COURT FILE NO.: CV-09-391701-00CP

DATE: 20120914

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

WAYNE B. GOULD

Plaintiff/Moving Party

and -

WESTERN COAL CORPORATION, AUDLEY EUROPEAN OPPORTUNITIES MASTER FUND LIMITED, AUDLEY CAPITAL MANAGEMENT LIMITED, AUDLEY ADVISORS LLP, CAMBRIAN MINING PLC, JOHN W. HOGG, ROBERT CHASE, JOHN B. BYRNE, JOHN J. CONLON, CHARLES G. PITCHER and JOHN ROBERT BRODIE

Defendants/Respondents

James C. Orr, Michael C. Spencer, Megan B. McPhee & Ahmad Erfan, for the Plaintiff

Benjamin Zarnett & David D. Conklin, for the Defendants Western Coal Corporation and Cambrian Mining PLC

Matthew Milne-Smith, for the Audley Defendants

David F. O’Connor & Sean M. Grayson, for the Defendants Robert Chase, John Robert Brodie and John Hogg

David Di Paolo & A. Nicole Westlake, for the Defendant Charles G. Pitcher

Joseph Groia & Kellie Seaman, for the Defendants John B. Byrne and John J. Conlon

HEARD: June 11, 12, 13, 18, 2012

Table of Contents

I. THE FACTS. 4

A. The Parties. 4

B. The Events at Issue. 8

II. THE PLEADING AND THE EVOLUTION OF THE PLAINTIFF’S CASE.. 15

III. THE EVIDENCE.. 17

A. The Plaintiff’s Evidence. 17

B. The Defendants’ Evidence. 18

C. Comments on the Evidence. 18

D. Comments on the Plaintiff’s Expert Evidence. 21

IV. THE ISSUES AND ANALYSIS. 26

A. The Leave Motion and Certification of the s. 138.3 Claim.. 26

Good Faith. 29
Reasonable Possibility of Success at Trial 30
Conclusions on the Leave Motion. 65
The Reasonable Investigation Defence. 72

B. The Conspiracy Claim.. 77

C. The Oppression Claim.. 88

V. CONCLUSION.. 95

G.R. Strathy J.

[1] The plaintiff moves to certify this action as a class proceeding under the Class Proceedings Act, 1992, S.O. 1992, c. 6 (the C.P.A.). He also seeks leave to commence an action for secondary market misrepresentation under Part XXIII.1 of the Securities Act, R.S.O. 1990, c. S.5.[^1]

[2] The plaintiff alleges that the defendants “fabricated” a financial crisis in the defendant Western Coal Corporation (the Company or WCC) in November, 2007, in order to artificially depress its stock price, so that they could enhance their shareholdings in the Company at a fraction of what the shares were worth. He claims that, as part of this scheme, some of the defendants created false cash flow projections and made inappropriate write-downs, causing the Company’s auditors to insist that the November 14, 2007 quarterly financial statements be qualified by a note that there was “substantial doubt about the ability of the Company to meet its obligations as they come due”.[^2]

[3] The plaintiff says that this contrived and unduly pessimistic news caused a loss of confidence in the Company, sending investors like him “stampeding to the exits”, selling their securities and causing a dramatic drop in the share price. He claims that this allowed the defendants to acquire or increase their interests in the Company at a discounted price, thereby diluting the shareholdings of other stockholders.

[4] The plaintiff asserts three claims, which he seeks to certify under the C.P.A.:

(a) an action for misrepresentation in the secondary securities market under Part XXIII.1 of the Securities Act, which requires leave of the court;

(b) a claim against some of the defendants for conspiracy; and

[5] I will begin with the factual background. I will then summarize the plaintiff’s claim as pleaded and provide some comments on the evidence. I will then address the three claims in the above order.

I. THE FACTS

[6] In this section, I will introduce the parties, describe the events and transactions that are the basis of the plaintiff’s complaints, and provide some context for the issues. Further detail will be added later, as necessary.

A. The Parties

The Plaintiff

[7] The putative representative plaintiff, Wayne Gould (Gould), is a retired engineer and lives in Alberta. In 2007 Gould became interested in WCC and decided to purchase WCC debentures, which paid 7.5% annual interest and were convertible to common shares at $4.00. At various times between January and early November 2007, he purchased WCC debentures with a total value of $100,000.

[8] Gould says that on November 15, 2007 he read an article in the Globe and Mail, based on a news release issued by WCC the previous day, announcing its results for the second quarter of 2008, which ended on September 30, 2007 (Q2 2008). The article stated that “… Western Canadian Coal said the soaring loonie, low coal prices and operational issues had pushed it to the brink of collapse.” Gould immediately liquidated all his holdings in WCC, leaving him with a capital loss of about $30,000.

[9] One week later, on November 22, 2007, Gould saw a news release announcing that WCC had entered into an agreement to issue a private placement of senior convertible debentures of between $30 million and $40 million to a group of investors led by the Audley defendants (the Audley Financing). He also learned that some of the individual defendants, who were officers and directors of WCC, had purchased “significant amounts of shares” in the Company shortly before the announcement of the Audley Financing. This made him suspect that the Audley Financing had been arranged well in advance of the November 22, 2007 news release. He speculated that the Q2 2008 financial statements were part of a conspiracy to temporarily deflate WCC’s share price so that insiders and related parties could benefit from the enhanced stock price after the announcement of the Audley Financing.

[10] Gould brings this action on behalf of all persons who held or disposed of WCC’s securities during what he refers to as the “Misrepresentation Class Period” – that is, between the release of the Q2 2008 financial statements and the filing on SEDAR[^3] of a Material Change Report confirming the completion of the Audley Financing (November 14, 2007 to December 10, 2007). He also seeks to represent those who acquired, held or disposed of securities of WCC between April 16, 2007 and July 13, 2009 – a period he describes as the “Oppression Class Period”.

WCC

[11] WCC is a British Columbia company, incorporated under the Business Corporations Act of that province. It is involved in the exploration, acquisition and development of coal mining properties in British Columbia. WCC is listed on the Toronto Stock Exchange (TSX) and on the Alternative Investment Market (AIM) of the London Stock Exchange. WCC was a reporting issuer under the Securities Act and was subject to the continuous disclosure obligations under Part XVIII of that Act and the civil liability provisions for secondary market misrepresentation under Part XXIII.1.

[12] WCC’s major shareholder was the defendant Cambrian Mining PLC (Cambrian), which held approximately 42% of WCC’s issued and outstanding shares.

[13] WCC had two primary coal-producing assets, both located in northeastern British Columbia. One was a group of open pit deposits, known as the Wolverine Mine or Wolverine Project. This project had a quarter billion dollar construction and start-up budget, which was to be financed through a combination of equity, debt and operations. Some of the debt financing, a $75 million facility, was provided by a syndicate led by BNP Paribas (BNP) and was secured by the assets of the Wolverine Mine. The other major coal asset was an open pit mine referred to as the Brule Mine.

[14] In June 2007, Cambrian had acquired a company called Falls Mountain Coals Inc. (FMC), which owned the Willow Creek Coal Mine, situated near WCC’s Brule Mine. Cambrian had given WCC a 180 day option to purchase FMC. The acquisition of FMC by WCC, if it could be accomplished, would enable WCC to use FMC’s coal handling, processing and loading facilities in conjunction with its Brule Mine, giving rise to significant synergies and costs savings.

[15] In the fall of 2007, there were some reasons to be optimistic about WCC’s future. It held substantial coal reserves, the quality of its coal had received positive reviews from international steel companies, coal prices were on the rise and it had access to an efficient rail and port infrastructure to get its product to market.

[16] There were, however, some real and significant immediate financial challenges facing WCC. Front and centre was its violation, as of September 30, 2007, of a current ratio[^4] covenant in its long term lending facility with the BNP lending syndicate. It had received a short term waiver of that default until November 30, 2007, but it was required to produce new debt or equity financing of at least $15 million as a condition of that waiver. It was anticipated by WCC that the covenant would be violated again within twelve months of September 30, 2007. In the event of a future default, BNP would be entitled to exercise its security over WCC’s assets, including its major income-producing asset, the Wolverine Mine. WCC’s relationship with BNP was rocky. BNP had imposed substantial penalties as conditions of its waivers and had amended the credit agreement to accelerate the reduction of principal and to require increased equity contributions.

[17] As well, WCC had not been generating operating profits. It had experienced losses since Q4 2007 (the three months ended March 31, 2007) and it was unlikely to turn a profit in the near term. The strengthening Canadian dollar impacted its revenues, because its sales were in U.S. dollars, but its costs were incurred in Canadian dollars. Revenues were insufficient to cover operating and overhead costs. WCC incurred a loss at the end of Q2 2008 of about $43 million, including a number of one-time or unusual items, some of which are discussed below. Operational difficulties had impacted revenues, adding to the company’s cash flow problems. On top of all this, the asset-backed commercial crisis was unfolding, impacting WCC’s ability to liquidate a $5 million investment and also causing a contraction of credit.

Cambrian Mining PLC

[18] Cambrian is a UK-incorporated mining investment company that held a wide range of resource-based investments in Europe, North America and Australia.

Audley

[19] Audley Capital Advisors LLP (incorrectly named in the Statement of Claim as Audley Advisors LLP) is an English investment advisor and the manager for Audley Capital Management Limited, a financial services firm located in Guernsey. Audley Capital Management managed and operated a number of private investment funds, including Audley European Opportunities Master Fund Limited. I will refer to all of these three entities as "Audley", unless otherwise noted. Audley held a 29% share of Cambrian at the material time.

The Individual Defendants

[20] The individual defendants were officers or directors of WCC at the material times, as follows:

(a) John W. Hogg (Hogg) was President and CEO of WCC and a director of WCC;

(b) Robert Chase (Chase) and John Robert Brodie (Brodie) were directors of WCC;

(c) John Byrne (Byrne) was a director and Chairman of the Board of WCC. He was also a director and Chairman of the Board of Cambrian;

(d) John J. Conlon (Conlon) was a director of both WCC and Cambrian; and

(e) Charles G. Pitcher (Pitcher) had been President and CEO and a director of WCC between 2003 and 2004. He resigned from these positions in May 2004 and served as an independent director of WCC from 2007 until 2010.

B. The Events at Issue

[21] To provide context for the discussion that follows, I will give an overview of the events that give rise to the plaintiff’s claims of misrepresentation, conspiracy and oppression. Some of these events will be described in more detail later in these reasons, as the need arises.

The Q2 2008 Disclosures

[22] On November 14, 2007, WCC released its results for Q2 2008. The relevant disclosures were contained in its financial statements, its Management Discussion and Analysis (MD&A) and a news release. The alleged misrepresentation, which is at the root of all the plaintiff’s claims, was contained in Note 1 to the financial statements and in the MD&A, and was repeated in the news release. Note 1 stated, in part:

The Company was in violation of a financial covenant in respect of its long term debt at September 30, 2007 and a waiver has been received from the Company’s lenders. It is expected, however, that this financial covenant will be violated in the 12 months following September 30, 2007, accordingly, this debt has been classified as current in these interim financial statements, with the result that the Company has a working capital deficiency of $24,264,000 at September 30, 2007.

