Guest column by Dimitri Lascaris of the Siskinds law firm in Canada. Mr. Lascaris is a partner in Siskinds’ Class Action department, and filed a proposed $550 million class action last week against American International Group, Inc. in Ontario, Canada.
For years, U.S. courts have aggressively asserted jurisdiction over foreign corporations and their foreign shareholders. The fact that a parallel class action was pending in the corporation’s home jurisdiction has often been dismissed by US courts as little more than an idle curiosity. In Nortel I, for example, the SDNY certified a class encompassing Canadian residents who had purchased Nortel shares over the Toronto Stock Exchange, and did so over the objections of counsel to the lead plaintiffs in a parallel class action pending in the Ontario Superior Court of Justice.
Similarly, following a dismissal for failure to plead scienter with adequate particularity, the US plaintiffs in the CP Ships Securities Litigation settled a class action pending in the Middle District Florida for a mere $1.3 million. By the time that the final settlement approval hearing was held before the MDF, Canadian Courts had denied the defendants’ motion to dismiss certain claims being asserted in a parallel Canadian class action, and had certified a class encompassing all persons resident in Canada who had acquired securities of CP Ships during the class period. Despite these facts, and in the face of the objection of a Canadian resident who had purchased shares of CP Ships on the NYSE, the MDF approved a settlement that purported to extinguish the claims not only of Canadian residents who purchased CP Ships shares over the NYSE, but also of some Canada residents who had acquired CP Ships securities in Canada.
It should therefore surprise no one that a Canadian Court will soon be asked to certify a class encompassing Canadian residents who acquired securities of AIG over the NYSE. Indeed, the class of persons on whose behalf the Canadian plaintiff seeks to act would not encompass AIG investors who are resident outside of Canada, and would therefore be considerably less expansive than the classes certified in Nortel I, CP Ships and other US class actions against foreign issuers.
The Securities Act of the Province of Ontario now expressly provides that an action may be brought under the Act against issuers that are not “reporting issuers” in Ontario, so long as (a) the issuer has a “real and substantial connection” to Ontario, and (b) the issuer’s securities are publicly traded. The plaintiffs in the Canadian action allege and will argue that AIG has a real and substantial connection to Ontario.
Moreover, the Ontario Securities Act now offers to plaintiffs important substantive and procedural advantages that are not available in a 10b-5 action. Indeed, while a business-friendly Congress has been enacting “reforms” that have undermined investor protection, and while an increasingly business-friendly judiciary has been chipping away at the 10b-5 right of action, other jurisdictions (notably Canada and Australia) have been enhancing investors’ access to justice.
Under the civil liability regime that came into effect in Ontario at the end of 2005, a plaintiff need not prove fraudulent intent so long as the misrepresentations were contained in certain “core” documents, such as the issuer’s annual and interim financial statements or MD&A. With respect to such misrepresentations, a showing of mere negligence will suffice. Moreover, once it has been demonstrated that the defendants made a misrepresentation in a core document, the onus shifts to the defendants to demonstrate that they conducted a due diligence investigation.
Ontario’s Securities Act imposes caps on the defendants’ liability: the issuer’s liability is limited to 5% of its market capitalization, while directors’ and officers’ liability is limited to 50% of the director’s or officer’s annual compensation from the issuer. The liability limit of directors and officers does not apply, however, if the plaintiff demonstrates that the director or officer knew that the impugned statements were misrepresentations. Moreover, the issuer’s liability cap is calculated by reference to the issuer’s market capitalization immediately prior to the making of the misrepresentation. AIG’s market capitalization immediately prior to the making of the alleged misrepresentations was approximately $175 billion, meaning that its liability limit under the Ontario Securities Act is approximately $8.75 billion. Thus, unless the aggregate damages sustained by Canadian residents exceeds $8.75 billion, then AIG’s liability limit is effectively an irrelevancy in the Canadian litigation.
Like the PSLRA, the Ontario Securities Act imposes a preliminary merits test. The Ontario test, however, is evidence-based rather than pleadings-based, and the Ontario Securities Act does not impose a stay of discovery until resolution of the merits test. Rather, the defendants are obliged to disclose essentially all evidence that has a “semblance of relevance” to the issues raised by the preliminary merits test.
Finally, under the Ontario Securities Act, there is a presumption that a stock drop that occurs contemporaneously to a corrective disclosure was caused by that disclosure. The defendants bear the burden of proving that that stock drop was wholly or partially attributable to factors other than the corrective disclosure. In light of the increasingly stringent loss causation requirements in 10b-5 actions, this presumption constitutes a significant advantage over the 10b-5 regime.
Accordingly, Canadian purchasers of AIG shares have considerable reason to prefer that their claims be adjudicated in Canada under Canadian law.
For a long time, America has largely dictated the standards by which issuers are obliged to conduct themselves in a globalized capital market. Like much else that is coming to an end in today’s capital markets, that era may be over.