Recent Trends in Securities Litigation and Enforcement

Teresa Tomchak

May 28, 2014

• Genesis v. Smoothwater Capital 2013 ABQB 509

• “joint actor” concept in 62-104 applies in proxy fights.

• Factors to consider are family relations, regularity of communications and attendance at meetings.

• Court found disclosure in circular not adequate, particularly in light of lack of disclosure in early warning report.

• Court ordered disclosure and adjourned the meeting by one month but refused to make order disentitling dissidents from voting their shares.

Proxy Fights – Joint Actors

• Smoothwater Capital v. Equity Financial 2014 ONSC 324 • Application to restrain breach of securities act which

requires proxies not be solicited until a circular is sent. • News release issued by company responding to dissident

was not a “solicitation” because – Principal purpose to defend company – NR did not encourage proxies and advised a circular would

be sent – Fact dissident had commenced a solicitation did not mean

any response from the company was also a solicitation. • In other circumstances, a series of news releases could be

construed differently.

Proxy Fights - Solicitation

• Concept Capital v. Oremex Silver 2013 ONSC 7820

• Court held that cancelled meeting that was convened and conducted by shareholders, was not valid.

• Company was permitted to postpone meeting approximately 90 days.

• Court changed record date finding that a private placement with shares held in escrow which closed on the record date, was done in an attempt to influence voting.

• Court ordered that scheduled meeting not be further postponed and that there be an independent chair.

Proxy Fights - Meeting

• Wells v. Bioniche 2013 ONSC 4871

• Board gave 6 months notice of meeting.

• Court refused to order earlier meeting because no demonstrated prejudice to dissident and saved the company the costs of holding two meetings.

Proxy Fights - Meeting

• Hastman v. St. Elias Mines 2013 BCSC 1069 • Court refused to grant a remedy overturning a chair’s

rejection of proxies where dissident failed to correct material misstatements in circular.

• Dissident was advised of the misrepresentations and company’s position it would reject proxies if not rectified.

• Dissident’s proxies showed 90% support for dissidents.

Proxy Fights/Oppression - Chair

• Proposed National Policy 25-201 – Guidance for proxy Advisors – released April 24, 2014. Addresses the following

• Conflicts of interest – disclose the conflict and policies.

• Transparency and accuracy of vote recommendations –prepare credible recommendations.

• Development of Proxy Voting Guidelines – engage and consult to develop and disclose guidelines.

• Communications with Clients, Market Participants, the Media and the Public – disclose certain info when making recommendations.

Proposed Policy for Proxy Advisors

• Alamos and Aurizon 2013 BCSECCOM 393 • Cease traded pill because auction at an end. • BCSC refused to interfere with the break fee in an

arrangement (although appears to suggest that it had jurisdiction to do so).

• Found break fee was a necessary element of an alternative transaction and the size was not unreasonable.

• BCSC noted that it heard no evidence that break fee would cause Alamos to abandon offer.

Poison Pills

• Hudbay and Augusta 2014 BCSECCOM 153

• BCSC allowed Augusta’s pill to remain for an additional 75 days (156 days from announcement of the offer)

• Order included 10 day extension if shares are taken up under the bid.

• Shareholder approval of pill 94% of votes cast.

• Reasons expected July 31, 2014.

Poison Pills

Poison Pills • Waterton v. Chapparal – 2014 BCSECCOM 131 – BCSC required a hearing

for an order cease trading a pill where both sides consented.

• Denison Mines and Rockgate (Oct. 8, 2013) – application to BCSC to cease trade options granted by Rockgate (totalling 9.4%) in the face of Denison’s unsolicited tob with minimum tender of 90%.

• Target did not oppose order, BCSC said cannot grant order unless in public interest and adjourned matter.

• Ultimately resolved matters.

• Coast Wholesale and CWAL (April 8, 2014) – application by insider holding approximately 40% of shares to cease trade a pill.

