Archive for the ‘Financial Transactions’ Category

Dan Parlow
Thursday, December 12th, 2013    Posted by Dan Parlow (posts)
Dan Parlow
Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.

The Supreme Court of Canada has opened the door more widely to consumer class actions in a case which follows an Ontario Securities Commission settlement: AIC Limited v. Fischer, 2013 SCC 69.  The decision will be equally applicable to class action certification motions in British Columbia.

One of the fundamental requirements to certification of a class action is that (to use the Ontario language) “a class proceeding would be the preferable procedure for the resolution of the common issues”:  Class Proceedings Act, 1992, S.O. 1992, c. 6, s. 5(1)(d).  The Court approached this “preferability requirement” from a consumer perspective, that is, whether the proposed class proceeding was preferable to other options (whether within or outside of the courts) from the point of view of providing access to justice.

In this case, the proposed class action relates to allegations of “market timing” against mutual fund managers who had previously entered into a settlement agreement with the Ontario Securities Commission following an OSC investigation.   That settlement specifically contemplated the prospect of civil proceedings being brought on behalf of investors.  Market timing is an investment strategy allowing some investors to profit from short-term market cycles by trading into and out of market sectors as they heat up and cool off.   The OSC, in its proceedings, had alleged that five defendant funds had engaged in such activities in disregard to the public interest and contrary to provisions in their prospectuses limiting the frequency of trading.    According to the settlement agreement, this practice breached the mutual fund manager’s requirement to exercise the powers and to discharge the duties of its office honestly and in good faith and in the best interests of the mutual fund and, in connection therewith, to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances. “Compliance with this duty requires that a mutual fund manager have regard to the potential for harm to a fund from an investor seeking to employ a frequent trading market timing strategy and take reasonable steps to protect a mutual fund from such harm to the extent that a reasonably prudent person would have done in the circumstances.”

The Supreme Court approached the preferability requirement by reference to what it termed the three principal goals of class actions, namely judicial economy, behaviour modification and access to justice.  In this case, the latter factor was the focus of the Court’s decision.  In a unanimous opinion, Mr. Justice Cromwell wrote at para. 26 that “[a] class action will serve the goal of access to justice if (1) there are access to justice concerns that a class action could address; and (2) these concerns remain even when alternative avenues of redress are considered…. To determine whether both of these elements are present, it may be helpful to address a series of questions” of which the court enumerated the following:

  • What Are the Barriers to Access to Justice?
  • What Is the Potential of the Class Proceedings to Address Those Barriers?
  • What Are the Alternatives to Class Proceedings?
  • To What Extent Do the Alternatives Address the Relevant Barriers?
  • How Do the Alternatively Proposed Proceedings Compare to the Class Proceedings?

Since the evidence at the certification stage will not allow for a detailed assessment of the merits or likely outcome of the class action or any alternatives to it, the court emphasized that the evidentiary burden applicable on a motion for certification is low.  This analysis has been applied both  to the preferability requirement in Ontario and to both the preferability and the commonality requirements to certification in the context of the similar British Columbia class actions regime: Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57.   The test requires there to be “‘some basis in fact’ before certification will be approved rather than for the court resolve conflicting facts and evidence at the certification stage”

The court further held that the limited scope of the factual inquiry on the certification motion means that the motions court will often not be able to compare the potential recoveries and/or methods of distribution in the event of success in the class action and in the alternative or alternatives which may be available.

Being somewhat unusual in that the OSC proceeding had already run its course, the underlying Divisional Court had found it a convenient opportunity to consider the preferability requirement by reference to whether “the plaintiffs have achieved full, or at the very least substantially full, recovery”.  Since a mathematical calculation had led the Divisional Court to conclude that “the plaintiffs’ current claim against AIC and CI, over and above the OSC settlement, [was] $333.8 million” (para. 4), which the court qualified as a “significant amount of money” (para. 8), it had used that analysis as a basis to conclude that maintaining a class action was preferable to other options.

However, the Supreme Court ultimately rejected that analysis as an overly narrow assessment having regard to the nature and limitations of the certification process.  Adopting the mathematical test would set the stage for future certification motions to be considered based on a detailed assessment of the merits, which the Supreme Court has repeatedly said is not appropriate for that stage.   The court held at para. 46 that “[w]ithout that [detailed] sort of examination, the most that can be done is to assess on the appropriately limited evidentiary record whether the access to justice barriers that may be addressed by a class proceeding remain even after the alternative process has run its course.”  In the end, the court held that although in assessing the comparative analysis, the representative plaintiff will necessarily have to show some basis in fact for concluding that a class action would be preferable to other litigation options, that “plaintiff cannot be expected to address every conceivable non-litigation option in order to establish that there is some basis in fact to think that a class action would be preferable.”  In such a situation, the evidentiary burden then shifts to the defendant who relies on a specific non-litigation alternative to raise it.

