LBP Holdings Ltd. v. Hycroft Mining Corporation
On October 24, 2017, the Ontario Superior Court of Justice (the "Court") handed down a decision in LBP Holdings Ltd. v. Hycroft Mining Corporation, declining to certify the portion of a securities class action relating to the underwriters on the basis that the common law claim of negligence failed to disclose a cause of action and a class proceeding was not the preferable procedure. This is an important precedent for underwriters, as it is the first reported Canadian case on the issue of whether underwriters owe investors who purchase securities under a prospectus a common law duty of care and a defence-favorable development of the law regarding class action certification of common law claims.
The action was brought on behalf of investors against Hycroft Mining (formerly Allied Nevada Gold Corp.) and two of its executives for primary market misrepresentation under section 130 of the Ontario Securities Act, alleging misrepresentations in a prospectus for a secondary public offering. The court granted certification against the Hycroft defendants (who had consented), but narrowed the proceeding to exclude the underwriters, who sold the shares in the bought deal offering. The statutory claim against the underwriters had previously been abandoned and the plaintiff sought to certify only common law claims for negligence and negligent misrepresentation.
The underwriters successfully resisted certification on the basis that the negligence claim failed to disclose a cause of action and a class proceeding was not the preferable procedure for either claim.
Justice Perell accepted the following arguments made by the underwriters:
- the negligence claim was subsumed within the negligent misrepresentation claim and was included by the plaintiff to avoid the necessity of proving reliance as a constituent element of the cause of action; and
- the cause of action for the negligence claim does not survive a duty of care analysis because the underwriters did not owe the duties to the investors alleged by the plaintiff: (i) to properly price the shares; and (ii) to perform due diligence to ensure comprehensive disclosure of material facts.
Justice Perell engaged in an Anns1 test analysis to determine whether the underwriters owed potential shareholders a duty of care. He found that an underwriter would not anticipate that purchasers would be relying on it to act as a gatekeeper separate and apart from its duties of care under s. 130 of the Ontario Securities Act and its common law duties with respect to misrepresentations in the prospectus. Even assuming the underwriters had a duty of care for negligence independent of their duty of care with respect to representations, policy factors negate the duty of care.
The negligent misrepresentation claim survived the cause of action analysis but failed the preferable procedure analysis. For the purposes of a preferable procedure analysis, Justice Perell also assumed that the cause of action criterion had been satisfied for negligence and found that it too failed the preferable procedure analysis. Justice Perell held that the elements of reliance, causation, and damages are matters that raise highly individual issues. A cost-benefit analysis indicated that little benefit was added by subjecting the individual claims to the procedure of a class action. This decision stands in contrast to the apparent judicial trend and willingness to certify securities class actions involving reliance-based claims.
1 Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2.