• Parties resolved by amending offer to require an irrevocable condition that a majority of independent shareholders tender, an announcement the condition has been met and a 10 day extension.

• NI 62-205 – Security Holder Rights Plans put out for comment in March, 2013. Comment period expired in June, 2013 and extended to July 2013.

• Would allow pill to remain in place if shareholder approval is obtained within 90 days of adoption or if a bid is made, within 90 days from when launched.

• Must be renewed annually and can be terminated at any time on shareholder approval.

• Shares of bidder excluded on vote but management shares counted.

Pills – CSA Proposal

• AMF released proposal March, 2013 considering defensive tactics more generally.

• Courts would determine matter.

• Pill could remain in effect indefinitely.

• Feb. 2014 – recommended changes to corporate legislation to protect Quebec businesses.

• Additional voting rights if held shares for over 2 years, restricting bidders voting rights, limiting what acquirer could do with assets or from changing composition of board.

Quebec Proposals

• Champion Iron Mines Limited 2014 ONSC 1988

• Court placed no weight on standard fairness opinion.

• Rules relating to expert evidence not met because of lack of substantive reasons supporting opinion.

• Courts are not “rubber stamps”.

Arrangements

• Sturm v. Sprott Resources 2014 BCSC 190 • First decision of a superior court to uphold the validity of a

sunset clause in a plan of arrangement. • Confirms finality of court approval of plan of arrangement. • Court again recognizes the broad and flexible nature of a

plan of arrangement.

Arrangements

• Brookfield Office Properties Inc. 2014 ONSC 2786 – even if optionholders are not “arranged” they should be sent a copy of circular.

• Tigray Resources Inc. 2014 ONSC 1979 – although the court approved a quorum requirement of only 5% in the interim order in accordance with the Company’s bylaws, it stated that it may not carry much weight in deciding whether to approve the plan as fair and reasonable.

• HHT Investments Inc. 2014 ONSC 1582 – approved plan of arrangement where the exchange of shares was for shares of an LP or REIT - court noted broad purpose of arrangements.

Arrangements

Secondary Market Class Actions – Leave

• Bayens v. Kinross 2013 ONSC 6864

• Court refused to grant leave for misrepresentations based on the following allegations:

1. Kinross ought to have reported a write down of its goodwill.

2. Kinross failed to disclose that its drilling program had revealed high amounts of low-grade ore.

3. Kinross misrepresented that the expansion project remained on schedule .

• Claims were based on nothing more than speculation or suspicion.

• Dugal v. Manulife – 2014 ONSC 1347 - court denied leave to appeal from a decision 2013 ONSC 4083 granting leave.

• Plaintiff alleged that Manulife misrepresented its equity risk from its segregated fund/guaranteed investment products by failing to disclose that it had abandoned hedging and reinsurance of them.

• Trustees v. Celestica 2014 ONSC 1057 - court granted leave for a claim regarding Celestica’s restructuring but dismissed leave for claims regarding inventory and non-compliance with GAAP.

Secondary Market Class Actions - Leave

• Green v. CIBC 2014 ONCA 90 – in a series of appeals, the Court held that Sharma v. Timminco 2012 ONCA 107 had been wrongly decided.

• Where a representative plaintiff in a class action pleads a cause of action based on the secondary market provisions, the claim has been asserted for the purposes of the class proceedings act and the limitation period is suspended.

Secondary Market Class Actions – Limitation Periods

• Kaynes v. BP - 2013 ONSC 5802– proposed class included all Canadian residents that purchases on TSX, NYSE, London and Frankfurt (.001% trading on TSX and ceased being a reporting issuer).

• If issuer makes misrepresenation and act deems reliance, the statutory tort must have been committed in Ontario.

• Mouaikel v. Facebook 2013 QCCS 417 – fact that financial loss was “recorded” (ie. where the account statement was issued) did not meet the test for damage being suffered in Quebec.

• Even if he test was met, the court would have declined jurisdiction because there were 41 lawsuits in NY courts.

