Ruling says 'time's up' on shareholder class actions

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It's only a 12-page document, but the Ontario Court of Appeal's recent decision in a lawsuit against failed metals company Timminco Ltd. has landed like a rock in the world of securities class actions.

On Feb. 16, the court dealt an apparent death blow to a 2009 lawsuit filed on behalf of investors who demanded $540-million and alleged that Toronto-based Timminco had defrauded them by claiming in 2008 that it had discovered a cheaper way to make silicon for solar panels.

The decision strictly interprets a three-year time limit imposed in the Ontario Securities Act for claims involving shares purchased on the stock market, meaning the clock had run out for the plaintiffs.

The ruling might also mean similar lawsuits that accuse major companies of misleading investors are simply out of time.

Plaintiff-side lawyers warn that the time limit is unrealistic for complex litigation and will allow companies that defraud or mislead the markets to drag their heels, run out the clock, and get away with it.

But lawyers who defend companies in such cases argue that three years is plenty of time. They say the 2005 amendments to the Ontario Securities Act that encouraged this kind of lawsuit, involving shares purchased in the stock market, were designed with safeguards against producing a U.S.-style avalanche of cases.

And some defence lawyers say they are now preparing to use the Timminco appeal ruling to knock claims out of court.

Won Kim of Kim Orr Barristers P.C. in Toronto, who acts for the plaintiffs in the Timminco case, said he is seeking leave from the Supreme Court of Canada to appeal the ruling, as well as lobbying for the Ontario government to change the law.

"This has been watched very carefully because it has the potential to destroy [other cases]" Mr. Kim said. But he also said the decision is not necessarily a "knockout punch" for his case against Timminco.

In its ruling, the Ontario Court of Appeal overturned a lower-court decision that said the Class Proceedings Act suspends the three-year time limit that the Securities Act gives plaintiffs to seek leave, or approval from a judge, required for their case to proceed. It's a clock that starts ticking when an alleged false statement is made.

More than 40 securities class actions are now before Canadian courts, including the blockbuster litigation facing Sino-Forest Corp., the TSX-listed Chinese forestry company facing fraud allegations.

Dimitri Lascaris of Siskinds LLP in London, Ont., who represents investors in Sino-Forest and in several other cases, estimates that 10 to 20 existing securities class actions are at risk. He has already received word from defence counsel in at least two of his cases – he would not say which ones – that intend to make use of the ruling.

He said it is "ludicrous" to expect plaintiffs to secure leave in just three years, given all the documents and legal skirmishing required.

Not every case will die, however. In some cases, he said, both sides have already agreed to waive the limitation period. In others, plaintiffs may have enough time to secure leave. Also, these cases usually make separate common-law claims that do not rely on the Securities Act. But, as a class action, these are much more difficult to prove.

As for the case against Sino-Forest, Mr. Lascaris said the appeal ruling gives him and his team until some time in 2014, three years after the last alleged misstatement made by the company before the infamous Muddy Waters report that accused Sino-Forest of fraud. But other claims in their lawsuit dating back to 2008 could be at risk. (A lawyer for Sino-Forest declined to comment.)

Alan D'Silva of Stikeman Elliott LLP, on the winning side of the Timminco ruling, said the three-year limit is meant to protect companies from having to deal with legal claims that date back many years: "These actions have a detrimental effect hanging over public companies and their long-term shareholders."