Litigation trends in corporate Canada

2020 has been a year of change and challenges. In this uncertain environment, corporate litigation has remained active, with disputes being heard electronically and digitally, as opposed to in court rooms.

In this article, we outline trends that have affected Canadian corporate litigation, highlighting risks to corporations and their directors and officers.

1. Caremark claims—coming soon to Canada?

In the United States, there has recently been an increase in “Caremark” claims, with five such claims being allowed to proceed in Delaware in the past two years¹. Caremark claims, which may be initiated after a significant failure of risk management, involve allegations that directors failed to make good faith efforts to oversee corporate operations, and therefore have breached their fiduciary duty of loyalty.

Most recently, in August 2020, the Delaware Court of Chancery held that a Caremark claim against the directors of AmerisourceBergen Corporation (ABC) could proceed². One of ABC’s subsidiaries illegally pooled excess drugs it received from a drug manufacturer and used this excess to fill syringes, which it then sold. The Delaware court concluded that directors of ABC faced a substantial likelihood of liability under the Caremark principle—i.e., that they had failed to make a good faith effort to oversee the corporation’s operations and exercise oversight responsibilities.

Canadian companies operating abroad may face new and increasing risk of liability in Canadian courts.

Canadian courts have not yet found a similarly articulated Caremark duty of corporate oversight. However, Canadian directors have fiduciary obligations, a duty of care, as well as statutory obligations to “manage” and “supervise” the business and affairs of a corporation³. It is not difficult to imagine that a Caremark claim could be brought against a Canadian director, in accordance with these pre-existing duties.

The recent proliferation of these claims in the United States indicates that we may see these types of claims in Canada soon. Further, the broad array of issues currently faced by directors (for example, pandemic-related stresses and increased social awareness of sexual harassment and discrimination) suggests that we may see Caremark-style claims in Canada connected to these new or heightened challenges.

2. Disclosure claims

Corporations and their directors and officers could also face litigation under securities legislation regarding the disclosure of risks, and the management of risks, among other things. The pandemic has highlighted disclosure claims regarding the disclosure of risks, but also disclosure of pandemic opportunities. The early stages of the COVID-19 pandemic caused large market declines for some issuers and has since continued to impact market volatility. We may therefore see an increase in securities class action filings associated with the pandemic. Such cases have already been filed in the United States; for example:

• in Norwegian Cruise Lines, shareholders allege that the cruise ship company failed to disclose: (1) the potential impact of COVID-19 on its business operations and prospects; and (2) questionable sales tactics, motivated by the desire to hit sales quotas and designed to conceal the risks of COVID-19 to customers⁴;
• in Inovio Pharmaceuticals, Inc., Sorrento Therapeutics and Chembio Diagnostics, shareholders allege that management made misleading public statements indicating that the company had created a vaccine for the COVID-19 virus, leading to a jump in the company’s stock price⁵; and
• in Geo Group Inc., shareholders allege that the real estate investment trust made omissions and misstatements regarding the effectiveness of its COVID-19 response procedures after multiple outbreaks in halfway homes operated by Geo Group⁶.

3. Increasing risks for companies operating overseas

Canadian companies operating abroad may face new and increasing risk of liability in Canadian courts. These risks may be particularly relevant to companies in the resource and extraction industry, and they may arise within corporate groups.

There is potential for rising risk that claims may be brought seeking to hold Canadian parent companies liable for the actions of foreign subsidiaries.

Last year, the UK Supreme Court decision in Vedanta Resources Plc and Konkola Copper Mines Plc v Lungowe and Others determined that claims against a UK-domiciled parent company could be brought in the UK with respect to claims against its Zambian-domiciled subsidiary⁷. This ruling highlights the need for multinational companies to be aware of the possibility that non-UK claimants may be able to bring claims against them in English courts where they have an English parent company.