At current coal prices and Canadian/US dollar exchange rates, the Company does not expect to have sufficient funds to meet its long term debt obligations as they come due and to continue the planned expansion of the Perry Creek Mine, and accordingly the Company will require equity or debt financing from its major shareholder and/or external sources. These circumstances lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern. The Company has been successful in raising additional equity and debt financing in the past to fund its capital expenditures and operations, and management believes that these funds will be available in the future, however there is no assurance that any required funding would be available to the Company on acceptable terms. [Emphasis added.][^5]

[23] The focus of the alleged misrepresentation is the underlined portions, particularly the sentence in the second paragraph expressing “substantial doubt” about the ability of the Company to meet its obligations as they come due, and therefore the appropriateness of going concern accounting. This will sometimes be referred to as the “going concern note”.

[24] When I discuss the leave test, I will describe the background to the preparation of the financial statements and, more specifically, the reasons for the decision to insert the going concern note in the financial statements.

[25] Immediately after the release of the Q2 2008 results, there was a significant decline in the value of WCC’s common shares, which fell from about $1.68 to 50 cents on November 15, 2007, rising slightly in the days following.

[26] The plaintiff asserts that the alleged misrepresentation concerning WCC’s financial condition was deliberately engineered as part of the defendants’ master plan to enrich themselves and to seize control of WCC. The plaintiff also asserts that these alleged misrepresentations were made in violation of generally accepted accounting principles (GAAP) and depressed WCC’s share price. This, allegedly, enabled the defendants to carry out certain transactions, described below, at vastly reduced costs.

The Accounting Adjustments

[27] The plaintiff pleads that the going concern note was only one of the means used by the defendants to effectuate their conspiracy to misrepresent WCC’s financial condition. He claims that the defendants also made “selective write-downs” in Q2 to inflate WCC’s losses and “concocted” false cash flow projections in order to make the Company’s financial condition appear worse that it was. He says that these actions, along with the going concern note, gave the “false impression that [WCC] was on the verge of bankruptcy.”

[28] These accounting adjustments are discussed later in these reasons.

Non-Disclosure of the Audley Financing

[29] Another feature of the alleged conspiracy is Gould’s claim that the Audley Financing, which provided an injection of capital to forestall a default in WCC’s obligations to BNP on November 30, 2007, had been secretly pre-arranged by WCC and Cambrian, with the knowledge of the individual defendants. The intentional short-term deflation of the share price was, he claims, intended to allow Audley, Cambrian and the individual defendants to acquire WCC’s shares at bargain-basement prices through the Audley Financing and the other transactions described immediately below.

The Impugned Transactions

[30] The transactions at issue are:

(a) the acquisition of shares in WCC by three directors, Chase, Brodie and Hogg;

(b) the Audley Financing, whereby Audley made any investment of $30 million in WCC by way of debentures convertible at 75 cents per share;

(d) the amendment of a loan agreement between Cambrian and WCC.

[31] The plaintiff contends that the defendants benefitted from these transactions because the price of WCC’s shares had been artificially reduced as a result of the conspiracy to misstate the Company’s financial condition. He pleads that the impact of the last three transactions was to enable Cambrian and Audley to increase their holdings in WCC on favourable terms and diluted class members’ holdings in the Company. These three transactions are at the core of the plaintiff’s claim of oppression.

(a) Acquisition of WCC Shares by Chase, Brodie and Hogg

[32] Gould’s suspicion of a conspiracy and insider trading was excited by his discovery that three WCC directors had purchased shares of WCC shortly after the disclosure of the Q2 2008 results. I will discuss the evidence surrounding these transactions, which were openly made and relatively modest, in due course. The directors have given uncontradicted evidence that they did not take advantage of any undisclosed material information concerning the affairs of WCC.

(b) The Audley Financing

[33] At the end of June 2007, WCC had closed a private placement of approximately $45 million, to meet its commitments due June 30, 2007 and to provide additional working capital.

[34] Around the same time, WCC became aware that it had violated certain reporting and financial covenants in its loan agreement with BNP. BNP granted a waiver of this default, but only on condition that WCC increase its principal payment due on September 15, 2007 from $10 million to $15 million.

[35] It soon became apparent that WCC would not be able to make the September 15, 2007 payment. Not only was it continuing to sustain operating losses, but its illiquid $5 million investment in asset-backed commercial paper was not available to help pay down the BNP loan.

[36] On September 15, 2007, BNP granted another waiver, but once again imposed tough terms. WCC was obliged to immediately pay $10 million of the outstanding loan, to raise $5 million to replace the illiquid commercial paper, and to raise an additional $10 million in capital by November 30, 2007.

[37] To satisfy BNP’s immediate demands, Cambrian made a $5 million loan to WCC in September 2007. The terms were negotiated between Cambrian’s CEO and WCC’s independent directors. The loan included an agreement that Cambrian would be issued 520,000 warrants to purchase common shares of WCC, exercisable up to September 30, 2008, at $2.35, the price that had been used for the $45 million equity issue in June, 2007.

[38] From June 30, 2007, up to the completion of the Audley Financing, WCC and its officers and directors were engaged in extensive efforts, personally and through outside expert consultants and with the assistance of Cambrian, to obtain more stable and secure long-term financing to replace the BNP facility. The evidence concerning these efforts is described in detail, in the affidavit of Jeff Redmond (Redmond), the acting CFO of WCC at the material time, the affidavit of Greg Jones, the former in-house counsel and corporate secretary of WCC and the affidavit of Chase.

[39] Notwithstanding these efforts, financing had not been arranged by November 14, 2007, when the Board of WCC met to approve the Q2 financial statements and regulatory filings. In spite of this, management was confident, as stated in Note 1 to the financial statements and in the MD&A and news release, that financing would be arranged, as it had been in the past.

[40] In the period immediately following the release of the Q2 2008 results on November 14, 2007, WCC continued to aggressively search for financing on a number of fronts, in order to meet its November 30, 2007 obligations to BNP and to finance the Company’s operations through to the spring of 2008, when cash flows were expected to improve.

[41] Financing proposals were ultimately received from three sources, including Audley. A term sheet was ultimately signed with Audley for up to $40 million in convertible debentures, with Audley committing to purchase $30 million and WCC being able to place $10 million with other investors. The debentures paid interest at 8.5% per annum and were convertible at 75 cents per share. In addition, Audley Management received warrants to purchase 4.24 million common shares of WCC at 75 cents per share as an underwriting and arrangement fee.

[42] WCC was able to rely on an exemption permitted under s. 604(e) of the TSX Company Manual that permitted issuers in “serious financial difficulty” to conclude a financing without shareholder approval. WCC sought and obtained the exemption for the Audley Financing.

[43] As a condition of the Audley Financing, WCC was required to exercise its option to acquire FMC from Cambrian. Audley believed that FMC would strengthen WCC’s asset base, provide operational efficiencies and synergies, and increase WCC’s long term value.

[44] The details of the negotiations leading up to the agreement of WCC to acquire FMC from Cambrian, and the amendment to the Cambrian loan, are set out, at great length, in the affidavits of both Burridge and Chase. They resulted in a memorandum of understanding dated November 30, 2007. The total price was set at approximately $28 million dollars, with an initial payment of 18,740,898 common shares at seventy five cents per share, representing approximately $14 million and a deferred payment of approximately $14 million to be made September 30, 2008, in either cash or shares, at the option of Cambrian. If Cambrian exercised that option, or if WCC was not able to fund the payment in cash, Cambrian was to receive 9 million shares of WCC valued at $1.56 per share.

[45] The memorandum of understanding was subsequently amended in February 2008, to provide that if Cambrian elected to receive the deferred payment of $14 million by June 30, 2008, it would receive 4,534,088 shares of WCC at a price of $3.10 per share.

[46] The evidence is clear that the negotiations were arm’s length and involved genuine bargaining. The transaction was recommended by an independent committee of WCC’s directors and was the subject of a fairness opinion from Capital West. It was ultimately approved by 99.94% of the votes cast by shareholders in favour of the acquisition of FMC. In the course of negotiations, the special committee of WCC obtained an opinion that FMC had a value of between $100-115 million, far in excess of the price of approximately $28 million.

(d) The Amendment of the Cambrian Loan

[47] It was also a condition of the Audley Financing that there be an amendment to the terms of the of the $5 million loan made by Cambrian to WCC in September 2007, to ensure that Cambrian would not exercise its right to demand repayment of the loan, a right that would be triggered by the financing.

[48] The amendment was negotiated between the independent directors of Cambrian and WCC and provided that:

(a) Cambrian agreed to waive its right to demand repayment of the loan;

(b) Cambrian agreed to release the asset-backed commercial paper that it held as security for the loan;

(d) Cambrian was entitled to convert the loan to shares on the same basis that Audley and the other investors had been offered – namely, $0.75, as opposed to the original price of $2.35 per share.

[49] The amendment to the Cambrian loan was made in November 2007 and was disclosed in a February 28, 2008 Information Circular. It was overwhelming approved by the shareholders of WCC on March 31, 2008.

[50] As events transpired, Cambrian did not exercise its conversion rights under the loan and, instead, the amounts owing to Cambrian were set off against amounts owed by Cambrian to WCC.

[51] The plaintiff claims that the Audley Financing, the sale of FMC to WCC and the amendment of the Cambrian loan were the end game of the conspiracy and were oppressive because they diluted class members’ holdings.

[52] The Audley Financing allowed WCC to survive the “perfect storm” of November 2007. It also made it possible for WCC to exercise its option to purchase FMC from Cambrian. As events transpired, coal prices rose significantly in April 2008 and had a dramatic effect on the Company’s profitability and, correspondingly, on its share price. Ultimately, in 2011, the Company was bought by Walter Equity at $11.50 per share, a handsome appreciation for those shareholders who accepted management’s opinion that WCC would find acceptable financing in November 2007 and who decided to hang on to WCC’s shares, having decided that the risk was an acceptable one.

II. THE PLEADING AND THE EVOLUTION OF THE PLAINTIFF’S CASE

[53] In this section, I will summarize the allegations in the Fresh as Amended Statement of Claim and will contrast those allegations with the position the plaintiff takes on this motion. I will give more details of the pleadings of misrepresentation, conspiracy and oppression in the sections dealing with those specific claims.

[54] The Fresh as Amended Statement of Claim pleads that WCC, the Audley defendants and Cambrian “misrepresented the true state of Western Coal’s finances to enable Audley, together with Cambrian, to acquire a controlling interest in Western Coal on highly favourable terms.” The plaintiff alleges that the misrepresentation included the statement that WCC did not have sufficient funds to meet its obligations as they came due, the improper accounting adjustments and the deliberate failure to disclose the allegedly pre-arranged Audley Financing.

[55] The plaintiff pleads that the alleged misrepresentation had a strategic purpose and was part of the conspiracy between WCC, Cambrian and Audley to profit financially. He says that the defendants knew, or ought to have known, that this misrepresentation would result in a precipitous drop in WCC’s share price, enabling them to acquire control of WCC on favourable terms through the Audley Financing, the sale of FMC by Cambrian to WCC and the amendment of the Cambrian loan.

[56] He pleads that these transactions were oppressive and unfairly prejudiced the rights of class members, because their shareholdings were diluted.

[57] Gould also alleges that Hogg, Brodie and Chase “purchased shares in Western Coal with the benefit of inside knowledge that had not been publicly disclosed, in violation of securities laws.”

[58] Relying on the evidence of his expert accounting witness, the plaintiff argues in his factum that the Q2 2008 disclosures painted an unnecessarily “bleak” picture of a company on the verge of bankruptcy. He alleges that the defendants deliberately enhanced WCC’s losses in the second quarter in order to “spread alarm” among investors and “concocted” false cash flow projections in order to induce WCC’s auditor, PricewaterhouseCoopers (PwC) to make the going concern note in the financial statements.

