The Supreme Court of Canada will release a trio of rulings on Friday – including one in a potentially mammoth case against Canadian Imperial Bank of Commerce – that were expected to have wide ramifications for shareholder class-action lawsuits.
The top court heard arguments last February on three separate cases launched in Ontario on behalf of shareholders against Imax Corp., Celestica Inc. and CIBC. In the CIBC case, investors allege the bank misled them about its exposure to the U.S. subprime mortgage market, which melted down and triggered the global financial crisis in 2008. CIBC denies the allegations.
The rulings could set new ground rules on how difficult it should be for plaintiffs who launch this kind of action to propel their cases past the early stages of litigation. The Ontario Securities Act and other similar laws in other provinces require plaintiffs to win "leave" from judge before trial, a screening procedure meant to weed out baseless U.S.-style "strike suits" seeking a quick settlement.
The Supreme Court may also decide whether plaintiffs filing a case like this can get around the ceiling (set at 5 per cent of a defendant's market capitalization) on damage claims in the Ontario Securities Act. They typically try to do this by filing additional claims known as common-law claims, which can be in the hundreds of millions, or billions, but are considered much harder to prove.
However, the main issue before the top court was whether these three particular cases should be allowed to proceed at all. All three cases, which have dragged on for years, looked dead in the water after the Ontario Court of Appeal initially ruled in 2012 (in a separate case) in favour of a strict interpretation of the Ontario Securities Act that imposed a three-year time limit for a judge to grant the required leave for a shareholder class action to go ahead.
The appeal decision provoked outrage from plaintiffs' lawyers, who warned that the corporations they were suing would simply use delaying tactics to run out the clock. Bay Street defence lawyers welcomed the tight deadline, saying it was meant to shield companies from allegations that hung over them for ages.
In the CIBC case, Ontario Superior Court Justice George Strathy declared the lawsuit out of time but said that he made the decision "with considerable regret" because he believed the case against the bank had a "reasonable possibility of success" at trial.
Last year, however, the appeals court, in a rare move, reversed itself, reviving these three cases and others like them.
The Ontario government has also since amended the legislation to eliminate the strict interpretation of the three-year deadline. But this rule only applies to future cases: The fate of these three lawsuits still hangs in the balance before the Supreme Court.
Shareholder class actions generally involve allegations that a company failed to properly disclose its financial results to investors. In many cases, a company later restates its numbers, its shares sink on the news, and a lawsuit follows as some shareholders seek to recover losses.
These kinds of cases have been on the rise in Canada ever since Ontario changed its Securities Act to make them much easier to file in 2005. Other provinces followed suit. While warnings that the legislation would cause a U.S.-style explosion of cases have proved overblown, there has been a slow and steady increase in claims filed.
According to a NERA Economic Consulting study from February, there are a total of 60 cases – representing $35-billion in claims – now working their way through the courts, with 11 new ones filed in 2014. None has made it to a full-blown trial.