Ontario Court of Appeal Provides Further Guidance on the Leave Test for Securities Misrepresentation Claims

Written By Jason Berall and Dylan Yegendorf

The test for leave to bring a secondary market securities misrepresentation claim under section 138.3 of the Ontario Securities Act (OSA) has been the source of much confusion and conflicting jurisprudence. In a series of decisions released in 2015, the Supreme Court of Canada attempted to clarify the threshold by explaining that “some credible evidence” is required to pass the test.

Just how much evidence is required remained an unsettled question following the Supreme Court’s guidance. On September 26, 2022, the Ontario Court of Appeal released its decision in Badesha v. Cronos Group Inc., in which the Court overturned the lower Court’s decision refusing to grant leave and attempted to provide some further clarification regarding the leave test. 

Two key takeaways from the decision are as follows:

1. First, the Court explained that the statement of claim should be read “generously” in the context of a motion for leave to bring a claim under s. 138.3 of the OSA. The Court found that the motion judge applied too strict a reading of the statement of claim, which impacted the decision to deny leave.
2. Second, the Court found that the motion judge went too far in weighing conflicting evidence presented on the motion, and that the plaintiff had presented sufficient evidence to meet the threshold on a motion for leave under s. 138.8 of the OSA.

The requirements for leave to bring a statutory claim for misrepresentation in the secondary market under s. 138.8 of the OSA are that (1) the action is brought in good faith, and (2) there is a “reasonable possibility” that the action will be resolved in favour of the plaintiff at trial.

In the 2015 decisions referenced above, the Supreme Court explained that the “reasonable possibility” test is meant to be “more than a speed-bump” but not meant to be a “mini-trial,” and that a plaintiff seeking leave must “offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.”

In addressing the motion for leave in this case, the motion judge characterized the proposed action as a claim alleging 7,449 individual misrepresentations. This characterization was premised on the hundreds of individual accounting misrepresentations that were listed in the plaintiff’s claim and its lengthy schedules. On that basis, the motion judge refused to grant leave, concluding that there was no reasonable possibility that the plaintiff could succeed at trial since there was insufficient evidence that each of the 7,449 alleged misrepresentations had affected Cronos’s share prices. 

The Court of Appeal found that the motion judge erred in characterizing the claim as alleging 7,449 individual misrepresentations. The Court explained that: “while the reasonable possibility test is meant to be more than a ‘speed bump’, at this early stage in the proceeding the claim is to be read generously.”

Reading the plaintiff’s claim “generously”, the Court of Appeal found that the claim did not plead 7,449 discrete misrepresentations as the motion judge suggested, but rather it alleged one “central” or “core” allegation. In the Court’s view, the vast majority of the particulars included in the claim and its schedules were not individually actionable misrepresentations, but were manifestations of, or at least related to, this core misrepresentation.

The Court of Appeal also found that the motion judge’s weighing of the conflicting expert evidence improperly tipped into the realm of a mini-trial. As articulated by the Court of Appeal, some weighing of evidence is permitted. The permissible weighing of evidence falls somewhere between a “de minimis assessment of the evidence on the record” and a “mini-trial”. The Court found that the motion judge engaged in too much scrutiny of the conflicting evidence and that the plaintiff’s evidence was sufficient to meet the evidentiary bar to overcome the “reasonable possibility” of success standard.

If you require assistance in respect of issues relating to securities misrepresentation or related matters, please contact a member of the Bennett Jones Litigation group.

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