Securities Class Actions – Jurisdiction

• Silver v. Imax – 2013 ONSC 6751 - Court denied leave to appeal decision – 2013 ONSC 1667 amending the class to exclude those class members who were part of a settlement class in US proceedings.

Secondary Market Class Actions – The Class

• AIC Limited v. Fischer 2013 SCC 69

• Court certified a class action based on market timing following a settlement with OSC for $200 M.

• Class proceedings were the preferable proceeding for pursuit of investor claims.

Securities Class Actions - Jurisdiction

• McLean v. BC (Securities Commission) – 2013 SCC 67

• Regulatory action must generally be commenced within 6 years of “event” (s. 159).

• The “event” can be an agreement with a securities regulator.

• Possible securities regulators could issue reciprocal orders sequentially.

• Conduct occurred in 2001, settlement with OSC in 2008, reciprocal order by BCSC in 2010 under s. 161.

Limitation Period for Enforcement Actions

• Saafnet Canada Inc. 2013 BCSECCOM 442

• Commission rejected the argument that the majority of illegal distributions predating the 6 year period were a “continuing contravention”.

• Considerable gaps in time periods between financings distinguishing this case from previous ones.

• Later trades were part of continuing contravention where each investor continued investing after the limitation date.

Limitation Period – Continuing Conduct

• Aviawest Resorts Inc. 2013 BCSECCOM 319

• Kept no documentation because did not know they were distributing “securities” – BCSC considered whether exemptions available.

• Individuals breached act but no penalties – reliance on legal advice important.

• CTO against company only.

Illegal Distributions – Legal Advice

• Photo Violation Technologies 2013 BCSECCOM 276

• Legal Advice mitigating factor in penalty but does not excuse non-compliance (5 year prohibition, no monetary penalty).

• Saafnet Canada Inc. 2014 BCSECCOM 96 (1 year prohibition, disgorgement (against co not individuals who sought to comply, did not profit personally and did not misuse funds, admin penalty).

• Sought legal advice.

• Emphasized the importance of maintaining records to support exemptions relied upon.

Illegal Distributions – Legal Advice/Records

• 45-106CP proposed to be amended to address verification of exemptions.

• Section 1.9 provides that issuers are expected to – Understand and be able to explain the conditions of the

exemption

– Verify the purchaser meets the conditions of the exemption

– Keep relevant and detailed documentation signed by the purchaser

– Establish policies and procedures.

Proposed Amendments to 45-106

• Canaco Resources Inc. 2013 BCSECCOM 310

• Test for materiality is objective therefore the following were not relevant – News release describing drill results as “spectacular”

– Internal emails describing results as “fantastic”

– Directors assessment that not material w/r/t stock issuance

– Exchange’s decision ordering that they be disclosed.

• Cautions against reliance on stock price to determine materiality.

Materiality

• OSC Staff Notice 15-702

• No contest settlements – need not confirm nor deny facts or admit violation of act.

• Not available for abusive, fraudulent or criminal conduct, where the harm is not satisfactorily addressed, or where Staff misled or obstructed during investigation.

• No Enforcement Action Agreements.

• Proactive self-reporting, cooperation with Staff, self-remediation.

OSC No-Contest Settlements/No Enforcement Agreements

• NEP Canada v. MEC 2013 ABQB 540

• As a result of amalgamation, pre-closing rights of company passed to the amalgamated entity so documents could be used in subsequent litigation.

• Court held parties could have inserted a clause into the share purchase agreement whereby any rights to privilege relating to the SPA negotiations would terminate on closing, leaving predecessor party in sole possession of the privilege.

• In the event of asset transaction, consider including privilege communications in the definition of “excluded assets”.

Solicitor-Client Privilege

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TERESA M. TOMCHAK, PARTNER Direct: (604) 661-1711 Fax:: (604) 661-9349 Email: ttomchak@farris.com Web: www.farris.com