Similar issues are before Canadian courts for Canadian-owned subsidiaries of extraction companies⁸. While the decision in Vendanta is not binding on Canadian courts, it signals a heightened risk that claims may be brought seeking to hold Canadian parent companies liable for the actions of foreign subsidiaries.

4. Shareholder recourse for diminution of share value

In the 1843 decision of Foss v. Harbottle, the House of Lords established that only the corporation may pursue a claim for wrongs done to it⁹. This seminal decision has had a lasting impact on Canadian corporate law and has been repeatedly applied and adopted in Canadian jurisprudence. As a result, in general, shareholders in Canada are prohibited from bringing a personal action for harm caused to a corporation.

In Tran v. Bloorston Farms Ltd.¹⁰, the Ontario Court of Appeal confirmed an important exception to the Foss v. Harbottle rule. A shareholder can bring a claim for harm incurred by a corporation in circumstances where the shareholder has a unique cause of action (or the only cause of action) against the defendant. Following this guidance from the Ontario courts, it is possible that we may see an increase in claims being cast so as to fall under this exception.

Bloorston Farms involved a restaurant that was owned by a corporation. The restaurant operated in a space that was leased by Mr. Tran, the corporation’s sole shareholder. Mr. Tran was the only listed tenant on the lease. When the landlord terminated the lease, the value of the corporation declined, because the restaurant was forced to close. Mr. Tran brought an action against the landlord, seeking recovery of the diminution of his shares in the corporation. The Ontario Court of Appeal concluded that Mr. Tran was not precluded from bringing an action against the landlord, even though the harm had been caused to the corporation (not him personally).

In reaching this conclusion, the Court reviewed the principles behind the rule in Foss v. Harbottle: 1) a corporation is a distinct legal entity, separate from its shareholders; and 2) the rule avoids a multiplicity of actions. The Court of Appeal acknowledged that there was some jurisprudential uncertainty about the scope of the rule in Foss v. Harbottle, and confirmed that there is an exception to this rule where: 1) a shareholder has his or her own distinct cause of action because of a wrong done to him or her¹¹; or, 2) the corporation—despite suffering its own losses—has no cause of action itself, because no legal wrong was done to it.

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¹ This term is a reference to the case of In re Caremark Intern. Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. Sept. 25, 1996) (Caremark). See: Marchand v Barnhill, 212 A.3d 805 (Del. 2019); In re Clovis Oncology, Inc. Derivative Litigation, C.A. No. 2017-0222-JRS, 2019 WL 4850188 (Del. Ch. Oct. 1, 2019; Inter-Marketing Group USA, Inc. v Armstrong, C.A. No. 2017-0030-TMR, 2020 WL 756965 (Del. Ch. Jan. 31, 2020); Hughes v. Hu, C.A. No. 2019-0112-JTL, 2020 WL 1987029 (Del. Ch. Apr. 27, 2020); Teamsters Local 443 Health Services & Insurance Plan v. Chou, No. 2019-0816-SG (Del. Ch. Aug. 24, 2020).

² Teamsters Local 443 Health Services & Insurance Plan v. Chou, No. 2019-0816-SG (Del. Ch. Aug. 24, 2020).

³ Canada Business Corporations Act, R.S.C., 1985, c. C-44, ss. 102(1), 122.

⁴ See more on this case here. A similar lawsuit has been commenced against Carnival Cruiselines.

⁵ See more on the Inovio case here.

⁶ See more on the Geo Group case here.

⁷ Vedanta Resources Plc and Konkola Copper Mines Plc v Lungowe and Others, [2019] UKSC 20.

⁸ See for example Caal Caal v. Hudbay Minerals Inc., 2020 ONSC 415.

⁹ Foss v. Harbottle, (1843), 67 ER 189 (UKHL).

¹⁰ Tran v. Bloorston Farms Ltd., 2020 ONCA 440.

¹¹ The Court of Appeal notes that such cases may or may not be actionable, depending on the circumstances of the case. See Tran v. Bloorston Farms Ltd., 2020 ONCA 440 at paras. 35-39.

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