[59] The plaintiff’s case has morphed over time. As presented in the original motion record, it was alleged that the Audley Financing was part of the entire “scheme”. Gould deposed in his affidavit that when he learned that the individual defendants had purchased shares shortly before the announcement of the Audley Financing, he became “suspicious” that the financing had been pre-arranged. Having sold his debentures at a loss, in the belief that the Company was about to fail, he was shocked and probably angry to discover that some of the directors had bought the Company’s shares during the crisis and that the stock price had rebounded on the announcement, a week after the release of the Q2 2008 results, that a source of funding had been obtained.

[60] In the face of the extensive and largely unchallenged evidence of the defendants, the plaintiff’s case has changed significantly. By the time the motion was heard, the plaintiff substantially downplayed, to the point of abandonment, his assertion that the alleged misrepresentation was part of a pre-planned scheme to enable Audley to seize an interest in WCC. Instead of contending that the Audley Financing had been pre-arranged, it was suggested that WCC deliberately delayed its efforts to obtain financing, apparently, to leave itself with no saviour other than Audley and that Audley was only too happy to jump into the vacuum, knowing that the going concern note in the financial statements was wrong. The plaintiff also suggested that the defendants deliberately painted a bleak financial picture for WCC by focusing on its short term problems rather than its long term prospects.

[61] It remained the plaintiff’s position, at least in counsel’s factum, delivered less than a month before the hearing, that the individual defendants (other than Pitcher), with the collaboration of Redmond, deliberately misrepresented to the public that “[WCC’s] financial condition was dire and the Company might not even survive”.

III. THE EVIDENCE

[62] As the leave motion requires an evidence-based analysis of whether the plaintiff’s claim has a reasonable possibility of success at trial, it is appropriate to make some preliminary comments on the evidence that has been tendered by the parties.

A. The Plaintiff’s Evidence

[63] The plaintiff provided evidence from two fact witnesses and two expert witnesses.

[64] Gould swore a short affidavit, describing his acquisition of the WCC debentures and the circumstances, described above, that led to the commencement of this action. He also deposed to his good faith in commencing this action and explained why, in his view, the action was appropriate for certification as a class action.

[65] The other fact witness was an associate in the office of the plaintiff’s counsel, who set out the background of the various transactions that are the subject of this action, based on public documents and corporate disclosures.

[66] Quite obviously, neither Gould nor his lawyers had any personal first-hand knowledge of the transactions at issue or of the underlying facts behind the claims of oppression, conspiracy, intentional misrepresentation and insider trading that are made in the statement of claim.

[67] The plaintiff filed two expert reports of Rosen & Associates Limited, an accounting firm specializing in forensic and investigative accounting. The first report took the form of an affidavit of Lawrence S. Rosen, one of the principals of the firm. The other was a report jointly signed by Mr. Rosen and A.T. Mak, who is also a principal in the firm. It was filed following the delivery of the defendants’ reply evidence. For the sake of convenience, I will refer to the authors of both reports as “Rosen”. Rosen’s evidence will be discussed in this part and also in my analysis of the issues in Part IV.

[68] The other expert was Derek Sigel, a securities lawyer, who deposed that the Audley Financing must have been known to WCC and its senior management “a number of days” in advance of its announcement on November 22, 2007. The purpose of this evidence appears to have been to attempt to show that the Audley Financing must have been arranged for some time, and inferentially that it was probably know at the time the Q2 2008 disclosures were made on November 14, 2007.

[69] As I have noted, by the time of the hearing, the allegation that the Audley Financing had been pre-arranged was effectively demolished by the defendants’ evidence and had been abandoned by the plaintiff.

[70] In the result, the plaintiff’s case is exclusively based on the public record, the evidentiary foundation produced by the defendants and the expert evidence of Rosen.

B. The Defendants’ Evidence

[71] The defendants have delivered a substantial body of evidence. WCC, Audley and Cambrian have provided evidence through one or more former officers or directors. Every one of the individual defendants, other than Conlon, has provided an affidavit. Affidavits have been provided by the audit partner of PwC responsible for WCC, and by the consultants involved in searching for financing for WCC. The deponents, fifteen in all, were personally involved in the events that are the subject of this litigation and they have provided detailed and thoroughly documented evidence concerning their actions during the material time.

[72] In addition, expert accounting evidence has been provided by several affiants on behalf of Deloitte & Touche LLP and by Navigant Consulting Inc.

[73] Only four of the defendants’ witnesses were cross-examined: Julian Treger (Audley) Mark Burridge (Cambrian’s former CEO), Lenard Boggio (Boggio), the audit partner of PwC responsible for WCC, and Redmond (Western’s former Director of Finance and acting CFO).

C. Comments on the Evidence

[74] The plaintiff objects that the mountain of evidence adduced by the defendants is a strategic attempt to turn the leave motion into an assessment of the merits based on the balance of probabilities and with an incomplete evidentiary record. He says that if the court condones this practice it will enable well-resourced and powerful defendants to overwhelm would-be class actions with an impenetrable wall of evidence.

[75] The plaintiff notes that there have been no affidavits of documents and says that the defendants have made selective disclosure, putting their best foot forward and concealing evidence that could harm their case. He notes that large volumes of material, and some affidavit evidence, was produced by the defendants only after cross-examinations had been completed.

[76] I do not accept the plaintiff’s position on this issue. The plaintiff claims damages of $200 million. He makes very serious allegations against the defendants and other professionals. The consequences of granting leave and certification are significant. The defendants are entitled to put a record before the court to establish that the plaintiff’s misrepresentation claim has no reasonable possibility of success. They are also entitled to rely on that record to show that there is no basis in fact for the existence of common issues of conspiracy and oppression.

[77] The plaintiff was at liberty to cross-examine any of the defendants’ witnesses. Only a few were cross-examined. No document has been identified that the plaintiff has requested and that the defendants have failed to produce. No motion was brought by the plaintiff for the production of any additional document or for leave to cross-examine any additional witness.

[78] In Silver v. Imax Corp., 2009 CanLII 72342 (ON SC), [2009] O.J. No. 5573, 66 B.L.R. (4th) 222, leave to appeal ref’d, 2011 ONSC 1035, [2011] O.J. No. 656 (Div. Ct.) (Silver v. Imax (Leave)), van Rensburg J. noted that the “reasonable possibility of success” requirement in the statutory leave test captures two meanings – the possibility must be more than a “mere” possibility and it “must be based on a reasoned consideration of the evidence” (at para. 324). In this latter regard, van Rensburg J. noted that the evaluation of the merits at the leave stage is necessarily constrained by the motion procedure – at paras. 326-327:

The leave provision, working with the definition of the statutory cause of action and defences, requires plaintiffs to put forward the evidence they rely on as to the misrepresentation, and the extent of knowledge or participation required for non-core documents and liability for officers, and permits each proposed defendant to offer an account that may contradict the plaintiffs' allegations, or would fall within the terms of one or more of the defences afforded by the statute.

The evidence must be considered at the leave stage to determine whether the plaintiffs' action, after the respondents have had the opportunity to put forward evidence to support their defences and the positions of the parties have been explored in cross-examination, has a reasonable possibility of success.

In this regard it is not sufficient (as the respondents contend) to put forward defences which the plaintiffs must "overcome". Nor is the court required (as the plaintiffs assert) to leave any assessment of the defences to a trial. The court must consider all of the evidence put forward in the leave motion, including evidence supportive of any statutory defence. Because the onus of proof of a statutory defence is on the respondents, the court must be satisfied that the evidence in support of such a defence at the preliminary merits stage will foreclose the plaintiffs' reasonable possibility of success at trial.

Considering all of the factors noted above, I have approached part two of the leave test by asking myself whether, on the evidence that is before the court on this motion -- that is the affidavits and transcripts of examinations, as well as the various documents that have been tendered as exhibits, and produced in response to undertakings and ordered to be produced during the cross-examination process -- as well as reasonable inferences to be drawn from such evidence, and considering the onus of proof for each of the cause of action and the defences, as well as the limitations of evaluating credibility in a motion, is there a reasonable possibility that the plaintiffs will succeed at trial in proving [the various elements of the statutory cause of action] …

[80] I respectfully adopt these comments. In this case, the defendants have – as they are entitled to do – put forward evidence to contradict the plaintiff’s allegations. In assessing the weight to be accorded this evidence, I am required to consider the limitations of the motions process, including the fact that the evidence is not given viva voce. I am also entitled to consider whether the evidence has been challenged on cross-examination, and whether it is consistent with other evidence and contemporaneous documentation, viewed as a whole.

D. Comments on the Plaintiff’s Expert Evidence

[81] The defendants have raised issues about Rosen’s evidence. They accuse him of breaching the duties of an expert by giving opinions on matters outside his expertise, by weighing evidence and making findings of fact and by engaging in argument and legal analysis. The plaintiff has failed to answer these objections and in my view they are well-founded. They call Rosen’s independence into question and justify substantially discounting his evidence to the point that I have no confidence in its reliability. I have come to this conclusion for the following reasons.

[82] First, Rosen and Mak are chartered accountants. They describe themselves as forensic accountants. They have experience and qualifications in matters of financial reporting and disclosure, GAAP (generally accepted accounting principles) and accountants’ negligence. In the course of their reports, however, they repeatedly purport to give opinions on matters outside their proven expertise, including matters of corporate governance and securities law. For example, in commenting on the use of “going concern” language in the Q2 2008 financial statements, Rosen stated: “Unwarranted gloom and biased descriptions do not constitute fair financial presentation, nor were they permitted under the Canadian accounting standards that existed at the time. Unjustifiable management-based impacts on share prices are contrary to good governance principles and basic securities law.” Leaving aside the accusation of bias, which is utterly unfounded, Rosen has no proven qualifications to opine on governance principles or securities law, even if evidence of the latter was admissible, which it is not.

[83] Other examples abound. Rosen made comments about WCC’s attempts to obtain financing, suggesting that management’s efforts were “slow and half-hearted and fell short of expected measures for a business that was supposed to be in financial distress.” This statement is not only impermissible fact-finding, but it also expresses an opinion on a subject matter – corporate financing practices – for which Rosen has no proven expertise, education or training.

[84] Rosen also purports to give evidence on matters having to do with corporate governance and oppression – frequently based on suspicion and innuendo – for example, “Far too many events and activities by the management of WCC raised very serious concerns about the governance of WCC in 2007. Minority shareholder oppression has to be thoroughly investigated as one possibility.”

[85] The willingness of an expert to step outside his or her area of proven expertise raises real questions about his or her independence and impartiality. It suggests that the witness may not be fully aware of, or faithful to, his or her responsibilities and necessarily causes the court to question the reliability of the evidence that is within the expert’s knowledge.

[86] Second, Rosen purports to weigh evidence, evaluate the credibility of witnesses and make findings of fact. Some of the previous examples are indicative of this propensity, but there are others. Simply by way of example, in one of his reports, Rosen stated: “Further investigation of the disclosures is necessary. Many indications exist that WCC was not insolvent and that its management chose not to explore viable options prior to, and during, the purported ‘financial distress period’. Such behaviour would be consistent with an intention to create false panic about the financial health of the Company, so as to suppress its stock price.” This statement is objectionable on a number of grounds: it is unvarnished fact-finding, it attributes motive and it contains pure speculation.

[87] I have already referred to Rosen’s evidence to the effect that the efforts of management to obtain financing lacked a “sense of urgency”. This is pure fact-finding in the form of generalized conclusory statements, without any attempt to provide a factual basis for his conclusions, couched in pejorative and argumentative language.

