Court File and Parties
DIVISIONAL COURT FILE NO.: 614/15
SUPERIOR COURT OF JUSTICE – ONTARIO
DIVISIONAL COURT
RE: Paiman Rahimi, Plaintiff
AND:
SouthGobi Resources Ltd., Alexander A. Molyneux, Terry Krepiakevich, Matthew O’Kane, Andre Deepwell, Pierre B. Lebel, Gordon Lancaster and Deloitte LLP, Defendants
BEFORE: Stewart J.
COUNSEL: Michael G. Robb, Paul Bates and Alex Dimson for the Plaintiff
John A. Campion for the Defendants Deloitte LLP
HEARD at Toronto: In Writing
ENDORSEMENT
Nature of the Motion
1The Defendant SouthGobi Resources Ltd. (“SouthGobi”) moves for leave to appeal to the Divisional Court from the Order and decision of Belobaba, J. dated November 5, 2015 which granted a motion by Paiman Rahimi (“Rahimi’) for leave to commence this action against SouthGobi under Part XXIII.1 of The Securities Act, R.S.O. 1990, c. S.5 (“Securities Act”). In that same decision, the motion judge held that Rahimi should not be granted leave to pursue his action against two officers of the corporation (the Defendants Krepiakevich and O’Kane) and three members of the Board of Directors who were members of the audit committee of SouthGobi (the Defendants Lebel, Deepwell and Lancaster) at the relevant times.
2The claim to be advanced by Rahimi arises out of a decision made in 2012 with respect to whether restatement of prior financial results was required to be made. A determination was made with the assistance and concurrence of SouthGobi auditors that no restatement of past results was necessary, but a change would be made to financial results on a go forward basis due to changes in contracting and accounting practices.
3Later, in November, 2013, it was determined that SouthGobi 2011 and 2012 financial results would be restated along with comparative information in SouthGobi’s interim financial statements for 2013 because, as found by the motion judge:
The uncontroverted evidence of the defendant directors is that SGR reluctantly agreed to restate the 2010 to 2012 financials for three reasons: one, to accommodate TQR’s dispute with the SEC and allow TQR to conclude its rights offering financing; two, to itself avoid default on a convertible debenture held by the Chinese Investment Corporation by making a required interest payment that depended on financial support from TQR, who would only fund the company’s operations if SGR’s earlier financials were restated; and three, because PwC was now taking the position, despite agreeing in 2012 that no restatements were necessary, that it would not approve SGR’s 3Q2013 financials unless the earlier financials were restated.
4The motion judge’s decision with respect to the individual Defendants was based on his finding that a defence of reasonable investigation under section 138.4(6) of the Securities Act had been proven on a balance of probabilities by the individual Defendants, and the evidence on the motion demonstrated that there was no reasonable possibility that the individual Defendants would not be able to establish one or both branches of the reasonable investigation defence.
5SouthGobi submits that the motion judge erred in not extending this same reasoning and these same conclusions to SouthGobi itself.
6Rahimi submits that the test for leave to appeal has not been met in this case.
Test for Leave to Appeal
7The test for granting leave to appeal under Rule 62.02(4) is well-settled. Leave should not be easily granted and the test to be met is a very strict one.
8There are two possible branches upon which leave may be granted. Both branches involve a two-part test and, in each case, both aspects of the two-part test must be met before leave may be granted.
9Under Rule 62.02(4) (a), the moving party must establish that there is a conflicting decision of another judge or court in Ontario or elsewhere not of a lower level court and that it is, in the opinion of the judge hearing the motion, desirable that leave to appeal be granted. A conflicting decision must be with respect to a matter of principle, not merely a situation in which a different result was reached in respect of particular facts: Comtrade Petroleum Inc. v. 490300 Ontario Ltd. (1992), 7 O.R. (3d) 542 (Div. Ct.).
10Under Rule 62.02(4) (b), the moving party must establish that there is reason to doubt the correctness of the order in question and that the proposed appeal involves matters of such importance that leave to appeal should be granted. It is not necessary that the judge granting leave be satisfied that the decision in question was actually wrong. That aspect of the test is satisfied if the judge granting leave finds that the correctness of the order is open to very serious debate: Nazari v. OTIP/RAEO Insurance Co., [2003] O.J. No. 3442 (S.C.J.); Ash v. Lloyd’s Corp. (1992), 8 O.R. (3d) 282 (Gen. Div.). In addition, the moving party must demonstrate matters of importance that go beyond the interests of the immediate parties and involve questions of general or public importance relevant to the development of the law and administration of justice: Rankin v. McLeod, Young, Weir Ltd. (1986), 57 O.R. (2d) 569 (H.C.J.); Greslik v. Ontario Legal Aid Plan (1988), 65 O.R. (2d) 110 (Div. Ct.).
Preliminary Issue
11Rahimi takes issue with the raising by SouthGobi of what he describes as a new issue: the corporate identification doctrine argument.
12I agree with SouthGobi’s position that the corporate identification concept was necessarily part and parcel of the submissions before the motions judge in that it was argued that the actions and the state of mind of the individual Defendants should be imputed to the corporation.
