Ontario Superior Court conditionally certifies securities class action despite no valid representative plaintiff

In the recent decision of Vecchio Longo Consulting Services Inc. v. Aphria Inc.¹, Justice Perell of the Ontario Superior Court of Justice certified a class action against the cannabis company Aphria Inc. (Aphria), certain of its directors and officers, and a group of investment banks which underwrote one of Aphria’s offerings. In the reasons, Justice Perell seeks to clarify the law surrounding certain issues related to representative plaintiffs in Ontario class actions and provide a model for how representative plaintiff issues may be resolved by Ontario courts in the future.

What you need to know

• This class action relates to alleged misrepresentations made by Aphria including in a prospectus released in connection with an offering of Aphria shares.
• The plaintiff proposed to bring a class action on behalf of investors who had purchased securities on both the primary and secondary markets. However, the proposed representative plaintiff had only purchased Aphria shares on the secondary market and as a result did not have a cause of action against the Underwriters who were only sued for misrepresentations made in the primary market.
• The Court held that the proposed representative plaintiff could not act as a representative plaintiff for class members who purchased Aphria shares on the primary market on the basis of earlier case law which requires that a representative plaintiff in class action must have a cause of action against each named defendant.
• Despite determining that the proposed representative plaintiff did not have a cause of action against the Underwriters, the Court still conditionally certified the primary market claim and ordered the Underwriters to produce a list of all of the respective purchasers in the offering at issue, following which class counsel would have an opportunity to try to appoint a suitable representative plaintiff.

Factual background

The class action concerns Aphria, a publicly-traded cannabis company. In January 2018, Aphria announced that it was acquiring another public cannabis company, Nuuvera Inc., for approximately $485 million (the Nuuvera Transaction). Following the completion of the Nuuvera Transaction, in March 2018 it was revealed in the press that certain Aphria insiders held undisclosed interests in Nuuvera at the time of the Nuuvera Transaction, which Aphria confirmed was accurate in May 2018.

In June 2018, Aphria issued common shares under a prospectus which raised approximately $259 million (the Prospectus Offering). This bought-deal offering was underwritten by a group of investment banks (the Underwriters). It is alleged that the prospectus failed to disclose a number of issues including: that the Nuuvera Transaction involved an overvaluation of the acquired assets and that Aphria’s disclosure regarding the integrity of its internal controls including those designed to avoid conflicts of interest were not effective.

Following the prospectus offering, in July 2018, Aphria announced a transaction known as the “LATAM Transaction” through which Aphria acquired certain companies located in Latin America and the Caribbean in exchange for Aprhia shares with a value of approximately $274 million.

In December 2018, two short sellers publicly alleged that the assets acquired in the LATAM Transaction were purchased by shell companies—some of which were controlled by Aphria insiders which then sold these assets to another company before selling them to Aphria at a substantial markup, resulting in Aphria acquiring assets worth far less than their purchase price. Following this report, Aphria’s share price dropped by approximately 43% resulting in a loss of $1.13 billion in market capitalization.

The class action

In January 2019, a proposed class action was commenced against Aphria, certain of its directors and officers, and the Underwriters. It alleged that the defendants misled the market from January 2018 to December 2018 in relation to the Nuuvera Transaction, the Prospectus Offering, and the LATAM Transaction which resulted in the price of Aphria’s shares being substantially inflated until the release of the short-sellers’ report. The Underwriters are defendants in respect of claims relating to the Prospectus Offering; the other defendants are named in respect of the primary market and secondary market claims.

Justice Perell’s decision

Justice Perell’s decision granted relief on a number of matters, including granting leave to assert the secondary market misrepresentation claim under section 138.3, Part XXIII.1 of the Ontario Securities Act, and certifying the secondary market misrepresentation claim against Aphria and its directors and officers.

The Underwriters contested the certification of the primary market claim made under section 130, Part XXIII of the Ontario Securities Act. The Underwriters argued that the primary market claim should not be certified for two reasons:

1. There was no basis in fact to conclude there are two or more class members that have a claim they wished to pursue for primary market misrepresentation; and
2. Notwithstanding that the proposed representative plaintiff was eligible to pursue the secondary market claim, it is not eligible to advance a primary market claim as it does not have a cause of action against the Underwriters.

Justice Perell held that the first argument had no merit as the test under section 5 of the Class Proceedings Act, 1992, does not require the plaintiff to show some basis in fact that there was a group of class members who wished to have their common complaint determined. Rather, Justice Perell held that there was some basis in fact, as alleged, to conclude that two or more purchasers from the Underwriters suffered a loss connected to the Prospectus Offering. Justice Perell further held that it was not a requirement at the certification stage to show that there are two or more persons who wished to pursue a claim but rather simply that there are two or more persons who share the same complaint of purchasing Aphria shares under the misapprehension that the prospectus was honest and true. Justice Perell concluded on this issue that even if the Underwriters were correct that no purchasers wish to pursue a primary market claim, this will be resolved by all of the primary market purchasers opting out of the class action. The second issue engages a long-standing debate about standing and proposed class actions.