[88] By the time Rosen delivered this report, he had the affidavits of all members of senior management of WCC, including Redmond, and the affidavit of Boggio of PwC explaining the process leading up to the inclusion of the going concern note in the financial statements. He also had the evidence of the defendants concerning their efforts to explore financing options before, during and after the release of the financial statements. In making the foregoing statements he was purporting to weigh and evaluate this evidence and was drawing adverse and unsupported conclusions about what the evidence established.

[89] Third, Rosen engaged in blatant advocacy, making exaggerated, inflammatory and pejorative comments and innuendos, which were argument rather than evidence. For example, in commenting on the Q2 2008 disclosures, Rosen stated: “In our opinion, WCC’s public announcement significantly overstated the financial risks facing the company in November 2007. A major concern for shareholders has to be that the Company’s disclosures could very well have deliberately been made to create false panic with investors and depress the Company’s share price.” This is also another example of Rosen attributing motive, and engaging in speculation, rather than confining himself to opinions that are within his area of expertise.

[90] Again, there are numerous examples of this kind of language set out in the factum of counsel for Chase, Hogg and Brodie. Rosen seldom missed an opportunity to take a pejorative swipe at the defendants, often in a speculative way. The following will suffice simply as examples:

• “Minority shareholder oppression is highly suspected, based on publically available evidence.”

• “[t]he entire transaction appeared to be unusual, carrying possible impacts on WCC’s share price and therefore could be oppressive to some shareholders.”

• “…the second quarter (ended September 30, 2007) financial statements represented the only opportunity to disseminate adverse news under the guise of “regular” financial reporting.”

• “A major concern for shareholders has to be that the Company’s disclosures could very well have deliberately been made to create false panic with investors, and depress the Company share price.”

• “We would expect that specific, extensive effort would have been made by WCC management to follow the seemingly simple solution to avoid adverse financial disclosures.” [emphasis added]

[91] There are multiple other instances in which Rosen exceeds the bounds of his expertise, purports to make findings of fact and engages in argument, advocacy and hyperbole. They offend the rules applicable to expert evidence as set out and discussed in: R. v. Mohan, 1994 CanLII 80 (SCC), [1994] 2 S.C.R. 9; Williams v. Canon Canada Inc., 2011 ONSC 6571, [2011] O.J. No. 5049 (S.C.J.); Carmen Alfano Family Trust (Trustee) v. Piersanti, 2012 ONCA 297, [2012] O.J. No.2042 (C.A); R. v. J (J.L.), 2000 SCC 51, [2000] 2 S.C.R. 600 (S.C.C.), at para. 37.

[92] In the Carmen Alfano Family Trust case, the Court of Appeal observed, at paras. 107-108:

That said, courts remain concerned that expert witnesses render opinions that are the product of their expertise and experience and, importantly, their independent analysis and assessment. Courts rely on expert witnesses to approach their tasks with objectivity and integrity. As Farley J. said in Bank of Montreal v. Citak, 2001 CanLII 12419 (QC CQ), [2001] O.J. No. 1096, "experts must be neutral and objective [and], to the extent they are not, they are not properly qualified to give expert opinions."

When courts have discussed the need for the independence of expert witnesses, they often have said that experts should not become advocates for the party or the positions of the party by whom they have been retained. It is not helpful to a court to have an expert simply parrot the position of the retaining client. Courts require more. The critical distinction is that the expert opinion should always be the result of the expert's independent analysis and conclusion. While the opinion may support the client's position, it should not be influenced as to form or content by the exigencies of the litigation or by pressure from the client. An expert's report or evidence should not be a platform from which to argue the client's case. As the trial judge in this case pointed out, "the fundamental principle in cases involving qualifications of experts is that the expert, although retained by the clients, assists the court."

[93] The Court of Appeal continued, at para. 110, by noting that where the court observes a lack of independence, it will generally discount the weight to be given to the expert’s opinion:

In most cases, the issue of whether an expert lacks independence or objectivity is addressed as a matter of weight to be attached to the expert's evidence rather than as a matter of the admissibility. Typically, when such an attack is mounted, the court will admit the evidence and weigh it in light of the independence concerns. Generally, admitting the evidence will not only be the path of least resistance, but also accord with common sense and efficiency.

[94] Rosen’s willingness to engage in this type of advocacy, exaggeration and over-statement, and his failure to make a balanced assessment of the evidence, drawing only the most unfavourable conclusions, casts serious doubt on his independence and objectivity and causes me to discount the weight which might be given to his evidence.

[95] Rosen signed an acknowledgment of expert’s duty in which he acknowledged a duty to provide fair, objective and non-partisan opinion that related only to matters that were within his area of expertise. He also acknowledged that this duty prevailed over any obligation he might owe to the party that retained him. Rosen did not confine himself to matters within his expertise. He engaged in impermissible fact-finding and speculation. The tone of his report was not fair, objective and non-partisan. These failings, together with shortcomings in his logic, discussed below, give me no confidence that his evidence can be relied upon, or could possibly be relied upon at trial.

IV. THE ISSUES AND ANALYSIS

[96] My examination of the issues departs from a conventional analysis of a certification motion, in which the court typically considers whether each of the requirements of s. 5(1) of the C.P.A. has been met. In these reasons, I first address the issue of whether leave should be granted to pursue the claim for secondary market misrepresentation under the Securities Act. I have concluded that leave should not be granted because the plaintiff’s claim has no reasonable possibility of success at trial. This conclusion makes it unnecessary to consider whether that claim should be certified. As the alleged misrepresentation is also a central aspect of the conspiracy claim, I then consider whether the evidence establishes a sufficient basis, in fact, for the existence of common issues that would make it appropriate to certify the conspiracy claim, assuming the other requirements of s. 5(1) of the C.P.A. are met. I have answered this question in the negative. Finally, I have accepted the defendants’ submission that this court has no jurisdiction over the oppression claim because the cause of action is within the exclusive jurisdiction of the Supreme Court of British Columbia. In these circumstances, it is not necessary to consider the many other issues raised by the parties, including the issues of whether the other requirements of s. 5(1) of the C.P.A. have been met in the case of each claim.

A. The Leave Motion and Certification of the s. 138.3 Claim

[97] Section 138.3 of the Securities Act confers a cause of action for misrepresentation in the secondary securities market in favour of a person who acquires, or disposes of, the issuer’s securities between the release of the document containing the misrepresentation and the time the misrepresentation was publicly corrected, regardless of whether or not the plaintiff actually relied on the misrepresentation. The section provides:

138.3(1) Where a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person or the company relied on the misrepresentation, a right of action for damages against,

(a) the responsible issuer;

(b) each director of the responsible issuer at the time the document was released;

[98] A “misrepresentation” is defined in s. 1(1) as:

(a) an untrue statement of material fact, or

(b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made.

[99] A “material fact”, when used in relation to issued securities, means:

a fact that would reasonably be expected to have a significant effect on the market price or value of the securities.

[100] Where the misrepresentation is made in a “core document”, which includes the issuer’s annual and interim financial statements and MD&A, the issuer, its directors and each officer who authorized, permitted or acquiesced in the release of the document, are liable for the misrepresentation, subject to the availability of the “reasonable investigation” defence in s. 138.4(6). In the case of core documents, therefore, it is not necessary to show that the issuer or the officer or director knew that the document contained a misrepresentation.

[101] In contrast, where the misrepresentation is made in a non-core document, or in a public oral statement, the burden is higher. Section 138.4(1) provides that to establish liability, the plaintiff must prove that the issuer, officer or director:

(a) knew, at the time that the document was released or public oral statement was made, that the document or public oral statement contained the misrepresentation;

(b) at or before the time that the document was released or public oral statement was made, deliberately avoided acquiring knowledge that the document or public oral statement contained the misrepresentation; or

(c) was, through action or failure to act, guilty of gross misconduct in connection with the release of the document or the making of the public oral statement that contained the misrepresentation.

[102] In this case, because the same alleged misrepresentations were made in both core documents (the financial statements and MD&A) and a non-core document (the news release), it is unnecessary to consider the requirements of s. 134.8(1).

[103] No action may be commenced under s. 138.3 without leave of the court, and leave can only be granted where the court is satisfied that:

(a) the action is brought in good faith; and

(b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff (s. 138.8(1)). [Emphasis added.]

[104] The plaintiff pleads that:

(a) he purchased and sold WCC debentures during the class periods;

(b) WCC is a “responsible issuer” within the meaning of the Securities Act;

(d) the Individual Defendants were directors of WCC during the Misrepresentation Class Period;

(e) WCC released one or more documents knowing that they contained a “misrepresentation”;

(f) as a result of the misrepresentation, the share price of WCC on the TSX dropped from a high of $1.75 on November 14, 3007 to a low of $0.47 the next day, on heavy trading;

(g) the individual defendants made the misrepresentations by releasing, or authorizing, permitting and/or acquiescing in the release of the documents containing the misrepresentations;

(h) Cambrian made the misrepresentations by knowingly influencing the release or by authorizing, permitting and/or acquiescing to the release of the documents containing the misrepresentations; and

(i) WCC, the individual defendants and Cambrian are liable to the Plaintiff and the Misrepresentation Class Members who held or disposed of their shares during the Misrepresentation Class Period.

[105] The history of the statutory remedy, and the principles applicable to the leave test, have been discussed at some length in Silver v. Imax (Leave); Dobbie v. Arctic Glacier Income Fund, 2011 ONSC 25, [2011] O.J. No. 932 and Green v. Canadian Imperial Bank of Commerce, 2012 ONSC 3637, [2012] O.J. No. 3072.

[106] The test should be applied in such a way as to screen out strike suits while providing access to the courts for shareholders with legitimate claims. It is necessary, however, to examine all the evidence to determine whether the plaintiff’s case is “so weak, or has been so successfully rebutted by the defendant, that it has no reasonable prospect of success”: Green v. Canadian Imperial Bank of Commerce, above, at para. 374.

1. Good Faith

[107] As noted, s. 138.8(1)(a) of the Securities Act requires that the action be brought in good faith. The defendants do not challenge the plaintiff’s good faith in bringing the claim. That being said, I have noted on several occasions that the commencement of this action by Mr. Gould appears to have been inflamed by three particular assumptions, to which Rosen has added fuel, and which have now been demonstrated to be entirely unfounded – namely, that the alleged misrepresentation was a deliberate act, that the Audley Financing was pre-arranged and that the individual defendants took advantage of inside information to increase their stockholdings.

2. Reasonable Possibility of Success at Trial

[108] I will now turn to the question of whether the plaintiff’s misrepresentation claim meets the second part of the leave test – that is, the requirement of s. 138.8(1)(b) that there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

[109] I will begin by examining the alleged misrepresentation in the context in which it was made in the Q2 2008 disclosures. I will then identify the main accounting principles that are at issue and that informed the disclosures that were made by WCC. I will then examine the process leading up to the release of the disclosures. Next, I will examine the expert evidence on both sides of the issue. As the plaintiff’s allegations of misrepresentation are tied to his claim that WCC made improper accounting adjustments to inflate its losses in Q2 2008, I will examine this contention as well as certain other allegations, including the allegation that some of the individual defendants enriched themselves by acquiring WCC shares to take advantage of their misrepresentation. Finally, I will explain why I have concluded that the plaintiff’s misrepresentation claim has no reasonable possibility of success at trial and leave should not be granted.