13Accordingly, this concept was demonstrably a matter upon which the parties both joined issue and adduced evidence and made argument, despite what appears to have been the case that the term “corporate identification doctrine” was not specifically employed in course of so doing. In my view, such a change in terminology, or even the absence of it, does not constitute the raising of a new issue on appeal: Webster v. Ernst & Young, 2000 BCCA 229.
14As a result, all of the material filed by the parties on this leave to appeal motion and all issues raised have been reviewed for the purposes of considering whether leave to appeal should be granted.
Analysis
15Having considered both tests, I am satisfied that leave to appeal ought to be granted pursuant to Rule 62.02(4) (b).
16The principal issue on this leave motion is whether the state of mind of the individual Defendants can be distinguished on the evidence from the state of mind of SouthGobi itself for the purposes of analyzing and applying the defence of reasonable investigation.
17In light of the factual context of the proposed claims and the comprehensive evidence adduced by the parties, the motion judge had no difficulty concluding that each of the SouthGobi individual Defendants would succeed in making out both branches of the reasonable investigation defence. As against these individual Defendants, he concluded that Rahimi’s claim therefore had no reasonable possibility of success.
18In connection with the claims against the directors and audit committee members, Deepwell, Lebel and Lancaster, the motion judge stated:
I find that the three defendant directors have presented detailed and credible affidavit evidence, unchallenged on cross-examination, that shows, in essence, that they did everything that could reasonably be expected of them as members of the SGR board and audit committee and further, that they had no reasonable grounds to believe that the various financial disclosures that were released under their jurisdiction over the time periods in question contained any misrepresentations about the “bill and hold” recognition of revenue.
19Similar findings were made with respect to Krepiakevich and O’Kane. The motion judge concluded:
The defendants’ evidence taken as a whole shows that the individual defendants were fully alive to the “bill and hold” issues. There were visits to Mongolia by the CFO, the audit committee and board, and the external auditors. There was thoughtful preparation, review and approval of audit plans and draft financial statements and the correction and adjustment of these statements as and when needed. I am satisfied on the evidence before me that nothing more could have been done by the two CFOs or the three defendant directors to ensure the legitimacy and accuracy of the financial representations at issue.
20With respect to the corporate Defendant SouthGobi, however, the motion judge found that there was a reasonable possibility that the reasonable investigation defence might fail at trial. This finding was made by the motion judge in spite of his findings concerning the individual Defendants and his acknowledgement of the compelling evidence of the corporate Defendant company that may well prevail at trial.
21Although there was no evidence before the court that supported the proposition that SouthGobi was not in the same factual position regarding a defence of reasonable investigation to that of it its management and directors, the motion judge relied on the fact and the wording of the restatement to grant leave to claim against it.
22I have reason to doubt the correctness of the order because the SouthGobi management and director Defendants constituted the directing mind of the company with respect to financial disclosure issues and its compliance with securities legislation. Deciding upon matters of revenue recognition and the application of IFRS standards was within their sphere of duty. On matters of financial disclosure, these Defendants had been granted plenary governing executive authority and, in this case, reasonable investigation by any one of these individuals must be attributed to the directing mind of the corporation. If each of these individual Defendants has made out the defence, the corporation must also have done so.
23Because the corporate identification doctrine merges the mental state of the responsible individual with that of the corporation, there is good reason to find that it would constitute an error of law to find the corporation to be legally responsible where the individual is exonerated: TFE Industries Inc. v. R 2009 NBCA 39. Further, there is good reason to doubt the correctness of the motion judge’s conclusion in that it is based only upon the fact and wording of the restatement with nothing else.
24In that regard, it is important to remember that the test does not require that I find that the order from which leave is sought is in error. It merely requires me to be satisfied that there is good reason to doubt its correctness, as I have done here.
25I am also satisfied that the issues involved in this appeal are matters of sufficient importance that leave to appeal ought to be granted. In that regard, I would observe that several courts have accepted that the secondary market securities misrepresentation cause of action created by Part XIII.1 of the Securities Act raises novel issues of application and interpretation of general interest and concern beyond these parties such that leave to appeal should be granted: CBS Canada Holdings Co. (c.o.b. Famous Players Inc.) v. Hammerschlay & Jaffe Inc., [2009] O.J. No. 5149 (S.C.J.); Dobbie v. Arctic Glacier Income Fund, 2012 ONSC 777.
Conclusion
26Leave to appeal is granted on the following questions:
(a) Where the individuals constituting an issuer’s directing mind with respect to matters of financial disclosure are able to prove that they will necessarily succeed in establishing the reasonable investigation defence at trial, is it open to the court to reach a different conclusion in respect of the issuer itself? That is, does a corporate identification doctrine apply to the defences under Part XXIII.1 of the Securities Act?
(b) Where an issuer has restated prior period financial results, does this fact alone mandate that leave be granted to commence an action under Part XXIII.1 of the Securities Act? That is, where an issuer demonstrates that the restatement was issued for reasons other than to correct the untruth or inaccuracy of the initial financial disclosures, and the plaintiff introduces no other supporting evidence, must the court nevertheless find that the plaintiff’s claim has a reasonable possibility of success?
Costs
27Costs of the leave motion are left to the hearing panel.
Stewart J.
Date: May 24, 2016