DATE: 20040723

DOCKET: C41300

COURT OF APPEAL FOR ONTARIO

SHARPE, SIMMONS and LANG JJ.A.

B E T W E E N:

WILFRED SHAW

John W. McDonald and John W. Findlay for the plaintiffs/appellants

(Plaintiff/Appellant)

• and -

BCE INC. and BELL CANADA INTERNATIONAL INC

Alan Mark and Steve Tenai for Bell Canada International Inc.

(Defendants/ Respondents)

A N D B E T W E E N

CAMERON GILLESPIE

(Plaintiff/Appellant)

• and -

BCE INC. and BELL CANADA INTERNATIONAL INC

F. Paul Morrison and Dana M. Peebles for BCE Inc.

(Defendants/ Respondents)

Heard: July 12, 2004

On appeal from the order of Justice James Farley of the Superior Court of Justice dated January 5, 2004, reported at (2003), 42 B.L.R. (3d) 107.

BY THE COURT:

[1] This is an appeal from the order of Farley J. dismissing two identical proposed class actions on the ground that the statements of claim failed to disclose a reasonable cause of action and on the grounds of res judicata, issue estoppel and abuse of process.

[2] The claims relate to the Bell Canada International (“BCI”) Recapitalization Plan, announced on December 3, 2001, to deal with BCI’s severe liquidity crisis arising from a general international devaluation of telecommunication companies, and in particular, adverse economic conditions affecting a major BCI holding in Brazil. The Recapitalization Plan involved raising additional capital through a rights offering to all BCI shareholders and the issuance of BCI shares to settle BCI debt in accordance with the terms of the debt obligations. The Recapitalization Plan also included the issuance of further shares to maintain the majority position of BCE Inc. (“BCE”), in order to comply with certain BCI debt obligations that provided that the debt would become due if BCE ceased to be the majority shareholder. Pursuant to the Recapitalization Plan, BCE injected substantial capital into BCI.

[3] The original statement of claim of the appellant Wilfred Shaw (“Shaw”) was based upon negligent misrepresentation. When Shaw moved to certify the claim as a class action on behalf of BCI shareholders, the claim was struck out on the ground that it failed to disclose a reasonable cause of action. Farley J. also ruled that the class action should not be certified and that Shaw was not an appropriate class representative. Shaw was given leave to amend, but cautioned that the statement of claim required major revisions and that it might not survive if the same allegations were repackaged under fresh labels. Shaw’s amended statement of claim essentially repeated the same allegations, this time claiming that the Recapitalization Plan and its implementation constituted oppression of minority shareholders. An identical statement of claim naming Cameron Gillespie (“Gillespie”) as plaintiff was issued, presumably to deal with the problem posed by the finding that Shaw was not an appropriate class representative. Although the Gillespie claim was not served, it was filed as a claim in the BCI Plan of Arrangement and the respondents were advised of its existence. As the Gillespie claim was known to the respondents, they included it in their motion to strike the Shaw amended statement of claim.

[4] In our view, the statements of claim were properly struck out pursuant to Rule 21 without further leave to amend. As we agree with the motions judge that the statements of claim fail to disclose a cause of action, we do not find it necessary to engage in a lengthy or detailed analysis of the minutiae of the claims in order to dispose of this appeal.

[5] Stripped to the essentials, the statements of claim failed to disclose a reasonable cause of action for three fundamental reasons. The motions judge, adopting BCE’s argument, described them in the following terms at para. 10:

(i) Shaw's Amended Claim in oppression has a fundamental flaw in it: it is premised on an allegation that reasonable expectations as to BCI’s financial stability were not met by the Defendants, but those expectations, as pleaded, cannot reasonably have arisen from the documents relied upon (principally, the Rights Offering Prospectus);

(ii) Shaw has failed to plead a prima facie case in oppression: the recapitalization transactions were, on their face, beneficial to BCI and to its minority shareholders; and

(iii) Shaw has failed to plead all of the constituent elements of his cause of action: there is no pleading in the Amended Claim which connects the allegedly oppressive acts or omissions of the Defendants to any loss sustained by the Plaintiff [emphasis in original].

