Canadian Court Limits Underwriters’ Liability and Susceptibility to Class Treatment
In LBP Holdings Ltd. v Hycroft Mining Corporation, the Ontario Superior Court of Justice denied the plaintiff’s motion to certify a class action in common law negligence and negligent misrepresentation against the underwriters involved in a Canadian public offering. Similarly to Section 12(a)(2) of the U.S. Securities Act of 1933, Section 130(1)(b) of the Ontario Securities Act provides for a cause of action against underwriters. However, while the plaintiff in LBP timely filed a Section 130 action against the issuer, it failed to add the underwriters as defendants until after Section 130’s 180-day statute of limitations had lapsed. Thus, the plaintiff abandoned its statutory claim against the underwriters and sought to certify only common law claims for negligence and negligent misrepresentation against the underwriters, alongside Section 130 claims against the issuer.
The plaintiff alleged that the issuer, and two of its executives made misrepresentations in a prospectus for a secondary public offering in violation of Section 130. The issuer and executives consented to class certification of the Section 130 claims against them.
Forced to abandon its statutory claim against the underwriter as time-barred, the plaintiff asserted a common law negligence and negligent misrepresentation claims. With respect to negligence, it alleged that the underwriters failed to meet the standard of care because they knew or ought to have known that the prospectus did not make full, true, and plain disclosure of all material facts and, therefore, contained misrepresentations. According to the plaintiff, the underwriters failed in their due diligence to learn about the issuer’s operational problems or did learn about the problems and were negligent in not reporting the material facts in the prospectus. The court highlighted the fact that the plaintiff had admitted that “the pertinent relationship between the putative Class Members and the Underwriters is the relationship of a seller to a purchaser.” With the relationship framed in this fashion, the Court rejected the plaintiff’s negligence claims, holding:
“These acknowledgements by [Plaintiff] reveal both the novelty and also the tenuousness of the alleged duty of care. In general, there is no recognized duty of care to properly price goods to reflect their genuine value in the marketplace or to perform due diligence in the pricing of the goods sold. In general, while vendors of goods will have contractual duties to purchasers, sometimes statutory duties to purchasers, and duties to not manufacture dangerous or potentially dangerous goods, generally speaking, the law of the sale of goods is caveat emptor and permits self-interested hard bargaining. Apart from negligent misrepresentation and warranty in contract, vendors of goods typically do not have a duty of care to purchasers.
Thus, the court held that the plaintiff could not proceed with class claims against the underwriters for negligence.
The basis of the plaintiff's negligent misrepresentation claim was that the prospectus contained misrepresentations notwithstanding the underwriters' certificate, indicating the prospectus made full, true and plain disclosure. The underwriters did not challenge the legal sufficiency of this claim, but they did argue that it was not suitable for class certification. The court agreed.
First, the court noted that under the prevailing Canadian decisional law, reliance based claims, like negligent misrepresentation, may be certified as tag-along claims to other causes of actions, if synergies between the causes of action lead to judicial efficiency. Specifically, the court stated “generally speaking, if the statutory cause of action is certified, then numerous synergies might be achieved for a companion common law tort.” However, the court rejected class certification because the statutory cause of action in this case was being asserted against the issuer, while the plaintiffs asserted negligent misrepresentation claims against the underwriter. According to the court
the common issues of the statutory claim against the [issuer] Defendants are not congruent with the common issues of the tort claims against the Underwriters. These circumstances increase the problems of managing the action with the combined claims and decrease the benefits of a class action procedure… In the case at bar, coat tailing the tort claims against the Underwriters with the statutory misrepresentation claim against the [issuer] Defendants is problematic in terms of manageability and given the difference between the claims against the co-defendants, there is only modest advancement in judicial economy and much less than would be the case if a statutory claim against the Underwriters had been combined with the common law claims against them. Indeed, given that the misrepresentations, duty of care, and standard of care issues are not the same for the co-defendants, combining the statutory and common law claims may complicate the prosecution and defence of the various causes of action.”
Thus, the court held that the plaintiff could not proceed with a class action against the underwriter.
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