Ontario Court of Appeal Decision Restricts Securities Class Actions

On February 16, 2012, the Court of Appeal for Ontario released a decision that will affect the conduct of secondary market securities class actions and bar some outstanding putative class actions from proceeding further. In Sharma v. Timminco Limited, the Court of Appeal held that the limitation period governing the cause of action created by the Securities Act (Ontario) for misrepresentation in an issuer’s continuous disclosure continues to run until leave is granted by the court, permitting the commencement of an action. The limitation period is not suspended by the Class Proceedings Act.

As a result of this decision, some proposed claims that are awaiting a hearing and decision on leave will be statute-barred. For others, plaintiffs will have to move quickly to have the leave requirement determined within the applicable three-year limitation period; alternatively, plaintiffs will have to enter into agreements with defendants to toll the limitation period. The Sharma decision will similarly affect other kinds of proceedings that also cannot be commenced without a court’s leave.


The Sharma Decision

Section 138.3 of the Securities Act (OSA) creates a cause of action permitting investors to sue if there are misrepresentations in an issuer’s continuous disclosure. To protect reporting issuers and capital markets generally from the costs associated with unmeritorious securities class action claims, the statutory secondary market liability regime contains a gatekeeping mechanism, requiring proposed class action plaintiffs to obtain a court’s permission to commence an action; this permission is to be granted only if the court is satisfied that the claim is made in good faith and has a reasonable possibility of success at trial. The OSA also prescribes a limitation period for making a claim under the statutory regime: an action cannot be commenced more than three years after the alleged misrepresentation was made. The question in Sharma was what happens when proposed class action plaintiffs present their motion for leave to commence a statutory claim within the three-year limitation period, but the motion is not heard and no decision on leave is made until the limitation period has expired. Is the proposed claim then statute-barred – since the statute prescribes that "No action shall be commenced" after the three-year limitation period?

In Sharma, the proposed plaintiff resisted the conclusion that the claim was statute-barred after three years by relying on section 28(1) of the Class Proceedings Act (CPA). That provision suspends the operation of limitation periods "applicable to a cause of action asserted in a class proceeding" upon the "commencement of the class proceeding." As a result of section 28(1) of the CPA, when a proposed class action is commenced, the limitation periods governing the causes of action asserted by the plaintiff in the statement of claim are suspended for members of the putative class until, among other things, the action is dismissed or settled.

The Court of Appeal decided in Sharma that section 28(1) of the CPA does not suspend the limitation period in the OSA until leave is granted for the plaintiff’s action to be commenced. The suspension of limitation periods occurs only after an action is commenced, which occurs with a section 138.3 claim only after leave is obtained.


The Effect of the Sharma Decision

The plaintiff in Sharma has not yet been granted leave to commence an action in respect of misrepresentations allegedly made in 2008. As a result of the Court of Appeal’s decision, the plaintiff's OSA claim is statute-barred.

For other class action plaintiffs who have not obtained leave and whose claims relate to disclosure made more than three years ago, their claims will also be statute-barred, subject to any agreement to suspend the running of the limitation period. Some plaintiffs had entered into such agreements tolling the OSA limitation period before the Sharma decision, and those agreements may protect the plaintiffs’ claims and the claims of members of the putative class. In the wake of the Sharma decision, plaintiffs will almost certainly request that defendants agree to toll the limitation period, failing which there will be a "hurry up" schedule for the leave motion to ensure that leave is determined before the OSA limitation period expires.

The reasoning in Sharma may have broader application to proposed class actions in Ontario beyond proceedings seeking to rely on section 138.3 of the OSA. Whenever leave is required before an action can be commenced, the applicable limitation period will not be suspended under section 28(1) of the CPA until leave is granted. That could apply to proposed class actions involving proposed defendants involved in Companies’ Creditors Arrangement Act proceedings: in those circumstances, until the court-ordered stay of proceedings is lifted and an action can be commenced, limitation periods will not be suspended. Similarly, derivative actions under the Business Corporations Act (Ontario) can only be commenced with leave of the court; according to Sharma, the limitation period applicable to those claims would not be suspended in a proposed class action until leave is granted and an action can be commenced.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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