have been addressed in the context of securities class actions in which the underlying facts have connections to foreign jurisdictions. The results have been mixed and it is challenging to identify a common thread to the decisions. The most that can be said at this early stage of the development of the jurisprudence is that outcomes are highly fact-dependent.
Kaynes v BP plc
The case that was the catalyst for the trend of pre-certification jurisdictional motions is Kaynes v BP plc.[1]
A class action was commenced in Ontario seeking remedies against UK-incorporated BP plc for alleged misrepresentations in BP’s disclosures to investors arising out of the Deepwater Horizon oil disaster in 2010. For a portion of the proposed class period, BP was a reporting issuer in Ontario and its securities were listed on the TSX. When it ceased to be a reporting issuer in Canada, BP undertook to continue to send disclosure material to Canadian securityholders. BP’s shares traded on European stock exchanges and its American Depositary Shares (“ADSs”) traded on the TSX and the NYSE. The representative plaintiff was an Ontario resident who bought BP ADSs over the NYSE.
The plaintiff sought to advance claims under Part XXIII.1 of the OSA and for common law negligent misrepresentation on behalf of Canadian residents who acquired BP securities during the proposed class period, regardless of whether those securities were purchased over the TSX, the NYSE or the European exchanges. The proposed class carved out persons who purchased securities over the NYSE and did not opt out of a parallel U.S. securities class action, which was being prosecuted on behalf of people who purchased BP securities over the NYSE. There was no parallel action on behalf of people who purchased BP securities over the European exchanges. The class definition for the Ontario case appears to have been carefully crafted with a view to avoiding a situation where BP investors could be class members in more than one extant action, thereby avoiding concerns about a multiplicity of proceedings. The actions were interlocking but not overlapping.
BP conceded Ontario’s jurisdiction over the claims of the class members who purchased BP securities over the TSX, but contested jurisdiction with respect to the claims of class members who purchased BP securities on the European and U.S. exchanges. The trading volume on the TSX during the class period was a tiny fraction of the trading volume on the European and U.S. exchanges. As such, a class action on behalf of TSX purchasers alone would be uneconomical to pursue.
Based on that set of facts, the Court of Appeal held that the Ontario courts had jurisdiction simpliciter over the claims of the representative plaintiff and other class members who purchased BP securities on non-Canadian exchanges. There was a real and substantial connection between those claims and Ontario given that the impugned disclosure documents containing the alleged misrepresentations had been released into Ontario (even though their initial release point was outside Ontario). However, the Court of Appeal went on to conclude that jurisdiction should be declined on forum non conveniens grounds. The claims of those class members were stayed in favour of U.S. courts (in respect of BP securities purchased over the NYSE) and U.K. courts (in respect of BP securities purchased over European stock exchanges), despite the fact that there was no litigation against BP in the U.K. and no real prospect of such litigation given the absence of a class action regime in that country.
The main principle animating the Court of Appeal’s decision on forum non conveniens is comity. BP tendered expert evidence to the effect that the rights of action for secondary market misrepresentation under U.S. and U.K. law are limited to transactions taking place on stock exchanges located in the respective jurisdictions. The Court of Appeal took the view that the assertion of jurisdiction by the Ontario court in respect of transactions over foreign stock exchanges would be inconsistent with the U.S. and U.K. approach, and the principle of comity dictated that the Ontario court should follow the “prevailing international norm or practice” reflected in the U.S. and U.K. approach.
The Court drew support for its conclusion from the U.S. Securities Exchange Act of 1934, which confers “exclusive jurisdiction” on U.S. federal courts with respect to claims under that statute, which includes claims for secondary market misrepresentation under Rule 10b-5 promulgated under section 10(b) of the Securities Exchange Act of 1934. However, that exclusive jurisdiction only applies to claims based on the Securities Exchange Act of 1934. The claims against BP in the Ontario proceeding included a claim under Part XXIII.1 of the OSA. It is significant that the Ontario legislature has chosen not to adopt the U.S. and U.K. approach of limiting the right of action for secondary market misrepresentation to transactions taking place on Canadian exchanges. Claims under Part XXIII.1 of the OSA are available against reporting issuers (a status that does not depend exclusively on having securities listed on a Canadian stock exchange) and other issuers “with a real and substantial connection to Ontario, any securities of which are publicly traded”. It has been established that the latter category is not limited to issuers with securities listed on Canadian stock exchanges[2] (though, of course, it must be shown that the issuer has a real and substantial connection to Ontario and has securities that are publicly traded somewhere). There are sound policy reasons underpinning the approach taken by the Ontario legislature in not limiting the liability regime to issuers with securities listed on Canadian exchanges. The Ontario legislature’s choice is undermined when investors who trade on non-Canadian exchanges are denied access to the Ontario courts to enforce the remedy that is available to them under Part XXIII.1. The choice has effectively been displaced by a different choice made by the legislators in the U.S. and U.K. Comity does not demand uniformity.
Interestingly, two years later, the plaintiff was successful in having the stay lifted by the Court of Appeal as a result of events that unfolded in the U.S. class action. Claims relating to pre-explosion misrepresentations were not certified in the U.S. After the Court of Appeal’s stay decision, discussed above, the Ontario representative plaintiff commenced a class action in the U.S. asserting claims for pre-explosion misrepresentations based on Part XXIII.1 of the OSA. That class action was dismissed. The Ontario Court of Appeal lifted the stay to permit Canadian investors (regardless of the exchange over which they acquired BP securities) to pursue claims in Ontario relating to the pre-explosion misrepresentations. The Court found it significant that BP accepted that the Ontario plaintiff’s claim was governed by Ontario law, and as such it was not a claim being advanced in the U.S. class action and was not within the “exclusive jurisdiction” of the U.S. courts.