The representative plaintiff issue

In respect of the Underwriters’ second argument, it was clear on the evidence that the proposed representative plaintiff had not purchased Aphria shares on the primary market. As a result, the Underwriters relied upon the Ragoonanan Principle, first developed in the case of Ragoonanan Estate v. Imperial Tobacco Canada Ltd.² and adopted by the Ontario Court of Appeal in Hughes v. Sunbeam Corp. (Canada)³, to argue that since there was no plaintiff with a cause of action against them the primary market claim could not be certified.

The plaintiff argued that the Ragoonanan Principle did not bar it from acting as the representative plaintiff for the primary market claim because the Principle had been overturned by the Supreme Court of Canada’s decision in Bank of Montreal v. Marcotte⁴. Justice Perell ultimately concluded that the Ragoonanan Principle remained good law in Ontario and the Marcotte decision did not overturn it which meant that the proposed representative plaintiff was not suitable to pursue the primary market claim.

In support of this conclusion, Justice Perell referred to the first principles associated with the Class Proceedings Act, 1992, including section 2 of the Act which outlines that only a member of the class may commence an action on behalf of other members of the class. Justice Perell also noted that this section distinguished Ontario’s class action legislation from that of other provinces which expressly permit non-class members to act as representative plaintiffs.

Justice Perell then reviewed the case law which preceded Marcotte on this issue, including Boulanger v. Johnson & Johnson Corp.⁵ which stands for the proposition that if a plaintiff has a cause of action against a defendant, then the plaintiff is qualified to be a representative plaintiff for the class members who have the same or different causes of action against the defendant. Therefore, since the plaintiff in this case had a cause of action against Aphria in the secondary market, in theory they could act as the representative plaintiff for primary market claims against Aphria. However, since the plaintiff did not have any cause of action against the Underwriters it could not act as representative plaintiff against them.

Justice Perell then considered Marcotte in which the Supreme Court concluded that a representative plaintiff in a class action commenced in Québec was suitable to act against defendants against whom it did not have a cause of action. Justice Perell recognized that class action jurisprudence has developed into a genuinely national jurisprudence meaning that it is certainly possible that a decision out of Québec can yield a Supreme Court of Canada decision which is binding on the class action regimes across the country. However, Justice Perell also recognized that it is not inevitable that all Supreme Court class action decisions establish a nationwide precedent. Given the Supreme Court’s focus in Marcotte on Article 55 of the Québec Code of Civil Procedure which requires plaintiffs to have a “sufficient interest” in the action before concluding that a “sufficient interest” need only include identical, similar, or related questions of law or fact in order to act as the representative plaintiff Justice Perell concluded that Marcotte could not be read as a decision meant to have any effect outside of Québec’s class action regime. As a result, Justice Perell concluded that Marcotte did not overturn the Ragoonanan Principle.

Having determined that the proposed representative plaintiff was ineligible, Justice Perell was faced with what to do with a class action which otherwise met the certification criteria. Ultimately, Justice Perell decided to certify the primary market claim but on the condition that class counsel appoint a representative plaintiff who had purchased Aphria’s shares on the primary market within 100 days. However, in order to assist class counsel, Justice Perell also ordered the Underwriters to produce an affidavit listing the names and contact information of purchasers of the prospectus offering within 30 days relying upon section 5(3) of the Class Proceedings Act, 1992 which requires parties to a certification motion to provide the parties’ best information on the number of members in the class.

Key takeaways

Despite the fact that the Underwriters were successful in showing that the proposed representative plaintiff was ineligible, this ended up being a pyrrhic victory as Justice Perell still certified the action against them. The decision lends support for the argument that defendants may not be able to rely on an ineligible representative plaintiff as grounds to defeat a certification motion unless it can be shown that class counsel has all of the relevant information required to try to recruit a suitable representative plaintiff and has failed to do so.

Further, in this case a syndicate of five investment banks participated in the offering at issue. It is unclear whether the court will accept a single primary market purchaser who may have only purchased Aphria securities from a single investment bank to act against all of the Underwriters or whether class counsel will be required to put forward a combination of representative plaintiffs who, collectively, purchased Aphria securities from each of the investment banks involved in a bought-deal financing. Arguably, under the Ragoonanan Principle, the latter is required, but the court’s resolution of this issue remains to be seen.

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

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