The public correction of misrepresentations has come to play an increasingly prominent role in decisions for leave to proceed with the statutory case of action for misrepresentation provided to secondary market investors under Part XXIII.1 of the Securities Act. In Baldwin v Imperial Metals Corporation, Chief Justice Strathy, writing for the Court of Appeal, further clarified the role of public correction and emphasized the modest role it is intended to play at the leave stage.
The Plaintiff, an investor in Imperial Metals Corporation (“Imperial”), alleges that Imperial’s continuous disclosure documents failed to disclose the specific and identifiable risk that its Mount Polley mine’s tailings storage facility would fail. The Plaintiff further alleges that the misrepresentations were corrected by an August 4, 2014 news release issued by Imperial that disclosed that the tailings storage facility had breached releasing “an undetermined amount of water and tailings.” The cause of the breach was not disclosed.
As required by Part XXIII.1 of the Securities Act, the Plaintiff sought leave of the Court to proceed with the cause of action, which requires her to show that she has a reasonable possibility of success at trial. The motion judge, who did not have the benefit of the Court of Appeal’s most recent guidance on public correction in Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v Barrick Gold Corporation (“Barrick Gold”)—without considering whether there had been a misrepresentation—denied leave on the basis that the August 4, 2014 news release did not qualify as a public correction. According to the motion judge, the August 4, 2014 news release could only be a correction of a representation that “The TSF is built to be failproof, and will never, ever fail.” His Honour assumed that a misrepresentation existed and did not assess the evidence led by the Plaintiff in support of the misrepresentation allegations.
Chief Justice Strathy overturned the motion judge’s public correction decision and, in so doing, built on the Court of Appeal’s earlier decision in Barrick Gold. Three key lessons emerge from Chief Justice Strathy’s decision.
First, public correction plays a modest role in the statutory scheme. Chief Justice Strathy emphasized that the role of public correction must be understood in light of the purpose of Part XXIII.1 of the Securities Act. The purpose is to deter misrepresentations and promote timely disclosure. To achieve this goal the “misrepresentation does the heavy lifting.”1 Public correction, on the other hand, only plays a modest role.
Chief Justice Strathy also held that a modest role for public correction and focus on the wrong targeted by the statutory scheme—the misrepresentation—is consistent with investors not being required to prove causation under Part XXIII.1 of the Securities Act. Specifically, Part XXIII.1 provides for investors’ deemed reliance on misrepresentations and a damages formula that places the onus on defendants to prove that the change in the securities’ price is unrelated to the inadequate disclosure. Although unstated in the decision, an overly exacting public correction requirement would erode these provisions by, in essence, making public correction a surrogate for causation. Indeed, in securities class actions in the United States public correction is used to establish causation.
Second, Chief Justice Strathy confirmed the public correction test from Barrick Gold Corporation and explicitly rejected a mirror-image approach to public correction. The test is whether “the alleged public correction was reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement.”2 The motion judge set the bar too high by requiring the correction to be express and directly linked to a specific misrepresentation (i.e. requiring a mirror image of the misrepresentation). For a public correction to exist, there only need to be some linkage or connection between the public correction and alleged misrepresentation, which can be used to assess how the market understood the correction.
This is consistent with the goal of incentivizing fair and accurate disclosure by public issuers because an overly stringent public correction standard would improperly allow defendants to escape liability by making vague or general corrections.
Third, on the logic of Chief Justice Strathy’s reasons it is difficult to conceptualize a case where the absence of a public correction can be found dispositive at the leave stage without first determining the existence of a misrepresentation or failure to make timely disclosure. Indeed, the inadequate disclosure provides vital context for assessing what the market would have understood the alleged public correction to mean. For example, in Imperial Metals Corporation a proper assessment of public correction depends “on what had been said, or not said, in Imperial’s public disclosures over the years concerning its waste management practices and environmental compliance measures, and the context in which the representations and the alleged public correction were made”.3
Baldwin v Imperial Metals Corporation is a good decision for investors. It maintains the statutory regime’s focus on the wrong it was designed to deter—the misrepresentation—while ensuring that investors do not lose out on compensation due to an unduly rigid public correction requirement that is susceptible to manipulation.
About the Author: Garett Hunter is an associate lawyer in Siskinds’ class actions department. He is a member of the counsel team representing the plaintiff in Baldwin v Imperial Metals et al.
1 Baldwin v Imperial Metals Corporation, at para 50
2 Baldwin v Imperial Metals Corporation, at para 48.
3 Baldwin v Imperial Metals Corporation, at para 61.