Case developments after Kaynes v BP plc
Unsurprisingly, the success achieved by the defendant in BP, at least in the first round of arguments before the Court of Appeal, has encouraged defendants in other securities class actions to mount pre-certification jurisdictional challenges.
The next case to come before the Ontario courts was Yip v HSBC Holdings plc.[3] UK-incorporated HSBC Holdings is the parent holding company of an international banking conglomerate with its head office in London, U.K. HSBC Holdings’ securities have never traded on Canadian stock exchanges. The misrepresentation claims arose out of allegations that HSBC Holdings and its subsidiaries (including HSBC Canada) failed to comply with anti-money laundering and anti-terrorist financing laws and that it participated in an illegal scheme to manipulate benchmark interest rates. The representative plaintiff was an Ontario resident who acquired HSBC Holdings securities over the Hong Kong Stock Exchange. He sought to advance claims on behalf of Canadian residents who acquired HSBC Holdings securities over foreign stock exchanges during the proposed class period, including claims under Part XXIII.1 of the OSA.
On the motion, Justice Perell found in favour of the defendants, concluding that: (i) HSBC Holdings is not a “responsible issuer” under Part XXIII.1 of the OSA because it is neither an Ontario reporting issuer nor “any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded”; (ii) Ontario does not have jurisdiction simpliciter over the claims of the class members; and (iii) even if there was jurisdiction, it should be declined on forum non conveniens grounds in favour of the U.K. courts. The Court of Appeal agreed with the conclusions reached by Justice Perell. The Court of Appeal rejected the plaintiff’s argument that the requirement for a real and substantial connection to Ontario built into the definition of “responsible issuer” in Part XXIII.1 is satisfied when the issuer knows or ought to know that its investor information is being made available to Canadian investors. The Court of Appeal applied the established test for identifying a real and substantial connection and concluded that it was not met on the facts of the case. In contrast to the BP case, the Court was not prepared to find that the real and substantial connection test was met on the basis of a tort committed in Ontario. Finally, on the issue of forum non conveniens, the Court expressed the view that, applying the principle of comity, the more appropriate forum for secondary market claims will often favour the forum of the exchanges where the securities trade.
A plaintiff successfully resisted a pre-certification jurisdiction motion in Paniccia v MDC Partners Inc.[4] The issuer defendant, MDC, is a federally incorporated Canadian company with its registered office in Toronto. Its securities traded on both the TSX and the NASDAQ in the U.S. during the relevant period, although the vast majority of the trading volume was over the NASDAQ. The representative plaintiff was a resident of Ontario who purchased MDC shares over the NASDAQ. He sought to advance claims under Part XXIII.1 of the OSA and for negligent misrepresentation on behalf of Canadian residents who acquired MDC securities over both the TSX and the NASDAQ. The plaintiff had initially proposed a global class in Ontario — i.e. it was not limited to Canadian residents — but the class definition was subsequently amended to comprise only Canadian residents. There was a parallel U.S. class action on behalf of purchasers over the NASDAQ, but that action was dismissed by the U.S. courts. The defendants in the Ontario action sought to confine the class to Canadians who traded over the TSX, arguing that Ontario was forum non conveniens for the claims of Canadians who traded over the NASDAQ. Justice Perell concluded that Ontario was the convenient forum for the resolution of the claims of the class members who purchased their shares over the NASDAQ. He rejected an argument that U.S. statutory law would apply to the claims of those class members even if the case proceeded in Ontario, instead finding that Ontario law (including Part XXIII.1 of the OSA) applied.
The most recent addition to the jurisprudence in this area is Leon v Volkswagen AG.[5] It involved misrepresentation claims against Volkswagen AG relating to the “diesel-gate” scandal. During the relevant period, Volkswagen’s shares traded on various European exchanges and its American Depositary Receipts (“ADRs”) traded OTC in the U.S. Its securities never traded on Canadian exchanges. The plaintiff was an Ontario resident who acquired Volkswagen ADRs in the U.S. OTC market. He proposed to represent Ontario residents who bought ADRs in the U.S. OTC market or Volkswagen shares over the European exchanges. The claim in the Ontario action was limited to fraudulent misrepresentation. No claim under Part XXIII.1 of the OSA was asserted because of the restrictive limitation period applicable to that claim. In parallel with the Ontario action, there was a U.S. securities class action on behalf of purchasers of Volkswagen ADRs in the U.S. OTC market, and a number of individual actions in Germany (including some by Ontario residents). Justice Belobaba dismissed the Ontario action, finding that Ontario did not have jurisdiction simpliciter over the claims of the class members and, even if there was jurisdiction, it should be declined on forum non conveniens grounds in favour of the courts in the U.S. (for claims relating to Volkswagen ADRs) and Germany (for claims relating to Volkswagen shares). Justice Belobaba identified what he characterized as a prevailing norm or practice that securities claims should be adjudicated in the forum where the securities trading took place, and concluded that the facts did not support a departure from that approach in this case.
[1] See 2013 ONSC 5802; 2014 ONCA 580; 2016 ONCA 601.
[2] Abdula v Canadian Solar Inc, 2012 ONCA 211; leave to appeal to SCC denied, [2012] SCCA No 246.
[3] See 2017 ONSC 5332; 2018 ONCA 626.
[4] See 2017 ONSC 7298.
[5] See 2018 ONSC 4265.