In O’Brien v. Maxar Technologies Inc., Justice Akbarali declined to grant the plaintiffs’ motion for leave to proceed with claims under section 138.3(1) of the Ontario Securities Act (“OSA”), concluding that there was no reasonable possibility that the action would be resolved in favour of the plaintiffs at trial. Because leave was not granted, the court also dismissed the plaintiffs’ motion for certification of the action as a class proceeding. The decision raises interesting considerations about evidentiary standards on motions for leave to proceed with claims under Part XXIII.1 of the OSA, selecting an appropriately qualified expert, and also provides guidance to plaintiff’s counsel on how to remain onside the rules against impermissible case splitting in the ever-evolving prosecution of a securities class action.1
In early 2019 the defendant Maxar Technologies Inc. (“Maxar”), a publicly traded space and geospatial intelligence and technology company, took financial impairments and other losses totalling a massive US $1.1 billion. On the news of Maxar’s impairments and other losses announced in Q3 and Q4 2018, the price of Maxar’s securities plummeted and investors suffered corresponding losses. From February 2018 through February 2019, the company shed approximately $4 billion of value or 90% of its market capitalization. The plaintiffs were shareholders who alleged that these losses were caused by the defendants’ misrepresentations and sued Maxar and certain of its directors and officers under Part XXIII.1 the OSA.
Specifically, the plaintiffs alleged that the defendants misrepresented that Maxar’s financial statements fairly presented Maxar’s financial position and performance in accordance with International Financial Reporting Standards (“IFRS”) by failing to impair assets when required, leading to inflated assets; and by improperly employing the percentage of completion approach to revenue recognition, resulting in inflated revenues. They also argued that management misrepresented that Maxar’s internal controls over financial reporting and disclosure controls and processes were effective throughout the class period.
The leave motion turned on the evidence before the court. In concluding that it was appropriate to dismiss the plaintiffs’ motion for leave, Justice Akbarali strictly applied the test from R v Mohan to the plaintiffs’ expert evidence, which is used to assess whether to admit that evidence into the record. On that analysis, Her Honour found that the plaintiffs’ expert reports were inadmissible, and then dismissed the motion in toto because there was no expert evidence before her supporting the plaintiffs’ case. As a parallel issue, Justice Akbarali also found that the plaintiffs impermissibly split their case with respect to, inter alia, allegations regarding the cancellation of a major satellite construction contract, AMOS 8, which underpinned the plaintiffs’ arguments respecting timely financial impairment.
In a nutshell, the AMOS 8 allegations were that in Q1 2018, Maxar announced it won a contract to build a satellite known as AMOS 8 for an Israeli company, Spacecom. The contract was conditional on the payment of a first instalment that was not described in public-facing news documents—rather, the company described it as a “win”. However, the loss of the “award” was announced in Q3 2018, at around the same time that the payment was due under the contract, but not paid. The plaintiffs submitted that there was evidence that the contract failed in Q2 or even earlier, and as a result, Maxar should have taken corresponding impairments earlier than Q3. In other words, Maxar announced that it was awarded a contract that it did not actually have as the conditions underlying it were not, and never were, satisfied.
In support of their motion for leave, the plaintiffs filed an expert report prepared by a Chartered Professional Accountant in British Columbia with more than 40 years of accounting experience. This expert opined that it was reasonably possible that Maxar had failed to comply with IFRS standards. Despite the plaintiffs’ arguments and some evidence to the contrary, Justice Akbarali found that their expert had a “paucity of IFRS-related qualifications” on his curriculum vitae and was therefore not qualified to opine on whether Maxar had adhered to the IFRS standards governing financial impairment and revenue recognition.
Her Honour also found that the plaintiffs’ expert inappropriately acted as an advocate by “elevating issues to a level of importance that was not apparent before” in his reply report. Among other things, he emphasized in his reply report that the failure of the AMOS 8 contract was a root cause underlying Maxar’s significant financial impairments in Q3 and Q4 2018 but did not suggest the same in his initial moving report, which was focussed on other aspects of the plaintiffs’ claims. Because the plaintiffs’ expert had “no relevant aerospace or satellite industry experience, and no experience negotiating government contracts in those industries,” Justice Akbarali found he was offering evidence outside the scope of his claimed expertise in accounting.
Her Honour accepted the defendants’ arguments that the plaintiffs’ claims had shifted over time in response to the defendants’ evidence, noting that the “the cancellation of the AMOS 8 contract is pleaded in the statement of claim, but the pleading comprises just two paragraphs of the 70-page claim”. Moreover, the claim did not plead “that the contract had failed, or Maxar knew it was likely the contract would fail before it announced it, and it should have disclosed it earlier and taken impairments earlier as a result.” Though the plaintiffs argued that there was no prejudice that could not be addressed by allowing the defendants’ experts to respond to their reply evidence by way of sur-reply, Her Honour found the suggestion technically and procedurally unfair. The court held the plaintiffs split their case and struck the evidence and portions of their expert’s reply report relating to the AMOS 8 impairment claims.
In light of the foregoing, Justice Akbarali concluded that the plaintiffs’ expert evidence failed to satisfy the four threshold requirements of the first branch of the Mohan test (relevance, necessity, the absence of an exclusionary rule, and proper qualifications including the requirement to act impartially and independently) and declined to admit it. Without any expert report, the plaintiffs had no expert evidence in support of their allegations. All that remained before the Court was the defendants’ expert report, which indicated that Maxar had done everything right. Accordingly, the plaintiffs’ motion was dismissed.
There are a few key takeaways for counsel here:
- Counsel should be very careful in selecting their expert, making sure they have significant and specific qualifications to provide an expert opinion. Here, the plaintiffs’ accounting opinion was not accepted primarily because their expert was not sufficiently qualified in the particular accounting standard at play, IFRS. It is possible that the plaintiffs would have been successful on their motions with a different expert opinion.
- Pleadings should evolve as case theory evolves. If the theory of the case shifts in a way that is not perfectly aligned with the pleading, the pleading must be amended in order not to run afoul of the rule against case-splitting.
- Even with the benefit of some guidance from the Supreme Court, the “reasonable possibility” aspect of the OSA leave test can be interpreted in a number of different ways by the lower courts, and the hurdle can be higher than expected.
There is no doubt that the court must act as a gatekeeper, determining whether the benefits of admitting evidence outweigh its potential risks, considering factors such as legal relevance, necessity, reliability, and absence of bias. Relevant and reliable evidence is critical to the court making appropriate and fair determinations. However, applying a critical lens, Justice Akbarali’s approach to fact finding raises questions about the level of scrutiny to be applied on a leave motion, where the “reasonable possibility of success” standard is applied to a limited evidentiary record. The core direction from the Supreme Court of Canada is that the leave motion “should not be treated as a mini-trial” (see: Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 at para 39), where ultimate findings of fact are made. Justice Akbarali’s approach to the evidence here could be interpreted as determining facts (e.g., related to the proposed expert’s qualifications) on a “balance of probabilities” rather than as “reasonable possibility” where the question isn’t “yes” or “no”, it’s “maybe so”.
1 Siskinds LLP was counsel to the plaintiffs in this case.