Thursday, May 23, 2013

No Secondary Market Cause of Action for Prospectus Mispresentation.

In a recent decision, the Ontario Superior Court of Justice confirmed that section 130(1) of the Ontario Securities Act (the "Act") does not provide a statutory cause of action and remedies to purchasers of securities in the secondary market.

In the case of Tucci v. Smart Technologies Inc. (114 O.R.) 3d at 294, the plaintiff, Tucci, brought a proposed class action for damages pursuant to section 130 of the Act. He brought a motion to certify the action as a class proceeding. Except for the contested issue which involved the interpretation of section 130(1) of the Act, the defendants consented to the certification of the action.

Smart Technologies Inc. ("Smart Tech") is incorporated under the Alberta Business Corporations Act. Its business concerned designing, manufacturing and selling interactive technology products. Its Class A Shares are listed for trading on the Toronto Stock Exchange and on the NASDAQ.

For the purposes of an initial public offering on July 15, 2010, Smart Tech filed a prospectus with Canadian Securities Regulators and a registration statement with US securities regulators. The IPO involved the sale to the pubic of 38,830,000 Class A Shares at US$17 per share.

Tucci, who lives in Ontario, purchased 850 Class A Shares at US$17 per share in the IPO. He alleges that the Canadian prospectuses and the American registration statement contained misrepresentations that did not become apparent until a corrective disclosure was made on November 9, 2010.

Although the IPO closed on July 20, 2010, Class A Shares began trading on the TSX and on the NASDAQ on July 15, 2010 in advance of the IPO closing. In other words there was secondary trading in the Class A Shares during the IPO.

In the proposed class action, Tucci alleged that the disclosure in Smart Tech's offering materials was materially deficient and that he and the other proposed class members suffered damages as a result of acquiring the shares of Smart Tech at an inflated price. He advanced a claim for prospectus misrepresentation under section 130 of the Act.  There was a parallel class action (McKenna v. Smart Technologies) pending in the United States District Court for the Southern District of New York.

In finding that Tucci's interpretation of section 130(1) was "unnecessary" and "strained", Justice Paul Perell considered that the conventional understanding of section 130(1) of the Act was that it provides a statutory cause of action and remedies to purchasers buying securities in the primary market for misrepresentations in the prospectus used during distribution to the public. The conventional understanding does not provide a remedy for any purchasers in the secondary market. Rather, subject to the court granting leave, purchasers in the secondary market have a statutory cause of action for misrepresentation pursuant to Part XXIII.1 of the Act.

Tucci challenged the conventional understanding of this section and argued that "a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public" included not only primary market purchasers but also some secondary market purchasers.  He argued that as a matter of public policy during the period of distribution of securities in the primary market, purchasers in the primary market and in the secondary market are similarly situated and therefore it was good public policy to treat those people the same rather than imposing a leave requirement on the purchasers in the secondary market.

In dismissing this argument, Justice Perell held that the judgment of the British Columbia Court of Appeal in Pearson v. Boliden Ltd. was persuasive.  That judgment held that the statutory rights of action for prospectus misrepresentation were available only to investors who purchased directly from an underwriter, issuer or selling security holder and not to others who purchased "during the period of distribution".

Justice Perell held that a secondary market purchaser does not purchase a security offered by a prospectus. Rather, he or she purchases a security offered by a secondary market vendor. The price of the security being sold and the terms of sale for the secondary market sale may and likely will be different in the primary market from the secondary market. Tucci's interpretation would leave the anomalous result that some of the claimants who purchased in the secondary market would not have the remedy of rescission that would be available to section 130 claimants who purchased in the primary market. This follows because the right to elect rescission is available only against the issuers of the security, the selling security holders and underwriters.

Finally, Justice Perell held that Tucci's interpretation was not necessary to serve the purposes of the Act which offered a section 130 cause of action for purchasers in the primary market and, with leave, a Part XXIII.1 cause of action for purchasers in the secondary market. There was no legislative purpose to be served by adding a special class of secondary market purchasers whose purchases happen to occur during the primary market's operation.



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