A seminal Ontario Superior Court decision leaves little doubt that success on an application for leave to appeal under the secondary market liability provisions of the Ontario Securities Act (OSA) does not portend success on the merits.
“The statute clearly delineates between the ‘reasonable possibility’ standard for leave and the ‘balance of probabilities’ threshold on the merits,” said Christopher Horkins in Cassels Brock & Blackwell LLP’s Toronto office. “But this is the first time we’ve seen that distinction in action.”
And, as Wong v. Pretium Resources 2021 ONSC 54 demonstrates, successful leave applications don’t even foolproof such lawsuits against summary judgment — and not even where the judge hearing the summary judgment motion is the one who granted leave.
“The decision could well incentivize more defendants to seek dismissal of these types of claims on the merits,” Horkins said. “It should disrupt the longstanding pattern of quick settlements that follow on the plaintiffs having obtained leave and certification.”
The case centred on allegations that Pretium had failed to disclose unsolicited concerns raised by Strathcona Mineral Services Limited regarding sampling results at its gold mining project in British Columbia. Despite Strathcona’s insistence that Pretium should make immediate public disclosure, the company concluded that the results were premature and not determinative — and therefore not material in the sense of requiring disclosure.
Strathcona resigned from the project. Pretium announced the resignation in two press releases over a 13-day period. The releases summarized the reasons for the resignation and repeated Pretium’s view that Strathcona’s results were unfounded.
Pretium’s share price fell by more than 50 per cent during the 13-day period. But after an expert’s assessment of a much larger bulk sample confirmed the validity of the company’s mineral resource estimates, the share price recovered.
The plaintiff sought leave to commence a class action for secondary market misrepresentation. Justice Edward Belobaba granted leave, concluding that there was a reasonable possibility that the action could succeed at trial. He reasoned that Pretium’s rejection of Strathcona’s concerns did not preclude the possibility that a trial court could conclude that those concerns were a material fact that required disclosure.
Pretium sought summary judgment before Justice Belobaba. On a fuller record, Justice Belobaba found that Strathcona’s unsolicited concerns were “inexpert, premature and unreliable.” He ruled that Pretium had no obligation to disclose erroneous and misleading information.
Justice Belobaba also accepted Pretium’s “reasonable investigation defence.” He concluded that the company had conducted such an investigation into Strathcona’s concerns. While the leave application produced no evidence that Pretium’s disbelief of the consultant’s findings were other than subjective, additional evidence on the summary judgment motion added an “objective dimension” to the company’s position.
But Andrew Morganti of Morganti & Co. P.C., the cross-border firm based in Detroit that represented the plaintiff, said the decision is wrong.
“Belobaba ignored two of the most relevant precedents,” Morganti said. “They were both significantly argued but aren’t even cited in the reasons.”
The cases to which Morganti alluded were Kerr v. Danier Leather 2007 SCC 44 and Rahimi v. SouthGobi Resources Ltd. 2017 ONCA 719.
“Danier makes it clear that management should disclose both sides of a story,” Morganti said. “And SouthGobi provides a framework for the analysis of the reasonable investigation defence — a framework Belobaba did not follow.”
Morganti also maintains that Justice Belobaba erred in his treatment of the law concerning “public corrective disclosure.”
“Belobaba only addressed the correction in the context of resource estimates, without regard to Strathcona’s concerns about the feasibility study and the reserve estimates,” he said.
What may remain somewhat confusing about the decision is that it arose in the context of a summary judgment motion. The OSA does not address the test for summary judgment — which Justice Belobaba correctly enunciated as “whether there was a genuine issue for trial.” That’s a different test than the “balance of probabilities” standard for success on the merits after a full trial.
But Horkins says it’s a distinction without a difference.
“In fact, the test for determining whether a party has established that there is or is not a genuine issue for trial is also on the balance of probabilities,” he said.
However that may be, Horkins says the decision is “heartening” for issuers: “The clear message is ‘Don’t leave at leave, because that’s not the end of the road for these cases.’”
Julius Melnitzer is a Toronto-based freelance legal affairs journalist and communications and media consultant to the legal profession. He can be reached by e-mail directly at [email protected] or at his website, www.legalwriter.net.
Photo credit / Tatiana Terekhina ISTOCKPHOTO.COM