Silver V. Imax and Ainslie V. Cv Technologies: What Has Been Left Out of the Leave Requirement

• Author: Andrea Laing and Brian Donnelly
• Pages: 180-218

180

SI LVER V. IMAX

AND

AINSLIE V.

CV TECHNOLOGIES

: WHAT HAS

BEEN LEFT OUT OF THE LEAVE

REQUIREMENT

Andrea Laing and Brian Donnelly*

A. INTRODUCTION

On 31 December 2005, with the enactment of Bill 198,1 the new Part

XXIII.1 of the Ontario Securities Act2 came into force. Part XXIII.1, now

comprising section 138 of the OSA, provides a statutory right of action

against “responsible issuers” and various related parties for misrepresen-

tations affecting the price of securities on the secondary market. The new

legislation also implements a leave application pursuant to section 138.8

of the OSA in an effort to protect defendants from American-style “strike

suits.”3 It is only now—over three years after the new Part XXIII.1 came

into force—that leave applications seeking judicial approval to com-

mence a proceeding under this new legislation are starting to be heard.4

To the present date, no decision in respect of a leave application has been

* Andrea Laing is a partner of Osler, Hoskin & Harcourt LLP and is a member of

the Osler class action speciality group; Brian Donnelly is an articling student at

Osler. The authors would like to thank Larry Lowenstein for his helpful com-

ments.

1 Bill 198, Keeping the Promise for a Strong Economy Act (Budget Measures), 2002,

3d Sess., 37th Leg., Ontario, 2002 (assented to 9 December 2002) [Bill 198].

2 Securities Act, R.S.O. 1990, c. S.5 [OSA].

3 Ontario Securities Commission, CSA Notice 53-302 — Proposal for a Statutory

Civil Remedy for Investors in the Secondary Market and Response to the Proposed

Change to the Definition of “Material Fact” and “Material Change” (2000) 23

O.S.C. Bull. 7383 at 7389 [CSA Notice 53-302]. The term “strike suit” refers to

the commencement and pursuit of a class proceeding where the claim is merit-

less but the nature of the claim is such that a sizeable settlement may nonethe-

less be extracted.

4 The first decision in respect of a leave application, pursuant to s. 138.8 of the

OSA, above note 2, is expected to be rendered in Silver v. Imax Corp. [Silver].

The decision in respect of the refusals motion in Silver, which is the subject-

matter of this paper, [2008] O.J. No. 1844 (S.C.J.), leave to appeal refused,

VOL UME 5, No 2, august 2009 181

released. Consequently, members of the Ontario securities bar, eager for

judicial analysis of the new secondary market liability provisions, must

satisfy themselves for the time being with two sets of decisions that have

been released in respect of preliminary evidentiary motions: Silver v. Imax

Corp.5 and Ainslie v. CV Technologies Inc.6

Silver considered the scope of permissible cross-examination on

affidavits filed pursuant to the new section 138.8. Section 138.8 imposes

a threshold test: in order pursue an action under Part XXIII.1, a plain-

tiff must first obtain leave from the court. On the leave application the

applicant must demonstrate that the action is brought in good faith and

that there is a reasonable possibility that it will be resolved at trial in

its favour. Justice van Rensburg determined that the scope of relevance

applicable for cross-examinations on affidavits filed on a leave application

pursuant to section 138.8 should be determined in accordance with the

same “semblance of relevance” test that applies on an examination for

discovery, with the result that she ordered extensive production by the

respondent.7

In the wake of Silver, it is understandable that the successful appli-

cant’s counsel has described the right to production of evidence of the

merits at the leave stage as tantamount to early “discovery.”8 Nor is it

[2008] O.J. No. 2751 (S.C.J.), was released on 6 May 2008, and the leave appli-

cation itself was heard in December 2008.

5 Ibid.

6 [2008] O.J. No. 4891 (S.C.J.), supplementary reasons [2008] O.J. No. 4927

(S.C.J.), leave to appeal granted, in part, [2009] O.J. No. 730 (S.C.J.), Bellamy

J. [CV Technologies].

7 Silver, above note 4 at paras. 12–17. At para. 17, van Rensburg J. held that the

leave application is governed by its own procedure outlined in the OSA, above

note 2, that “specifically requires proposed defendants to put forward informa-

tion . . . and that specifically authorizes examination on such information.”

This is known as the “semblance of relevance” test.

8 Dimitri Lascaris [counsel to Silver], “Guest Column: Canadian Law Most

Advantageous to Canadian Investors Suing AIG” Securities Docket: Global

Securities Litigation and Enforcement Report, online: www.securitiesdocket.

com/2008/11/16/guest-column-canadian-law-most-advantageous-to-canadian-

investors-suing-aig/. Lascaris posits that the OSA’s evidence-based preliminary

merits test does not compel a stay of discovery until resolution of said test;

instead, the prospective defendants are “obliged to disclose essentially all evi-

dence that has a ‘semblance of relevance’ to the issues raised by the preliminary

merits test.” Technically, however, as van Rensburg J. herself pointed out in

Silver, ibid. at para. 20, the leave application does not amount to a discovery

process “in the sense that the parties are not compelled to produce affidavits of

documents disclosing all relevant documents within their power and control,

182 THE CANADIAN CLASS ACTION REVIEW

surprising that the decision has been met with strong criticism from the

defence bar. Issuers, who were likely of the impression that they were the

intended beneficiaries of the leave application, are concerned that they

may now be faced with invasive production obligations before an action

has even been commenced. Defendants’ counsel have been quick to point

to the irony that a leave application intended to prevent abusive proceed-

ings now has a significant potential to itself become a vehicle for abuse.9

Plaintiffs and defendants alike will need to re-evaluate their positions

in light of the more recent decision of Justice Lax in CV Technologies.10

In CV Technologies, Lax J. considered a related, although not identical,

question to that which was before van Rensburg J. in Silver—specifically,

whether a respondent who contests a leave application may be compelled

to file affidavit evidence in light of section 138.8(2) of the OSA, which

provides that “the plaintiff and each defendant shall file and serve affida-

vits setting forth the materials facts on which each intends to rely.” Justice

Lax interpreted the obligation of respondents to provide evidence on a

leave application in light of the underlying purpose of the leave require-

ment. In considering the legislative intent of the new provision, Lax J.

determined that respondents are not required to file affidavit evidence,

and that they may either file the affidavit of an expert or file no affidavit

at all, thereby insulating themselves from the extensive cross-examina-

tion condoned by van Rensburg J. in Silver. Leave to appeal from Lax J.’s

decision has been granted.

Despite the relatively limited scope of these procedural decisions,

Silver and CV Technologies give securities class action counsel much to

ponder. In particular, the decisions raise fundamental questions about the

role of the judge as gatekeeper and the underlying objectives of the leave

requirement. Undoubtedly, the reaction to these decisions foreshadows

further discord, which can be expected to arise once the first decisions

granting or denying leave start to be released. At least for the immediate

future, until appellate courts provide direction as to how section 138.8

is to be construed, counsel and their clients will need to make difficult

strategic decisions about how to respond to leave applications in the face

and they are not subject to examination on everything having a semblance of

relevance to the action, including the common law claims.” As would be the

case on any cross-examination, the applicant must still pose the right questions

in order to elicit production.

9 Sandra Rubin, “Bay Street Hears Growling at the Gate” The Globe and Mail (18

November 2008).

10 CV Technologies (original decision), above note 6. The leave application and the

motion for certification were scheduled to be heard together in June 2009.