[6] With respect to the first point, in support of the allegation that BCI shareholders had a reasonable expectation that BCI would be financially stable following the Recapitalization Plan, the statements of claim incorporate substantial extracts from the Rights Offering Prospectus. Accordingly, the motions judge was entitled to consider the Prospectus as a whole in assessing whether or not the statements of claim disclose a reasonable cause of action. The bold type on the face page of the Prospectus made it crystal clear that BCI faced a significant financial crisis and that the Rights offered were speculative investments with a significant element of risk: “An investment in the Units or the Common Shares should be considered speculative due to the Corporation’s present financial condition. Prior to subscribing for Units, potential purchasers should carefully consider certain risk factors. See ‘Risk Factors’” [emphasis in original]. The Prospectus specifically cautioned BCI investors that the significant increase in the number of shares was likely to have a negative effect on the price of the shares; that BCE had no obligation to fund BCI after the implementation of the Recapitalization Plan; that BCI would require further additional capital in the near future; and that BCI might need to secure protection from its creditors. The terms of the Prospectus contradict and completely undermine the allegation that BCI shareholders had a reasonable expectation that BCI would be financially stable following the Recapitalization Plan. We agree with the conclusion of the motions judge (at para. 10):

…the documents indicated, chiefly the Prospectus, relied on by Shaw as the foundation for reasonable expectations warned that BCI might have to file for protection from its creditors. There was absolutely no implication that BCI’s long-term prospects were stable. At para. 14 of my earlier decision, I stated that "in any oppression case, the court must look at the entirety of the document/pronouncement to see if the alleged expectation was reasonable” and I concluded at para. 8 that: “In the subject case, the document (the Prospectus), in which the alleged misrepresentations are contained clearly identified the risks which subsequently materialized”. Notwithstanding that, Shaw’s amended Statement of Claim at para. 48 states that the “Prospectus ... created the reasonable expectation that the exercise of the Rights and the purchase of BCI Common Shares, while a speculative decision, was nevertheless a prudent investment decision ...”. I would note that by its very wording this para. 48 is self-contradictory except to the possible remote extent that it was only referring to a group of speculators and not the spectrum of BCI shareholders purported to form the class. It is inconceivable with absolutely no air of reality to my view that the risk of substantial shareholder dilution would not be appreciated. There was a complaint that alternatives were not considered, but no alternative was proposed by these plaintiffs nor was there any demonstration that any alternative would have resulted in a better result. It appears that these plaintiffs wanted BCE to continue to support with mega dollars BCI, but this was neither realistic or promised - indeed, the contrary was cautioned about. Secondly, the transactions complained of were designed to prevent the failure of BCI which would have had an automatic result that Shaw's holdings would have been completely and irredeemably without value. Where the amended Statement of Claim reveals that the subject transactions in fact conferred a benefit upon the minority (non-BCE) shareholders as indicated by the documents, especially the Prospectus, as relied on to ground his claim, then Shaw's pleading fails to disclose a reasonable cause of action in oppression and must be struck out [footnotes omitted].

[7] As for the second point, it is common ground, and acknowledged by the statements of claim, that BCI faced a liquidity crisis and could not have met its financial obligations without the Recapitalization Plan. Without the Recapitalization Plan, BCI shares would have had little or no value and no prospect of increasing in value in the future. As the appellants themselves note in their statements of claim, “…BCI was likely going to collapse if the Recapitalization Transactions did not close” (Shaw amended statement of claim at para. 21 q). The effect of the Recapitalization Plan was essentially to inject enough capital into BCI to permit it to continue operations for a period of time in the hope that the international climate and the value of its Brazilian investment would improve. As the Recapitalization Plan permitted BCI to avoid immediate financial collapse, it was beneficial to the appellants and the BCI shareholders they seek to represent. We agree with the submission that in these circumstances, in order to succeed in an oppression action, the appellants must allege that there was some preferable alternative available to rescue BCI from the financial crisis that it faced. The appellants failed to allege any such alternative. This constitutes a fatal flaw in their claim of oppression.