In assessing the access to justice question, the court considered first, the economic barrier arising from the nature of the claim – being effectively a series of small claims which individually are not large enough to support viable actions.  Access to justice requires access to a process that has the potential to provide in an economically feasible manner just compensation for the class members’ individual economic claims should they be established. The second barrier is that, as a result of the nature of the claim, “there is potentially no access to a fair process, geared towards protecting the rights of class members, to seek a resolution of the common issues for what could potentially be a class of over a million members. Thus, traditional litigation cannot achieve either the substantive or the procedural dimensions of access to justice in a case such as this.”

The court concluded that the proposed class action would address both substantive and procedural barriers, by making it economically and procedurally feasible to advance on behalf of the class a group of individual claims that would otherwise not be feasible to pursue individually.   Since the mutual fund dealers had not discharged their burden of proving the existence of a realistic alternative procedure for providing access to justice, the class action was certified.

 

Posted by Dan Parlow (posts) | Filed under Financial Transactions, Litigation and ADR | ....
Dan Parlow
Monday, June 14th, 2010    Posted by Dan Parlow (posts)
Dan Parlow
Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.

On June 10, 2010 the Canadian Securities Administrators issued new guidelines to assist insiders in  reporting certain derivative-based transactions, including transactions which are commonly referred to as “equity monetization” transactions.

An investor is said to monetize the equity in securities when she or he transfers the risk and/or return of those securities for cash, without actually transferring ownership or control.  It is a way for investors to lock in a market gain without concurrently transferring ownership of the underlying security.

The guidelines consider a number of common derivative transactions giving rise to the duty to file an insider report through the System for Electronic Disclosure by Insiders (SEDI):

  • Entering into a forward contract to sell the securities for a fixed amount on a specific date
  • Entering into a swap transaction which has similar effect to such a  forward contract
  • Buying a put option which allows, but does not obligate, the insider to sell the securities on a specific date for an amount which is either fixed or formula-based
  • Simultaneously buying a put option allowing the insider to sell to another party at a certain price, and selling a call option allowing the same party to buy the same securities from the insider at a higher price.  The sale of the call option exercisable at a higher price is a way of financing the purchase of the put option.  The combination of a put option and call option is sometimes referred to as a “collar”
  • Borrowing an amount close to the current fair market value of the securities under a limited-recourse secured loan for which the lender cannot look beyond the securities for repayment on its due date

Such transactions are most commonly entered into with investment banks who hedge their risk by entering into a series of short sales in the secondary market.

Step-by-step details of the recommended filing methods can be found here.

The guidelines are not mandatory but do serve to give comfort to the investor that disclosure will be acceptable; and they also serve to enhance uniformity of insider reporting requirements throughout Canada.

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Dan Parlow
Monday, April 12th, 2010    Posted by Dan Parlow (posts)
Dan Parlow
Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.

The British Columbia Securities Commission issued reasons on Thurdsay, April 8, 2010 for its recent decision not to enter the fray of a takeover battle for Yukon-based Crew Gold Corporation.

In the midst of a take-over battle between Russian-based Severstal Gold NV and Grand Cayman-based Endeavour Financial Corporation, Severstal asked the BC Securities Commission to compel TSX-listed Endeavour to comply with Canadian take-over bid requirements (Instrument MI-62-104 – Take-over Bids and Issuer Bids).

Pending that determination Severstal applied to the Executive Director to issue temporary order under section 161(2) of the Securities Act prohibiting Endeavour from trading Crew securities until a hearing was held to consider the issues raised by Severstal in its application.   The application was investigated quickly and 9 days later, the Executive Director issued a reply declining to intervene.

In last Thursday’s reasons,  the Securities Commission made short shrift of Severstal’s application to review that refusal, doing so both on procedural and substantive grounds.

Procedurally, the Commission applied Alberta and B.C.  law that the Executive Director’s discretion whether to issue such a temporary order is not subject to a review to the Commission under section 165(3) of the Securities Act.    It is not reviewable since the failure to make an order is not the same as a “decision” of the Executive Director which would be subject to statutory review.  Furthermore,  Severstal was held not to have standing to apply for a cease-trade order in that situation.

Although it could have simply dismissed Severstal’s application on procedural grounds, the Commission went one step further, in a move which is a caution to parties involved in a take-over battle not to use the Commission as a tool to manipulate a market battle without good reason.   The reasons underlying Severstal’s application were first, that recent Endeavour purchases in the marketplace were made with insider information; and second that having acquired more than 20% of the target company the purchases constituted a take-over triggering a regulatory process.  Severstal had itself announced a plan to make its own take-over bid at a price below what became the rising market price.

The Commission was obviously miffed with Severstal’s serious allegations of insider trading when it did not produce a shred of evidence to support it; the Commission expressed “concern” over that false allegation.    There had also been no ”take-over bid” triggering the Canadian regulatory process, since Endeavour’s purchases of Crew Gold stock were made offshore and not from sellers “any of whom is in the local jurisdiction”.

I view the Securities Commission’s willingness to expand its decision to cover substantive issues, and its rebuke over false inside trading allegations, as indicative of its disinclination to be used as a tool by which public companies may seek to use securities regulation to manipulate natural market forces.

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