In the recent decision of Tucci v. Smart Technologies Inc. (2013 ONSC 802), Justice Perell confirmed that the statutory cause of action for misrepresentation in a prospectus (set out in s. 130(1) of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “OSA”)) does not apply to purchasers in the secondary market even when those purchasers buy securities during an ongoing IPO.
Background
In Tucci, the defendant Smart Technologies (“Smart”) filed a prospectus for the purposes of an IPO in respect of which the period of distribution began on July 15, 2010. In addition to Smart, both the defendants Intel Corporation and School S.a.r.L. sold Smart shares pursuant to the IPO. The IPO closed on July 20, 2010. However, prior to closing, the Smart shares began trading on the secondary market (on both the TSX and NASDAQ). The plaintiff alleges that on November 9, 2010, Smart made corrective disclosure in respect of a misrepresentation contained in its prospectus. The plaintiff subsequently commenced a proposed class action asserting a claim for damages under s. 130 of the OSA (as well as similar claims under the relevant sections of other Canadian securities legislation).
At the certification motion before Justice Perell, the defendants consented to certification of the action subject to one contested issue regarding the scope of the plaintiff’s proposed class definition. Section 130(1) of the OSA provides that where a prospectus contains a misrepresentation, “a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public” has a cause of action against, amongst others, the issuer and underwriters of the securities in question. This statutory cause of action has conventionally been understood to be available only to purchasers buying securities in the primary market, and not purchasers in the secondary market (who have their own statutory cause of action set out in s. 138.1 of the OSA for which leave is required). The plaintiff challenged this conventional understanding by seeking to certify a class which included persons who acquired Smart shares on the secondary market between July 15 and 20, 2010, arguing that during the period of distribution, purchasers in both the primary and secondary markets are similarly situated and, as a matter of public policy, it is desirable to treat similarly-situated persons equally. The plaintiff also sought to distinguish existing Ontario case law restricting the s. 130 cause of action to primary market purchasers on the basis that those cases only addressed secondary market purchasers who bought securities after the primary market distribution had been completed.
In rejecting the plaintiff’s submissions, Justice Perell held that a secondary market purchaser does not purchase securities offered by a prospectus but, rather, purchases securities offered by a secondary market vendor, likely at a different price and on different terms of sale than primary market purchasers. Justice Perell also noted that the plaintiff’s “strained interpretation” would have the anomalous result that some s. 130 claimants (the secondary market purchasers) would not have the alternative statutory right of rescission which is only available against the issuer, selling security holders and underwriters (and not secondary market vendors). In the result, the plaintiff’s proposed class definition was revised by excluding secondary market purchasers.
Commentary
This result is consistent with previous decisions, including Menegon v. Philip Services Corp. (2001 CanLII 28396 (ON SC)), in which FMC’s J.L. McDougall and Michael Schafler successfully argued that extending s. 130 to secondary market purchasers could expose issuers and their advisors to indeterminate liability, as primary market purchasers might sell their purchased securities during the period of distribution to secondary market purchasers, who may themselves resell the securities several times.