(a) The Alleged Misrepresentation

[110] It is important to put the alleged misrepresentation in context. It was contained in the first note to the unaudited consolidated financial statements of WCC for the three and six months ending September 30, 2007. The financial statements are twenty-one pages long and there were nineteen notes. Although I have quoted the note earlier, I repeat it here for context. Note 1 provided, in part, as follows:

[111] This language was repeated in the MD&A, at page eighteen of a twenty-four page document, which set out, in great detail, management’s views on the financial circumstances of the Company. The MD&A also described the Company’s violation of its financial covenant with BNP and the need to reclassify the long term debt as current. A somewhat more abbreviated statement was contained in the eight-page news release. The second bullet on the first page of the news release stated:

At current coal prices and Canadian/US dollar exchange rates, the Company does not expect to have sufficient funds in the near term to meet its financial obligations as they come due. The Company will require additional capital from its major shareholder and external sources. In the past, the Company has been successful in raising additional capital and management believes that these funds will again be available in the future. [Emphasis added.]

[112] Like the MD&A, the news release contained substantial additional information about WCC’s financial condition, concerning such matters as its summary of revenues and operations, the operating loss for the quarter, other expenses, the Company’s long-term debt, and the market outlook. The latter section forecast strong demand for WCC’s coal and rising coal prices. It concluded with the following comment:

In the longer term, the Company believes that the market fundamentals for metallurgical coal will provide substantial opportunity to increase market diversity and market share. The Company’s Wolverine hard coking coal has received positive reviews from some of the world’s leading steel mills. The Company’s Burnt River low volatile PCI coal is consistently ranked in the top three PCI coals worldwide and has experienced unparalleled demand. These coals, in conjunction with highly efficient rail and port infrastructure with excess capacity, provide to the Company a strategic advantage to grow and diversify.

[113] A similar statement was made in the MD&A.

[114] The statements in Note 1, some of which are identified above, must be read as a whole. The plaintiff focuses on the going concern note in the second paragraph, but gives no attention to the sentence immediately following, which I have highlighted, expressing management’s belief that funds will be available. As well, the note cannot be read in isolation. It must be considered in the context of the financial statements as a whole and the MD&A as a whole and it must be considered from the perspective of a reasonably informed investor. Such an individual, on reading these documents, would be informed that while WCC was facing some major challenges, it also had some real opportunities.

[115] Some of the major challenges identified in the disclosures included, but were by no means limited to:

• WCC had sustained a net loss for Q2 2008 of nearly $44 million and an operating loss of $13.5 million;

• WCC had a working capital deficiency of about $25 million;

• it was unable to meet its long term debt obligations without additional equity or debt financing;

• there had been violations of its debt covenants and future violations were anticipated;

• the strengthening Canadian dollar was impacting revenues and cash flow; and

• WCC’s current coal sales agreements for its Wolverine hard coking coal covered shipments only for the coal year ended March 31, 2008, with the result that increases in coal prices would not hit the financial statements until some time after that date.

[116] On the other hand, the financial statements and MD&A identified a number of positive features of WCC’s circumstances, including:

• the Company had over $400 million in assets, including the Wolverine Project and the Brule Mine, both of which had demonstrated economic viability;

• the acquisition of FMC pursuant to the agreement with Cambrian would create considerable synergy with WCC’s existing operations;

• there was an anticipated increased global demand for both metallurgical coal and pulverized coal, with corresponding anticipated price increases;

• there had been positive reviews of WCC’s coal from some leading global steel companies;

• negotiations were under way to fix long term sales agreements with “top tier steel mills with excellent growth and stability prospects”; and

• management believed that the needed additional financing would be available, albeit without an assurance that the terms would be acceptable.

[117] The MD&A noted that over the previous two years WCC had transitioned “from a junior coal exploration company into a coal producer.” A reasonably informed investor reading the disclosure documents could see that there were risks attached to the investment, including the risk that WCC would not obtain additional funding on acceptable terms, even though it had managed to do so in the past. That same investor would also see that there were opportunities attached to the investment, including the potential FMC acquisition, rising international coal prices and long term sales contracts with top tier steel companies.

[118] In order to understand the discussions that took place between WCC management, the Audit Committee and the auditors, PwC, concerning the appropriate level of disclosure in the financial statements, it will be helpful to give a general description of the applicable accounting principles. There will be further discussion of these principles when I examine the expert evidence on the issue.

(b) Applicable Accounting Principles

[119] The Handbook of the Canadian Institute of Chartered Accountants (the Handbook and CICA) is considered to be an authoritative statement of Canadian GAAP. In this section, I will set out the applicable GAAP principles, as identified in the evidence.

[120] The Q2 2008 financial statements of WCC were prepared on a going concern basis. This is consistent with Section 1000 – Financial Statement Concepts of the Handbook, which provides, at para. 58, that financial statements are prepared on a going concern basis, meaning that the entity will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.[^6]

[121] The Handbook mandates that in preparing the financial statements, management must make an assessment of whether the company is able to continue as a going concern.[^7] It provides that the statements shall be prepared on a going concern basis, unless management intends to liquidate the entity or stop business or has no realistic alternative but to do so. However, when management is aware of “material uncertainties” that may cast “significant doubt” on the ability of the entity to continue as a going concern, the Handbook provides that those uncertainties shall be disclosed.[^8]

[122] The Handbook provides further guidance on the going concern assumption, requiring management to take into account all available information about the future, looking forward at least twelve months from the balance sheet date.[^9]

[123] As well, assistance is given by the Ontario Securities Commission in OSC Staff Notice 52-7194, dated December 2010, entitled “Going Concern Disclosure Review”:

Overall, we found that issuers disclosed material uncertainties in the notes to their financial statements. However, 41% did not explicitly state that the disclosed uncertainties may cast significant doubt upon the entity’s ability to continue as a going concern. This omission is significant because, absent such linking disclosure, the going concern risk is not highlighted for readers to assess the likelihood and impact of the uncertainties disclosed on the issuers’ financial condition. During our review, we often found it difficult, based on the entity’s public disclosures alone, to differentiate uncertainties that cast significant doubt on an entity’s ability to continue as a going concern from uncertainties that do not cast such doubt, and had to request additional information from the issuer for clarification. Investors do not have the ability to request this additional information and rely on the public disclosure record to make investment decisions. That is why clear robust disclosure is important. In order for the going concern disclosures to be useful to investors, the going concern disclosures should explicitly identify that the disclosed uncertainties may cast significant doubt upon the entity’s ability to continue as a going concern. [Emphasis added.]

[124] This extract expresses the important requirement that disclosure of the going concern risk must be “clear” and “robust”, must identify the uncertainties that cast doubt on the ability of the entity to continue as a going concern and must specifically link those uncertainties to the going concern risk.

[125] GAAP also gives guidance concerning the accounting and reporting of situations in which debt covenants are expected to be violated within twelve months after a reporting period. This is set out in the abstracts of the Emerging Issues Committee (EIC) of the CICA. Issue 1 of EIC 59 provides that where the entity has violated one of more of its long-term debt covenants, giving the creditor a right to demand repayment of the debt, the debt must generally be re-classified as a current liability, unless the creditor has waived the right to demand payment and it is not likely that there will be a further violation of the covenant, giving a right to demand repayment, within one year of the balance sheet date.[^10]

[126] As we shall see, since WCC had violated its debt covenant with BNP, and did not fall within the exception because further default was anticipated, WCC classified the BNP debt as current, rather than long term, in its Q2 2008 financial statements. This had other impacts on WCC’s financial statements, as discussed below.

[127] I now turn to the preparation of the Q2 2008 disclosures and the circumstances that led to the inclusion of the alleged misrepresentation.

(c) The Preparation of the Q2 2008 Disclosures

[128] As I have said, the root of the plaintiff’s allegations of misrepresentation, conspiracy and oppression is the complaint that the going concern note to WCC’s financial statements – flagging the issue of whether it was appropriate to use going concern accounting in light of substantial doubt about WCC’s ability to meet its obligations as they came due – was a deliberate misrepresentation or was an unduly “bleak” forecast.

[129] In order to examine this allegation, I will turn first to the evidence of those involved in the preparation of the disclosure documents. In the next section, I will examine the expert evidence on this issue.

[130] It will be recalled that Redmond was the senior financial officer of WCC at the material time, with responsibilities as acting CFO. He was responsible for preparing the Q2 2008 interim financial statements. He worked closely during that time with Boggio, the PwC partner who was the audit engagement leader for WCC’s audit.

[131] Redmond’s affidavit describes his involvement in seeking financing for WCC in the fall of 2007, his work in managing the Company’s financial position in November, his preparation of the Q2 2008 interim financial statements and the advice and direction he received from PwC about the disclosures required to be made in those financial statements. He also described his participation in the search for financing for WCC between November 15 and November 30, 2007, culminating in the Audley Financing. Redmond produced his entire working papers for the preparation of the financial statements.

[132] Boggio had been a partner in PwC for twenty years and was a senior partner in the firm’s Canadian Mining Industry Group. He had considerable experience in matters of accounting policy and had served, from 2006 to 2009, as a member of the Continuous Disclosure Advisory Committee of the Ontario Securities Commission.

[133] Boggio was directly involved in the review of WCC’s Q2 2008 interim financial statements. He swore a detailed affidavit setting out his work in the review engagement, which was carried out between the second week in October, 2007 and the filing of the statements on SEDAR on November 14, 2007. He deposed that the “going concern” language to which the plaintiff objects was composed by him and that he advised WCC that the wording was necessary and appropriate in the circumstances.

[134] Redmond deposed that he prepared the first draft of Note 1, which was presented to WCC’s Audit Committee on November 9, 2007. It did not contain the “going concern” language and instead simply referred to WCC’s “capital obligations” in connection with the completion of the Perry Creek Mine and the acquisition of FMC. Note 1 as drafted by Redmond stated:

The Company’s ability to meet these planned obligations depends on its ability to generate positive cash flow and profits from operations, and on its ability to raise financing and/or debt financing from its major shareholder or other third parties. There is no assurance, however, that any required funding would be available to the Company on acceptable terms.

[135] Boggio attended the meeting of the Audit Committee on November 9, 2007, having previously provided the committee with a report of PwC’s review of the unaudited interim financial statements. At that meeting, Boggio expressed reservations about Redmond’s draft of the proposed language of Note 1, in view of his opinion, which was shared by WCC management, that there would be insufficient funds available to meet the Company’s debt obligations as they came due and to meet the conditions imposed by BNP, including the obligation to raise an additional $15 million in equity by November 30, 2007. He suggested to the committee that greater disclosure was required. It was left that both Boggio and management would give further consideration to the issue.

[136] After the Audit Committee meeting, Boggio did additional research on the disclosure requirements. He sent Redmond an extract from the Handbook including EIC 59, discussed above. He concluded that, in the circumstances that existed at the time, WCC was not able to fall within the exception in EIC 59 and the BNP debt was required to be re-classified as a current liability.

[137] The language of Note 1 was substantially revised by Boggio, who sent a “blacklined” revision of the note to Redmond on November 11, 2007. The language now proposed by Boggio included the wording of which the plaintiff complains, specifically the statement:

These circumstances lend substantial doubt as to the ability of the company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.

[138] Boggio discussed the issue with his risk management partner and his quality review partner to obtain their input. All agreed that the disclosure he proposed was consistent with disclosures by other companies with significant going concern contingencies.

[139] On receipt of Boggio’s blacklined revision, Redmond sent Boggio an email in which he argued that there were a number of factors that justified “a more favourable outlook than what is currently being presented in your marked up version of our financials”. These included the projections of increased coal prices in the year commencing April 1, 2008, agreements in principle with customers for long term contracts and the existence of a long range plan projecting positive cash flows. He concluded with the observation that WCC’s financial position was “not as bleak as this set of marked up financial present”. Redmond expressed the concern that the statements could be misleading to shareholders, customers and employees.

