The Ontario government is contemplating rules that would give a leg up to investors trying to pursue class-action lawsuits against companies accused of misrepresenting their financial results.
Last week's provincial budget mentioned a possible change to the Ontario Securities Act that would suspend the controversial time limit currently facing investors seeking court permission to proceed with a class-action suit against a company.
The government offered little detail on the change, but suggested a decision on how to proceed would be made following the outcome of "current court cases that the government is monitoring closely" and could lead to a decision to suspend the time limit "if needed."
There are currently three high-profile cases involving shareholder lawsuits against Imax Corp., Canadian Imperial Bank of Commerce and Celestica Inc. that are being heard next week by the Ontario Court of Appeal before a special five-judge panel. In all three cases, investors allege the companies misreported or hid information about their financial results, and shareholders were hurt when share prices later fell.
The hearings next week will include an in-depth review of a controversial appeal court decision from February, 2012, involving Timminco Ltd., which was accused of defrauding investors by making false claims that it had discovered a cheaper way to make solar panels. In that decision, the appeal court imposed a three-year time limit for plaintiffs to get permission from a judge for a class-action to proceed.
The Timminco decision caused an outcry from lawyers who fight on behalf of shareholders. They said a three-year limit from the time a company makes an alleged misrepresentation is far too short given the inherent delays in the court system, the complexity of the cases and the ability of lawyers to use legal tactics to delay hearings. Lawyers working for companies, however, said the time limit was needed to keep cases from hanging over companies for many years.
Class action lawyer Kirk Baert said the Timminco decision means lawyers have to get leave to launch a class action within three years of the date of the misrepresentation – not the date when it comes to light – which can give rise to a tight deadline to react. Even if investors learn of a problem quickly, he said experience has shown that the cases cannot get through Toronto's clogged courts in three years, with most taking at least four years to get leave approved, he said.
Mr. Baert said the Timminco ruling now means companies have a huge incentive to cause delays at every stage to push cases past the three-year limit. He said the government should amend the legislation to say there is no time limit once the class-action case has been filed. "If you give people an incentive to delay doing something, they will."
Securities lawyer Larry Lowenstein said it would be preferable for Ontario to amend its legislation with a clear statement about how the time limit will work, rather than leave it to appeal court judges to grapple with interpreting the existing rules. "I think if you're going to make a change, it's better by legislation than by uncertain, judge-made rules."
He added it is "unfortunate" the government has said it will watch the outcome of current cases and then make amendments to suspend the time limits if necessary, because it gives the impression the government is signalling to the court what decision should be made. "The government has stepped in and in effect put its thumb on the scale on the side of the plaintiffs, and that's a political decision," Mr. Lowenstein said.
Class-action lawyer Dimitri Lascaris said it would ideal if the province would move ahead without waiting for the appeal court to take the lead with its rulings. He said Manitoba has already suspended its deadline for seeking court approval to proceed with a class-action.
"I think it's time for all legislatures to take action," he said.
Mr. Lascaris said he will be particularly interested to see how a new Ontario rule would affect cases that have already passed the three-year time line, questioning whether the rule would be applied retroactively to them as well.