British Columbia Court Of Appeal Overturns Refusal To Certify Class Action For Securities Misrepresentation

On March 3, 2022, the British Columbia Court of Appeal released its decision in 0116064 B.C. Ltd. v. Alio Gold Inc., 2022 BCCA 85 and overturned the decision of the Court below, which declined to certify a proposed class action. The appellate Court did not certify the class action, but remitted the certification application to the British Columbia Supreme Court.

What You Need to Know

In its judgment, the BCCA addresses some important concepts for shareholders alleging misrepresentation, and confirms that:

• where damage is suffered by all shareholders of a corporation, the rule in Foss v. Harbottle (1843), 67 E.R. 189 (U.K.H.L.) (Foss v. Harbottle) does not necessarily bar them from advancing a cause of action; and
• where misrepresentations have been made to all shareholders at the same time, investor-specific issues that predominate many misrepresentation cases should not stand as a bar to certification.

Background

The appellant, 0116064 B.C. Ltd. (6064), is a former shareholder of Rye Patch Gold Corp. (Rye Patch). Its shares were sold to the respondent, Alio Gold Inc. (Alio), pursuant to a plan of arrangement approved by the BCSC. Pursuant to the arrangement, Alio acquired all of the outstanding shares of Rye Patch, the price of which was to be partially determined based on the value of Alio's shares. The appellant alleged that the ascertained value of Alio shares was based on misrepresented product forecasts, upon which the appellant relied. The appellant alleged that as a result of the misrepresentations, it did not receive fair value for its shares.

The case was originally brought before the BCSC, where Justice Macintosh refused to certify a proposed class action for securities misrepresentation. The Court relied on the rule in Foss v. Harbottle which provides that individual shareholders have no cause of action for wrongs done to the corporation and that if an action is to be brought in respect of losses, it must be brought by the corporation itself or by way of derivative action. This rule is predicated on the rationale that in supervising management, shareholders act in the corporation's best interests, rather than as individuals in respect of their own interests.

Additionally, Justice Macintosh noted that there was no methodology to prove the shareholders relied on the misrepresentation when voting in favour of the arrangement.

6064 appealed this decision, asserting that the Court erred in its assessment of the rule in Foss v. Harbottle, and seeking an order certifying the class action.

The Applicability of Foss v. Harbottle

The BCCA overturned the earlier decision and held that Foss v. Harbottle was not applicable. In doing so, the Court observed that the rule is a consequence of the fact the corporation is a separate legal entity that acquires causes of action for damage the company suffers. In this case, however, Rye Patch tendered no shares to Alio, and the shareholders themselves dealt directly with Alio. As such, the BCCA rejected the lower Court's characterization of the facts and held that the individual shareholders suffered a loss, while Rye Patch did not.

Causation as an Obstacle to Certification

The BCSC originally dismissed the claim, finding that it would be impossible to determine the misrepresentation-induced specific purchases. In doing so, the Court observed that typical investor-specific issues predominate misrepresentation cases and stand as a bar to certification. Specifically, it is difficult to ascertain whether or not each class member was induced by the misrepresentation.

On appeal, the BCCA held otherwise and concluded that causation could, in fact, be determined. Specifically, the Court found that the facts of this case distinguish it from more common investor-specific misrepresentations, as here the misrepresentations were limited in number, made at the same time to all shareholders, and were considered in one proceeding (i.e., the plan of arrangement), which compelled all shareholders to transfer their shares at a fixed exchange rate. Due to the singular-nature of the misrepresentations, the Court concluded it would be preferable to advance the litigation by means of class action, rather than via numerous individual claims.

Conclusion

The BCCA set aside the order dismissing the plaintiff's claim and remitted the application to the BCSC, directing the Court to consider two issues which were raised by counsel but not addressed by the chambers judge:

1. whether there are two or more individuals who have the same claim as the representative plaintiff to advance; and
2. whether the appellant is a suitable class representative.

The BCCA directed that the appellant be permitted to renew the certification application founded upon a description of the common questions that is consistent with the claim it now seeks to advance.

Companies will want to take note of the decision of the BCCA, and keep an eye on the upcoming decision of the BCSC, as this case confirms that shareholders may successfully bring a class action against a company even where the rule in Foss v. Harbottle might be thought to typically apply, and in instances where an alleged limited number of specific representations were made at once to all shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ms Jessica L. Lewis
Cassels
Suite 2100, Scotia Plaza
40 King Street West
Toronto
Ontario M5H 3C2
CANADA
E-mail: [e-mail]
URL: www.cassels.com

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