Ontario Court of Appeal Articulates Jurisdictional Limits to Secondary Market Misrepresentation Claims Against Foreign Issuers

The Ontario Court of Appeal has upheld a stay of proceedings in Yip v. HSBC Holdings plc. Yip is a secondary market securities class action commenced in Ontario against a foreign issuer whose securities had never been traded or listed on any Canadian exchange, but were owned in part by Canadians. The Yip decision, released on July 11, clarifies the jurisdictional limits of secondary market misrepresentation claims.

What You Need To Know

• The Court of Appeal held that the definition of responsible issuer found in s. 138.1 of Ontario's Securities Act (Act)—which includes issuers with a "real and substantial connection to Ontario" whose securities are publicly traded—is intended to prevent jurisdictional overreach by Ontario courts. Accordingly, the traditional common law test for asserting jurisdiction applies. The Court rejected an alternative, statute-specific test proposed by the plaintiff, which would have resulted in universal jurisdiction for Ontario in secondary market misrepresentation cases.
• Even in cases where Ontario has jurisdiction simpliciter, the Court of Appeal held that the more appropriate forum for secondary market claims will often favour the forum of the exchange(s) where the securities trade.
• In light of the decision, it will be difficult for Ontario courts to assert jurisdiction over foreign public issuers whose securities have not traded or been listed on a Canadian exchange, and who have no business operations in Canada.

The Underlying Action

The class action was commenced by a Canadian shareholder who had purchased shares of HSBC Holdings plc (HSBC Holdings) online using a Hong Kong bank account on the Hong Kong Stock Exchange. HSBC Holdings is the parent company of an international banking conglomerate based the United Kingdom, whose securities had never been traded or listed on a Canadian stock exchange. The plaintiff alleged that some of HSBC Holdings' disclosure documents, which he had downloaded from the HSBC Holdings website, contained misrepresentations.

The Motion Below

On the motion below, the motion judge applied the common law test for determining whether a Canadian court will assume jurisdiction in assessing if HSBC Holdings met the definition of "responsible issuer" for the purpose of s. 138.1 of the Act:

1. requiring the presence of a presumptive connecting factor to Ontario (including that the defendant carries on business in Ontario or that the tort was committed in Ontario);
2. determining whether the factor has been rebutted through evidence indicating the presumptive connective factor points to only a "weak" relationship (i.e., where there would be no reasonable expectation on the part of the defendant that it would be required to respond to proceedings in Ontario); and
3. applying the forum non conveniens doctrine, pursuant to which a court must decline jurisdiction if it is not the most appropriate forum for the dispute.

The motion judge concluded that Ontario lacked jurisdiction because HSBC Holdings did not carry on business in Ontario. Further, while the tort at issue was arguably committed in Ontario, that presumptive factor was rebutted given there was only a weak connection to Ontario. In the alternative, Ontario would not be the appropriate forum for the dispute. Although the motion judge acknowledged there was no "place of trading requirement" in the Act, the more appropriate forum in this case was the forum where the trades took place.

The Appeal Decision

On appeal, the appellant argued the following points.

• The Court should adopt a "purposive" analysis of the words' "real and substantial connection," found in the definition of responsible issuer in s. 138.1 of the Act. More specifically, the plaintiffs argued that an issuer that "knows or ought to know that its investor information is being made available to Canadian investors has a securities regulatory nexus with Ontario sufficient to establish the real and substantial connection under... the definition of responsible issuer in s. 138.1." This would have represented a significant departure from the common law test for determining whether a Canadian court will assume jurisdiction, as described above.
• Even if the common law test for jurisdiction applied, the motion judge erred in his application of the test, both in finding that HSBC Holdings did not carry on business in Ontario and in finding that, although the tort at issue was arguably committed in Ontario, the connection to Ontario was too weak to assert jurisdiction.
• The motion judge erred in his application of the doctrine of forum non conveniens, by placing too much emphasis on the place of trade.

The Court of Appeal dismissed the appeal, finding that:

• Based on an analysis of the legislative and jurisprudential history, it was clear that the Ontario Legislature intended the common law "real and substantial connection" test to apply to an analysis under s. 138.1 of the Act. There was "no legislative intention to create a universal jurisdiction for Ontario in secondary market misrepresentation claims, which is what the test proposed by the plaintiff would have done."
• Using the common law test for asserting jurisdiction, the Court of Appeal agreed that Ontario lacked jurisdiction simpliciter and that HSBC Holdings did not carry on business in Ontario. It also agreed with the motion judge's finding that, although a tort may have been committed in Ontario, the connection to Ontario was rebutted. More specifically, the Court of Appeal found that (i) downloading HSBC Holdings' disclosure documents from its website was an "extremely weak connection" to Ontario; and (ii) HSBC Holdings would have had no reason to believe it was subject to Ontario securities regulation in the circumstances.
• Even if Ontario had jurisdiction simpliciter (which it did not), this was a case in which Ontario ought to decline jurisdiction on the basis of forum non conveniens. Although there is no strict "place of trading requirement" under Part XXIII.1 of the Act (as had been recognized by the motion judge), courts should generally favour the forum where the trades took place, in the context of secondary market misrepresentation claims.

Guidance on the Jurisdictional Limits of Secondary Market Misrepresentation Claims

The Yip decision clarifies the jurisdictional limits of secondary market misrepresentation claims involving a foreign issuer and trading outside Ontario. The emphasis on the place of trading in the Court of Appeal's decision is consistent with the U.S. approach to the limits of secondary market misrepresentation claims. Yip should therefore also help resolve disputes in claims against cross-listed issuers, suggesting that, in such cases, an Ontario class should be limited to persons who traded in Ontario, leaving for a U.S. action the class of persons who traded in the U.S.