[140] Boggio responded by email later that day, making it clear that in his view it was necessary to include the going concern language. He made the point that the Company’s need to obtain outside investment triggered the requirement to express doubt about the going concern assumption and that management’s optimism about the ability to raise financing was a factor that could be addressed, but left to investors to evaluate. His response is instructive and I will quote it in full:

Jeff – thanks for your notes.

Your long range plans, the waiver request to the banks and your notes below all indicate that there is a shortfall of cash and that you will need to go outside for funds and that therefore you will be relying on others to agree to cut a cheque for new equity or new debt for the company.

One of the key items to consider in whether you need to identify that there is substantial doubt about going concern explicitly in your financial statements revolves around whether or not you expect to earn the funds from your regular operations to continue in realizing assets and repaying obligations in the normal course, or whether you must go to the outside to bring in third party investors. The third party investor requirement is really what triggers the need by management to disclose that there is substantial doubt with respect to the going concern assumption, and to make sure that it is referenced on the balance sheet.

I don’t think that putting this information in to the statements is anything more than factual, and we recommended this disclosure knowing pretty much of all of the information you set out below, most of which we have already talked about and factored in to our review. The thing is, if you weren’t optimistic about the outcome, you couldn’t properly represent that you think you will be able to raise or earn the money to continue. This still doesn’t change the uncertainty that you face with respect to getting outside investors to share your optimism, and the fact that it is their call on whether or not to invest, and not yours.

I am going to be out this evening, but we can carry on our discussion in the morning. I have three meetings scheduled during the day, but we can find time to talk in between them. [Emphasis added.]

[141] As there was, in fact, substantial doubt about WCC’s ability to meet the commitment due on November 30, 2007, and in light of BNP’s express refusal to waive the obligation, Redmond agreed to include the language that Boggio had proposed.

[142] Boggio swore in his affidavit that, had the note to WCC’s financial statements not incorporated the language he proposed, or similar language, he would have had to consider whether PwC should have withheld or qualified its review engagement report on the basis that the interim financial statements had not been prepared in accordance with GAAP, due to the failure to disclose the going concern contingency. This fact would have to have been noted in WCC’s public filings, presumably with negative results in terms of its ability to raise capital.

[143] The evidence of Brodie, who was an independent director of WCC and Chair of the Audit Committee at the material time, is particularly significant. Brodie is a chartered accountant and a former partner in KPMG holding a number of senior management and directorship positions with the firm, including chairing the firm’s audit committee and serving as managing partner of its Ottawa office. He had extensive personal experience as a C.A. in the audit of public companies and had served on the board and as chair of the audit committees of several mining and resource companies. Brodie was a member of the independent committee that reviewed and approved the Audley Financing and the special committee that was formed to consider the acquisition by WCC of the shares of FMC.

[144] Brodie gave extensive affidavit evidence concerning the events and discussions leading up to the release of WCC’s Q2 2008 disclosures on November 14, 2008. As might be expected, he communicated regularly with Redmond in preparation for the Audit Committee meeting on November 9, 2007 and discussed the implications of the Company’s breach of its working capital covenant under its loan from BNP as of September 30, 2007.

[145] Brodie’s evidence makes it clear that there was, at what he described as a “long and detailed” Audit Committee meeting on November 9, 2007, extensive, vigorous and sophisticated discussion of the proposed note to the financial statements, the disclosure recommended by PwC, the need for going concern language, the need for disclosure of the Company’s financing requirements and the need to make fair disclosure that would comply with the rules expressed in the Handbook.

[146] At the conclusion of the meeting, it was agreed that the Audit Committee would meet again on November 13, 2007 to review and finalize the financial statements and the wording proposed by PwC. Brodie participated in ongoing communications with Redmond and Boggio concerning the financial statements. Brodie swore that in light of his knowledge of the financial condition of the Company, and his knowledge of the CICA Handbook, he was in agreement with the recommendations of PwC in connection with the going concern note.

[147] At the meeting of the Audit Committee on November 13, 2007, there was specific discussion of the need to classify the Company’s long-term debt obligations as current and the changes to the going concern note as recommended by PwC. Brodie’s evidence concerning the discussion of the language proposed by PwC was:

The meeting was advised that the auditors were comfortable with the proposed disclosure language. Mr. Redmond was of the view that the disclosure as contemplated was required to be made to investors. I accept and agreed with the advice of the auditors and Mr. Redmond. I also stated, as I believed then and I still believe now, that the disclosure contained in the second quarter financial statements was factual and, even though it was unfortunate, going concern disclosure was required.

[148] Brodie said that he agreed with the inclusion of the going concern language because the ability to obtain financing was not within the Company’s control. He also agreed that it was appropriate to express management’s believe that funds could be raised in the future, “but they also knew, as I did, that there was no guarantee that funds would be made available on acceptable terms to [WCC]”.

[149] The financial statements, including Note 1, were approved by the Audit Committee at its meeting on August 13, 2007.

[150] The disclosures were approved by WCC’s Board on November 14, 2007, prior to their public release.

[151] Brodie’s further comments are instructive:

As a member of the Audit Committee and Board, I carefully considered all of the issues raised with respect to the Second Quarter 2000 Interim Financial filings. Based on the analysis and information provided by management (including Mr. Redmond) relating to the Company’s finances, forecasts and cash flows, and based on the report, advice and strong recommendations of Mr. Boggio, I agreed as a member of the Audit Committee and of the Board with all of the content and wording of the second quarter financial filings. I also note, and relied upon the fact, that both Mr. Hogg and Mr. Redmond certified the accuracy of the financial statements.

Contrary to the allegation of the plaintiff, there was no financing agreement reached between [WCC] and Audley on or before November 14, 2007. I was not aware of any consideration or discussion within [WCC] of the prospect of Audley providing any financing to or investment in [WCC]. I, like Mr. Chase explains, learned that Audley might be prepared to provide financing at the Board meeting on November 17, 2007 when Mr. Burridge advised the Board that there was a 50/50 chance that Audley might invest.

[152] Chase’s evidence accords substantially with the evidence of Brodie. Chase was a professional non-executive director. He was trained as a chartered accountant although most of his career had been spent in the business world. He had extensive experience in the mining and resource industries and extensive experience with the audit of public companies and auditing standards. He attended the meeting of the Audit Committee on November 9, 2007 and was satisfied that the going concern language was accurate and required by GAAP. While he was optimistic that financing could be arranged going forward, it was accurate, in his view, to state that there was no assurance that financing would be available in a timely manner or on acceptable terms. He flatly denied that the Audley Financing was pre-arranged. In a subsequent affidavit, he also denied that the financial disclosures made by WCC were designed to create a false panic about the financial health of the Company or to depress the value of its stock.

[153] Byrne’s evidence is also germane. He was Chairman of the boards of both WCC and Cambrian. He deposed that WCC’s Board was concerned that the Q2 2008 statements would deliver a negative message to the market about the financial risks confronting the Company. The Board discussed whether less severe language could be used in the disclosure because they believed that the Company would obtain the financing it needed to meet its obligations. Byrne was persuaded, however, that the Board should follow the advice of WCC’s auditors. Byrne’s evidence continued:

As a result, we [the WCC Board] felt that it was important that [WCC] issue the November 14, 2007 news release that accompanied the financial statements and emphasized our collective belief that [WCC] would obtain financing to allow the Company to meet its financial commitments due at the end of November to BNP.

[154] The evidence of Redmond, Boggio, Brodie, Chase and Byrne, which is entirely consistent with the evidence of all other factual witnesses, makes it clear that the alleged “misrepresentation” was not the result of a conspiracy hatched by the defendants to misrepresent the Company’s financial position. On the contrary, the language originated with the Company’s auditors and was initially resisted by the Company because of management’s expectation that the Company would weather the immediate financial crisis. The Company and its senior officers and directors only agreed to the inclusion of the going concern note after being persuaded by the auditor that the facts and the requirements of GAAP required the disclosure of uncertainty about the going concerning assumption, which could be balanced by the reference to management’s expectations.

[155] I turn now to the expert evidence on the central issue of whether the Q2 2008 disclosures contained a misrepresentation that will support the plaintiff’s proposed class action under Part XXIII.1 of the Securities Act.

(d) Expert Accounting Evidence

The Plaintiff’s Expert Evidence

[156] Rosen’s initial report indicated that he had been retained to provide an opinion on financial events affecting WCC in November and December 2007. The thrust of Rosen’s evidence was that the events surrounding the dramatic decline in WCC’s stock price following the November 15, 2007 disclosures “warrant considerable investigation.” Rosen suggested that transactions carried out during the “liquidity crisis” (his quotation marks)[^11] in the November to December 2007 period “have extensive ownership dilution effects and tend to favour a few insiders and related entities”.

[157] Rosen noted that it would be necessary for investors to have more knowledge about the events in question in order to understand the large trading volumes and sharp drop in the share price following the release of WCC’s Q2 2008 results. He added, “[M]inority shareholder oppression is highly suspected, based on the publicly-available evidence”. He noted that, around the time of the liquidity crisis, debt financing had been arranged and FMC had been acquired from a related company (Cambrian) using depressed stock prices. The use of convertible debt and share warrants to undertake these transactions had, he opined, serious dilution consequences for the other shareholders of WCC.

[158] Rosen stated that several accounting write-downs had been made by WCC, and suggested that the financial statements painted a “gloomy picture of WCC’s future”:

The fiscal 2008 second quarter financial results were released on November 14, 2007. Several accounting write-downs were made in the second quarter, which served to paint a gloomy picture of WCC’s future. The pessimism underlying the negative accounting adjustments was not consistent with WCC management’s positive assessment of operational prospects. In particular, the anticipation of future losses was contradicted by management’s expectation of rising future coal prices and the intention to proceed with the FMC acquisition. The FMC acquisition was expected to generate significant synergies.

[159] Rosen noted that the financial statements, MD&A and news release reported that the Company did not expect to have sufficient funds in the near term to meet its financial obligations as they came due and expected to violate financial covenants within the next twelve months and, on that basis, “chose to reclassify its long-term debt to current liabilities.” He added, “[T]he effect was to create an impression that the company had significant impending repayment obligations, which would not be met. Such a disclosure by a company would reasonably be expected to alarm investors.”

[160] Rosen suggested that there were “numerous inconsistencies” in WCC’s public statements. He pointed out that:

• the company’s concerns about its cash flow were predicated on “current coal prices and Canadian/US dollar exchange rates”, yet he noted that the same statement referred to the fact that future coal prices were expected to be significantly higher;

• management believed that additional capital would be available in the future, and expressed his opinion that “the expectation of available financing contradicts the belief that WCC would not be able to fulfill its repayment obligations. Additional financing, or refinancing, apparently was expected, yet had been downplayed in the wording that had been utilized in communications with shareholders”;

• WCC had an option to acquire FMC from Cambrian, with potential synergies for WCC’s operations, adding “it would seem highly unusual for a company that purportedly is on the verge of bankruptcy to write about corporate acquisition and expansion.”

[161] I have commented on aspects of Rosen’s evidence that lead to my conclusion that he failed to display the independence and objectivity required of an expert witness. His statement about future coal prices, however, reflects a lack of knowledge of the nature of WCC’s business and the pricing of coal contracts which, as even Gould knew, was done in April of each year. Thus, the Company’s cash flow until at least April 2008 would be based on its existing contracts at lower coal prices. His comments in the second two bullets reflect, in my view, not only a lack of balance in his own evidence but also a lack of appreciation for the need for balance and objectivity in the Company’s disclosures.

