Shareholder Class Actions in Ontario: Putting John C. Coffee, Jr.’s Findings to the Test

AuthorMichael P.A. Carabash
Pages328-398
328
SHAREHOLDER CLASS ACTIONS
IN ONTARIO: PUTTING JOHN C.
COFFEE, JR.’S FINDINGS TO THE
TEST
Michael P.A. Carabash1
[T]here is still a long way to go to fix a broken securities litigation
system, in which shareholders basically end up suing themselves
with the lawyers raking huge sums off the top.2
– The U.S. Chamber of Commerce
A. INTRODUCTION
In his seminal article entitled “Reforming the Securities Class Action: An
Essay on Deterrence and its Implementation,” Professor John C. Coffee,
Jr.,3 concludes: “As presently constituted, [U.S.] securities class actions
produce wealth transfers among shareholders that neither compensate
nor deter.”4 According to Professor Coffee, corporations and their inno-
cent shareholders — as opposed to culpable individual offenders acting
on behalf of corporations — have ultimately borne the costs of share-
1 Michael Carabash has a B.A. from the University of Toronto, an LL.B. from
Osgoode Hall Law School, and an M.B.A. from the Schulich School of Business.
He is currently articling at Ontario Power Generation Inc. and hopes to estab-
lish his own law firm. Mr. Carabash thanks Professors Garry D. Watson and
Allan C. Hutchinson of Osgoode Hall Law School for their invaluable guid-
ance and Amana Karim for her unwavering support. This essay is dedicated to
Parastou Gheidarpour.
2 U.S. Chamber of Commerce, “U.S. Capital Markets: Summary of Chamber
Activity” (January 2007) at 8, online: U.S. Chamber of Commerce: www.
uschamber.com (site accessed 28 February 2007).
3 Professor John C. Coffee, Jr., is the Adolf A. Berle Professor of Law at Columbia
University School of Law and Director of its Center on Corporate Governance.
4 John C. Coffee, Jr., “Reforming the Securities Class Action: An Essay on
Deterrence and its Implementation” (2006) 106 Colum. L. Rev. 1534 at 1535–
36.
VOL UME 4, No 2, march 2008 329
holder class actions.5 Specifically, shareholder class actions have not suc-
ceeded in recovering high ratios of shareholder losses and have imposed
substantial transaction costs on both the public (that is, more judicial
time and resources have been spent managing shareholder class actions
than other types of class actions) and shareholders (for example, through
substantial counsel fees, higher director and officer (D&O) insurance
premiums, corporate disruption, and adverse publicity). Moreover, given
that D&O insurance, which is paid for by the corporation and its share-
holders, typically covers director and officer liability,6 deterrence seems
to be a non-issue.
The focus of this paper is to test Professor Coffee’s key findings
— namely, that shareholder class actions have imposed significant trans-
action costs on both the public and shareholders, while neither compen-
sating innocent shareholders nor deterring culpable individual offenders
— as they pertain to Ontario. In light of the extremely limited informa-
tion available, two research strategies were employed: (1) quantitative
and qualitative analysis of Ontario shareholder class actions was derived
from court files, and (2) interviews were conducted with lawyers in a
sample of shareholder class actions, as well as with class proceedings staff
at the Ontario Superior Court of Justice — Toronto Region office.
Sections B and C of this paper briefly review how Ontario share-
holder class actions are typically advanced — namely, via common law
or statutory misrepresentation. Differences between the Ontario and
U.S. jurisprudence have led some plaintiff class action practitioners to
raise concerns over the viability of advancing certain claims in Ontario.
According to them, claims based on misrepresentation at common law
are hindered by the need to establish that each class member relied on
corporate disclosure documents to purchase securities in a public market;
such claims are also of little assistance to secondary market shareholders.
For its part, the new secondary market statutory civil liability regime is
impeded by liability caps and procedural hurdles which, coupled with
Ontario’s fee-shifting rule and the possibility of endless motions and
appeals, creates a significant financial deterrent. Whether these concerns
are significant impediments to advancing shareholder class actions in
Ontario will depend on how the courts address them over time.
Section D addresses the issue of the public’s role in subsidizing share-
holder class actions. Here, Professor Coffee’s finding that U.S. shareholder
5 Ibid. at 1536–37.
6 With the exception of fraud.
330 THE CANADIAN CLASS ACTION REVIEW
class actions have disproportionately consumed more judicial resources
than other types of class actions has not, for the most part, come true
in Ontario. Section E discusses the benefits derived from shareholder
class actions vis-à-vis public enforcement measures, largely supporting
Professor Coffee’s finding that plaintiff class counsel are better at extract-
ing funds from corporate pocketbooks than regulators. Finally, sections F
and G examine the compensation and deterrence rationales, respectively,
for shareholder class actions. Here, the Ontario shareholder class action
data strongly supports Professor Coffee’s aforementioned finding that
shareholder class actions have neither compensated innocent sharehold-
ers nor deterred (at least in theory) wrongdoing on the part of culpable
individual offenders.7
Notwithstanding these shortcomings, shareholder class actions
should not be abandoned outright in Ontario. Ultimately, the practical
recommendations offered by Professor Coffee for U.S. shareholder class
actions — so as to shift the incidence of damages less on the innocent
and more on the culpable — should be followed in Ontario. Such rec-
ommendations include applying proportionate liability to the corporate
defendant and extending it to the settlement context,8 “activating the
insurer” so as to resist and deny coverage in cases of fraud,9 and basing
plaintiff attorney fees in part on the source of a settlement.10
7 Individual directors and officers have not, to date, been found ultimately liable
in Ontario via the shareholder class action device of any wrongdoing. Those
shareholder class actions which have been fully resolved via the courts have
been in the defendants’ favour: see Menegon v. Philip Services Corp., [2001] O.J.
No. 5547 (S.C.J.) (certification dismissed), aff ’d [2003] O.J. No. 8 (C.A.), leave
to appeal to S.C.C. refused, [2003] S.C.C.A. No. 95 [Menegon]; and Shaw v.
BCE Inc.; Gillespie v. BCE Inc., [2003] O.J. No. 2695 (S.C.J.); (2003), 42 B.L.R.
(3d) 107 (Ont. S.C.J.) (motion to strike claim allowed), aff’d (2004), 49 B.L.R.
(3d) 1 (C.A.), leave to appeal to S.C.C. refused, 2005 CarswellOnt 790 (S.C.C.)
[Shaw]. All of the shareholder class actions that settled had, as consideration
for the settlement, no admissions of liability on the part of the defendants for
any and all alleged wrongdoing.
8 See Coffee, above note 4 at 1573–75.
9 Ibid. at 1580–81.
10 Ibid. at 1581–82.

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