[8] We add here that we agree with the submission that many other allegations made in the statement of claim are contradictory or defy common sense. For example, the appellants assert that the Recapitalization Plan should have been withdrawn shortly after it was announced, yet offer no alternative to avoid the certainty of BCI’s collapse without the Recapitalization Plan. The appellants also complain that as ordinary shareholders the appellants were unfairly denied rights accorded to secured lenders by the terms of the security, an assertion that on its face is plainly untenable. In oral argument, the appellants relied upon the “deemed reliance” provision of the Securities Act R.S.O. 1990, c. S.5, s. 130, and National Instrument 45-101, as adopted by the Ontario Securities Commission. We do not find this submission persuasive. No claim is advanced in the amended statement of claim under these provisions and, in any event, we see nothing in the Act or the National Instrument to repair the fundamental defects in the pleading that we have identified.

[9] The third point is that the claims are fatally flawed because they fail to allege how or even if any of the acts complained of caused either appellant any damage or loss. There is no allegation of any loss or damage suffered beyond a bald and general allegation that all BCI shareholders suffered a loss of $1 billion. The appellants plead no facts specifying the nature of their holdings or when or in what circumstances they were acquired or sold. Shaw’s original statement of claim suffered a similar defect and the reasons of the motions judge for striking the original statement of claim put Shaw on notice that this defect was fatal. Despite that clear warning, the amended statement of claim and the Gillespie statement of claim are similarly defective. These claims have not been certified as a class proceeding and if they are to survive as disclosing a cause of action at the pre-certification stage, the appellants must plead the nature of their loss, if any, and how the actions of the respondents caused such loss. They have failed to do so and this provides a further basis for striking out the statements of claim under Rule 21.

[10] The conclusions we have reached regarding the substantive inadequacy of the statements of claim are sufficient to dispose of this appeal and accordingly we need not consider the arguments based upon res judicata, issue estoppel and abuse of process.

[11] We dismiss the motion to introduce a letter and attachments from the appellant’s counsel to respondents’ counsel as fresh evidence on appeal. The proposed fresh evidence relates to the nature of Gillespie’s interest in BCI. We do not admit it for four reasons. First, it was plainly available before the motion was heard and there is no adequate explanation for why it was not presented then. Second, if admitted, it could not be expected to affect the result. Third, it is not sworn. Finally, it is doubtful that such evidence could be received on a Rule 21 motion in any event.

[12] We also dismiss the appeal against the motions judge’s order as to costs. We are not persuaded that costs should have been refused because this is a class proceeding brought for the benefit of the public and other investors. That argument has no force in light of the first motion to strike the statement of claim. The appellants were put on notice that their pleading was defective and explicitly warned by the motions judge (at para. 18) that “an unsuccessful attempt [to amend] would conceivably be ‘rewarded’ with a significant costs award”. They gambled with a second try and we see no reason to interfere with the motions judge’s determination that they should pay the price. Nor are we persuaded that the motions judge erred by awarding costs against Gillespie despite the fact that his statement of claim was never served. Gillespie put his statement of claim in play by issuing it and filing it under the Plan of Arrangement. As it is a carbon copy of the Shaw amended statement of claim and intended to be used in the event that the motions judge maintained his ruling that Shaw was not a proper class representative, the respondents were entitled to move against it. Gillespie did not withdraw the statement of claim but resisted the motion and there was a proper basis for a costs order against him.

[13] The respondents are entitled to their costs of the appeal fixed at $25,000 to each respondent, inclusive of GST and disbursements, payable by the appellants on a joint and several basis.

“Robert J. Sharpe J.A.”

“Janet M. Simmons J.A.”

“Susan Lang J.A.”

Released: July 23, 2004