[162] Rosen then set out his comments about the going concern note, expressing the opinion that if WCC did not expect to satisfy its debt obligations as they came due, it was not appropriate to continue to apply going concern accounting. It is important to set out his evidence in full:

An analysis of WCC’s financial reporting and accounting choices yields similar concerns. The November 14, 2007 news release expressed management’s belief that the company would not be able to meet its financial obligations as they came due. Yet, WCC continued to apply ‘going concern’ accounting, which implies that it would be able to discharge its liabilities as they came due.

As set out in Section 1000.58 of the Handbook of the Canadian Institute of Chartered Accountants, ‘going concern’ accounting refers to the presumption that a business entity will be able to continue in its normal course of operations, realizing its assets and discharging its liabilities as they come due. If an entity is not considered to be a going concern, other bases of accounting would be appropriate or be compulsory. An example of an alternative accounting basis is liquidation accounting. Liquidation accounting would restate the assets to their expected net realizable values, and liabilities to their present values if settled immediately.

If WCC did not expect to be able to satisfy its debt obligations as they came due, it would not have been appropriate to continue applying the ‘going concern’ assumption. In my view, WCC’s decision to remain with going concern accounting is not consistent with its assessment of its liquidity position, and the reclassification of its debt to the current liability category, as is noted below.

[163] Rosen then referred to EIC-59, requiring a debt to be classified as current if a covenant is likely to be violated within one year of the balance sheet date. He suggested that management’s stated expectation that additional financing would be obtained from related parties to meet its cash requirements was inconsistent with the view that additional covenants would be violated in the coming year.

[164] I will discuss Rosen’s opinion below, and will compare it to the opinions expressed by the defendants’ expert. After reviewing other accounting adjustments made by WCC, Rosen came to the rather dramatic conclusion that stock manipulation had taken place:

The inconsistencies in WCC management’s explanations and the accounting adjustments strongly suggest that the negative liquidity news and financial reports were intended to cause a suppression of the company’s stock price.

[165] He then suggested that further investigation was required to get to the bottom of the matter:

Given the timing of the financial disclosures and reporting, and the apparent effect of the same on WCC’s stock price, significant further investigation is required. The accounting choices by WCC’s management must be probed, and factual support carefully evaluated.

[166] Rosen’s second report was prepared with the benefit of having had access to the substantial volume of affidavit evidence filed by the defendants, including the evidence of Redmond and WCC’s expert accounting witness, Wayland of Deloitte. He concluded that WCC’s going concern disclosures were not required by GAAP and surmised that they must have been made deliberately to cast a “dark cloud” over the company and to deliberately suppress its stock price:

Overall, Western Coal’s ‘going concern’ disclosures were not required by GAAP, particularly for an interim or quarterly report, given the magnitude of dollars involved. Admissions of financial difficulty therefore were voluntary and appear to have been elected to be made by management to cast a dark cloud over the Company. Given the adverse implications for the confidence of investors, employees, suppliers and customers in a company when admissions of imminent business failure are made, WCC’s decision to volunteer incomplete, distressing news is puzzling. Announcing possible business failures carries a risk that the warning will be self-fulfilling. Hence, we would expect that such disclosures would not be made unless failure was unavoidable.

Further investigation of the disclosures is necessary. Many indications exist that WCC was not [emphasis in original] insolvent and that its management chose not to explore viable options prior to, and during, the purported “financial distress period” [his quotation marks]. Such behaviour would be consistent with an intention to create false panic about the financial health of the Company, so as to suppress its stock price.

[167] This statement is yet another example of Rosen improperly engaging in fact-finding, speculation and the attribution of motive.

[168] Rosen’s conclusions on the disclosure issue can be summarized, using his own language in some cases, as follows:

• disclosure of doubts about WCC’s ability to continue as a going concern was not required, recommended or appropriate according to GAAP, and was made by management without providing disclosure of all the relevant facts;

• the Company’s cash pressures were limited to the need to refinance a relatively small proportion of its overall liabilities and the use of going concern language was either prohibited by GAAP or was highly unusual;

• “Unwarranted gloom and biased descriptions do not constitute fair financial presentation, nor were they permitted under Canadian accounting standards that existed at the time. Unjustifiable management-based impacts on share prices are contrary to good governance principles and basic securities law”;

• “The Company’s claims of impending insolvency were not consistent with its available financial resources or with management’s actions leading up to the disclosures. In our opinion, WCC’s public announcement significantly overstated the financial risks facing the company in November 2007. A major concern for shareholders has to be that the Company’s disclosures could very well have deliberately been made to create false panic with investors, and depress the Company’s share price.”

[169] Later in the report, Rosen suggested that where doubt exists about a corporation’s ability to continue as a going concern “much softer wording is utilized in financial statements”. He said that, “[T]he term ‘going concern’ is typically avoided because of its harshness and severity. Hence, inclusion of such words by WCC was likely to cause alarm and concerns. In our opinion, such effects should have been well known to the management of WCC.” He said that, “[E]xcessive conservatism and gloom is not an acceptable GAAP concept”, referring to the Handbook s. 1000.21(d).[^12]

[170] Rosen went further in the report, suggesting that admissions that the going concern assumption may be in doubt “are tantamount to a company declaring imminent business failure”. He described the going concern qualification in WCC’s financial statement as being “questionably consistent with the definition of insolvency” and “an unwarranted admission that the Company expected to become insolvent”.

[171] Rosen concluded that WCC “was not facing a legitimate risk of insolvency in November 2007” and that the disclosure of going concern doubts was “not warranted based on relevant Canadian financial reporting standards.” He pointed, in particular, to the positive value of the Company’s substantial net assets, its forecasted cash flows from future operations, the failure to renew or obtain a support letter from Cambrian and the alleged lack of urgency in obtaining alternative financing, which he said were all indicative of the absence of any real crisis. The cash pressures facing the Company, he said, were limited to a need to refinance a relatively small proportion of its overall liabilities, refinancing options existed, and the Company was far from insolvent on a day-to-day operational basis.

[172] Rosen suggested that the overstatement of the financial risks facing WCC in November 2007 raised the concern that these could have been made deliberately, with the intention of creating “false panic with investors … [to] depress the Company’s share price.” He suggested that the conduct of the Defendants, including the management of WCC, Cambrian and Audley, “requires close scrutiny and investigation”, because it is not consistent with experience and observations over many years.

[173] Rosen’s reply report suggested that his work had only just begun. He said that further investigation of WCC’s disclosures was necessary and that there were many indications that WCC was not insolvent and that its management deliberately chose not to explore viable options during the period of financial distress. He suggested that, “[S]uch behaviour would be consistent with an intention to create false panic about the financial health of the Company, so as to suppress its stock price.”

[174] I turn now to the expert evidence on behalf of the defendants.

The Defendants’ Expert Evidence

[175] As noted above, expert accounting evidence on behalf of the defendants was given by Wayland, a chartered accountant and partner with Deloitte, with extensive experience in GAAP compliant financial statements and disclosures. He prepared an initial report dated March 1, 2011 and a second report, dated November 28, 2011, specifically in response to Rosen’s reply report.

[176] In his first report, Wayland expressed the opinion that, in view of (a) WCC’s breach of its debt covenant, which was waived for a period of two months after September 30, 2007 conditional on a requirement that WCC contribute equity of a total of $15 million (an increase from the previous requirement for $10 million) and (b) management’s forecast that the covenant would be violated within the next twelve months, it was required under GAAP and specifically EIC 59, discussed above, to classify the long-term debt as a current liability. There is no dispute about this requirement. The classification of the long-term debt as current resulted in a $24 million working capital deficiency.

[177] Moreover, as required by GAAP, in preparing its financial statements it was necessary for the Company to make an assessment of its ability to continue as a going concern. Wayland’s opinion is that it was appropriate to prepare the financial statements on a going concern basis, in light of management’s stated belief that the Company would have available sufficient funds to meet its obligations in the future and had no intention of liquidating or ceasing operations. It was also his opinion, however, that in accordance with s. 1400 of the Handbook, it was appropriate for the Company to disclose the material uncertainties that cast doubt on its ability to continue as a going concern. These uncertainties included:

• the absence of any firm commitment to renew or re-finance WCC’s existing debt or to provide the additional $15 million in equity it would require, by November 30, 2007, to satisfy the condition attached to BNP’s waiver;

• management’s cash flow forecasts that demonstrated that if the $15 million equity injection could not be obtained, WCC’s cash flow would not be sufficient to enable it to repay its now current debt; and

• the Company had incurred significant losses in Q2 2008 and in each of the previous four quarters.

[178] Wayland agreed with Boggio’s conclusion that if a client did not make disclosures that he believed were required by GAAP, he would have to consider withholding or qualifying his review engagement report.

[179] Wayland’s first report also addressed several accounting write-downs that were taken by WCC in Q2 2008, including a $14.7 million valuation allowance that had been taken against losses in previous years which had been recorded as an asset. These are discussed in the next section.

[180] Wayland’s second report was prepared in response to Rosen’s second report. He opined that Rosen has misstated the purpose and import of the going concern note in WCC’s financial statements. Rosen’s report repeatedly characterized Note 1 as describing an “impending threat of insolvency” or “impending insolvency” or “an unavoidable threat” as if it was a statement that insolvency was about to happen.[^13] This misstatement has been carried through by plaintiff’s counsel in their submissions. Plaintiff’s counsel claimed that it described WCC as being “on the verge of bankruptcy” or facing “pending insolvency”.

[181] As I will explain later in these reasons, I accept the evidence of Boggio and Redmond, who were actually involved in the disclosure decisions and of Wayland, whose evidence confirms the reasonableness of their approach. In my view, Rosen’s evidence fails to consider the disclosure as a whole, distorts the standard to be applied and proposes a form of “disclosure light” that is not consistent with the law or with GAAP and would confuse and mislead readers of the financial statements. I find that there is no reasonable possibility that Rosen’s evidence would be accepted at trial in preference to the defendants’ evidence.

(e) Alleged Improper Accounting Adjustments

[182] As I have noted, the plaintiff claims that the defendants intentionally made inappropriate discretionary accounting write-downs and adjustments and unjustifiable projections, deliberately inflating WCC’s loss for Q2 2008, as part of their strategy to misrepresent WCC’s financial condition in the Q2 2008 disclosures. In Rosen’s initial report, it was noted that a large portion of WCC’s net loss for the quarter, was tax related. He said, “[S]uch a percentage, based on discretionary choices, merits investigation.”

[183] In this section, I will review the main plaintiff’s principal contentions. It is worth repeating, however, that as of September 30, 2007, the end of Q2 2008, and as of November 14, 2008, when the public disclosures were made, WCC was facing significant financial challenges and uncertainties. Not the least of these was its failure to obtain financing to stave off default on its obligations to BNP, which were coming due on November 30, 2007. This circumstance, and the need to classify the Company’s long-term debt as current, had other accounting implications.

“Cleaning House” and Write-off of Costs

[184] As evidence of the alleged conspiracy to misrepresent WCC’s financial condition, the plaintiff relies on an email dated October 28, 2007 from Redmond to Brodie, Chase and Conlon in which he explained the rationale for writing off costs incurred in connection with WCC’s option to purchase FMC. Redmond stated:

John – another issue Western will need to consider at this point is the classification of its deferred transaction costs as at September 30, 2007.

The Company has a total of approximately $1.2 million in deferred costs of which $650k related to the FMC transaction contemplated during Q1 and $550k incurred to date relating to Project Carbon [the potential merger of WCC and Cambrian]. I was comfortable arguing that the FMC costs could be rolled into an evolved transaction but given where we are we may wish to consider writing off as either abandoned transaction costs or consulting costs or a combination thereof further enhancing our loss this quarter. [Emphasis added.]

[185] In response, Brodie, the Chair of WCC’s Audit Committee, wrote:

I am in agreement, let’s clean house and put everything behind us. [Emphasis added.]

[186] The plaintiff says that Redmond’s words “further enhancing our loss this quarter” are evidence that he was deliberately seeking to “enhance” WCC’s losses, to make its losses seem greater than they really were. In my view, the plaintiff is taking a perfectly innocuous “sound bite” out of context and is giving it an unwarranted sinister meaning.

[187] To put the statement in context, WCC had just held a board meeting, at which it had been agreed that “Project Carbon”, a proposed merger between WCC and Cambrian, would not be taking place in the foreseeable future. The Board also concluded that WCC was not in a position to exercise its option to purchase FMC in light of its financial condition. In these circumstances, the evidence establishes that it was perfectly appropriate accounting practice to write off the costs of those transactions, which had previously been recorded as assets.

[188] On cross-examination, Redmond gave a complete explanation of his rationale for the adjustment and denied that it was part of a deliberate strategy to enhance losses. He stated:

And I think that our position was that we needed to really put our numbers under scrutiny to make sure that they could stand up to the tests of a review and certainly, you know, the assertions that the financial statements were prepared within and this comment about let’s clean house, I’m not sure if it reflected the entirety of those financials or just simply the transaction costs that were associated with the FMC and project carbon, in that it was sort of determined that that was a transaction given the state where we were at that wasn’t going to go forward and I think we could look at the next three months and say with certainty that we were not going to pursue a transaction that related to merging with Cambrian.

[189] Brodie, who was not cross-examined on this issue, gave similar evidence:

With respect to the write-off of the transaction costs of approximately $950,000, I should set out my thoughts on the issue at the time. I did not believe at the time of the release of the financials (November 14th) that it was appropriate to conclude that the Company would complete the two transactions (the acquisition of FMC and a potential merger with Cambrian) for which costs had been capitalized and recorded previously as assets. The Board had shelved discussions of any merger with Cambrian in late October and the Company simply did not have the money to exercise its option to acquire FMC before the contractual 180 day deadline expiring on December 31, 2007. In my view, it was conservative to write off the costs for September 30, 2007, rather than maybe taking the charge in a subsequent quarter.

[190] The evidence of Wayland of Deloitte is that the expensing of previously capitalized corporate transaction costs is appropriate under EIC 94 where “the enterprise ceases to be engaged on a regular and ongoing basis with completion of the specifically identified transaction and it is not likely that activities with respect to the completion of the particular transaction will resume within the next three months.” This was the situation at the time. The decision to write off these expenses, which were, in the overall scheme of things, relatively modest, was therefore in accordance with GAAP.

[191] Rosen claimed that because the FMC transaction was ultimately completed, albeit well after November 15, 2007, the statements should have been corrected and the recording of the write-off was premature. In my view, the ultimate occurrence of the subsequent event did not make the write-off improper at the time it occurred.

[192] In the overall context, in which WCC was contemplating going into the market to obtain financing, it made perfect sense that it would attempt to “clean house”, write off unrealizable assets and put its losses behind it. The entire tone of the emails, and the evidence of Redmond and Boggio is to this effect, and is inconsistent with any ulterior and improper motive.

Cash Flow Forecasts

[193] The plaintiff also alleges that WCC’s officers “concocted” cash flow projections to show that it would not have sufficient funds to meet its long-term obligations as they came due, and then duped its auditors, PwC, into buying into this proposition.

[194] This allegation is based on the portion of Note 1 to the financial statements, which was prepared by management, to the effect that:

[195] There is no dispute about the impact of the strengthening Canadian dollar on WCC’s cash flow, because coal sales were made in US dollars and the Canadian/US exchange rate had strengthened approximately 5% from Q1 to Q2, according to the MD&A.

[196] Gould says, however, that the statement about coal prices was false because WCC knew that spot coal prices as of November 2007 were in the range of US$120 to $160 per tonne and forecasts for 2008 were in the range of $110-135 per tonne. The plaintiff says that the forecasts used in WCC’s projections were based on contracts entered into on or before March 2007, when prices were much lower, at around US$86 per tonne.

[197] The flaw in this analysis is that, although market prices had been increasing during 2007, a factor that was discussed in a positive and prominent way in the MD&A and news release, the practice in the coal market was to set coal contract prices on April 1 of each year. Thus, most of WCC’s contracts as of November 2007, and up to March 31, 2008, were based on prices that were in effect in March 2007 and those prices were much lower than the “spot” prices that were prevailing in November 2007. The fact that the market price was on the rise would not significantly impact WCC’s cash flow until Q1 2009, at the earliest.

[198] Redmond’s evidence is completely consistent with the foregoing and completely inconsistent with any deliberate attempt to pull the wool over the eyes of the auditors. This is another example of Rosen’s inclination to find a boogie man under every bed. When light is actually shone on the subject, it disappears.

[199] Quite apart from this, as Boggio pointed out on his cross-examination, the immediate issue facing WCC at the time, and the primary reason for the going concern note, was the uncertainty about whether funding could be obtained to satisfy WCC’s November 30, 2007 obligation to BNP.

Write Down of Future Income Tax Assets (FITA)

[200] Income tax losses, which are capable of being carried forward, are referred to as a “future income tax asset” (FITA), because they can, in certain circumstances, be applied against future income for tax purposes. WCC substantially wrote down a FITA in Q2 2008 on the basis that it would not likely have sufficient income in the future to make use of the carry-over of these losses. This resulted in a decrease in assets and net income of $14.7 million. The rationale for this adjustment was specifically identified, and explained, in Note 13 to the financial statements.

[201] In criticizing the write down of the FITA assets, Rosen observed that WCC was forecasting positive cash flows as early as January 2008, producing a taxable income against which previous years against which the previous years’ losses could be applied. He concluded:

The write-down of the future income tax asset resulted in a decrease to assets and a decrease in net income of $14.7 million. In short, in our opinion, management made a negative arbitrary decision to paint an unwarranted, alarming financial position. Financial statement fairness apparently was ignored.

[202] This is another example of Rosen’s assumption of a fact-finding role, his tendency to ascribe motive to conduct and his propensity to engage in argument and advocacy.

[203] GAAP (Handbook s. 3465) requires that a tax loss be recorded as a FITA where it is “more likely than not”, (i.e., more than a 50% probability), that sufficient future income will be generated to enable the company to use the loss carry forward.

[204] The defendants’ expert witness, Wayland of Deloitte, commented on this issue, and opined that, in light of management’s conclusion that there was substantial doubt about the Company’s ability to continue as a going concern, it was appropriate to record a full valuation allowance for the tax asset, for the obvious reason that it could not be said that it was probable that there would be income against which the losses could be offset.

[205] Wayland testified that his firm’s view was that where the auditor’s report identifies a going concern issue, it will be necessary to make a valuation allowance. Similar advice was given by PwC to WCC in connection with the preparation of the Q2 2008 statements. The existence of substantial doubt about the ability of WCC to continue as a going concern made it “less likely” that there would be future income against which the past losses could be applied. In the circumstances, then, it was appropriate to take the allowance.

[206] Redmond’s evidence was that in concluding that the tax asset should be substantially written off, he and management had regard to Handbook 3465 and to the fact that: (a) the Company had a history of tax losses, negative cash flow and working capital deficiency, among other things; (b) the Company needed external financing to meet its November 30, 2007 obligation to BNP; and (c) the Company needed bridge financing or capital to continue to operate until March 31, 2008, in view of its negative cash flows.

[207] In my view, the evidence overwhelmingly establishes that the decision to substantially write down the tax asset was made on a reasonable basis, after due deliberation, with the advice of WCC’s auditors and in accordance with GAAP. Rosen’s evidence to the contrary, which exceeds the boundaries of expert evidence, and is based on unfounded assumptions about WCC’s motives, is neither balanced nor fair.

Inventory Write-Down

[208] GAAP (Handbook s. 3030) requires inventory to be valued in each reporting period at the lower of cost and net realizable value – that is, the “estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.” WCC recorded a write down in inventory of $2.8 million in Q2 2008 to reflect the fact that the value at which the inventory could be realized was less than the value at which it was being carried for accounting purposes. Assuming that the facts support this conclusion, the proposition that the financial statements should show the realizable value of the inventory – even when its book value is higher – makes perfect sense.

[209] Redmond explained this adjustment as follows, in his affidavit:

Our coal inventory was sold pursuant to fixed prices, payable in American dollars. The Company’s accounting policy was that inventory was recorded at the lower of cost or net realizable valuable [sic]. In this period, our costs were increasing due to performance and operational issues while at the same time, the net realizable value of inventory was falling as the value of the Canadian dollar rose against US dollar priced contracts. These two factors combined such that we were required to write off $2,803,000 from our inventory.

[210] Redmond attached to his affidavit the working papers that were used to prepare WCC’s inventory valuation for the Q2 2008 statements. The analysis indicated that the cost of the inventory on hand as of September 30, 2007 exceeded the contractually agreed selling prices by about $2.8 million.

[211] The inventory write off was specifically highlighted in the “Summary of Quarter” portion of the MD&A, which explained that:

Write-off of inventory of $2,803,000 due to the strengthening Canadian dollar and higher production costs. Production costs during the quarter were higher due to mining issues including equipment shortages, poor equipment uptime due to maintenance issues and low productivity due to an inexperienced work force.

[212] In commenting on the Company’s reasons for the write-down of inventory, Rosen made the following statements in his second report:

The inventory write-down resulting in a decrease to assets and a decrease to quarterly net income of $2.8 million. As forensic accountants we are highly concerned that the write-down could have added to the overall unfairness of the September 30, 2007 financial statements. It is not clear whether the inventory was ultimately sold for a price in excess of its historical cost, which would render the write-down to be inappropriate.

Overall, WCC recorded several adjustments to reduce its reported net assets and net income in its second quarter 2007 financial statements. At least some of these negative adjustments probably were arbitrary and have a high likelihood of being inappropriate. Suppressing net assets and net income would be consistent with a desire to convey a dismal financial picture of WCC so as to suppress its stock price.

Unwarranted write-downs are in violation of the vital ‘fairness’ standards of GAAP and of the securities acts of Canada. Quite clearly, further investigations of the write-downs are called for, to obtain full facts and assess reporting balance and ‘fairness’. Subsequent events would appear to contradict the stance that was adopted by the management of the Company.

[213] These statements, which do not actually express an opinion that the write-down of inventory was inappropriate or inconsistent with GAAP, is a gratuitous, speculative and unjustified swipe at WCC. It suggests that the write-down was inappropriate and sinister without the slightest evidence. Redmond’s evidence gives a complete and coherent explanation of the issue, which Rosen does not even examine.

[214] Wayland’s evidence is that the inventory write-off was made in accordance with GAAP and that it was appropriate to value the inventory as of the end of the quarter.

Conclusions on Accounting Adjustments

[215] Although the allegedly improper accounting adjustments were not central to the plaintiff’s misrepresentation and conspiracy claims, they were pleaded and argued as being supportive of those claims and were used to bolster the plaintiff’s contention that the defendants deliberately manufactured a financial crisis in WCC.

[216] The allegations have been thoroughly refuted by the evidence of those directly involved in the preparation of the Q2 2008 disclosures and by the defendants’ expert who has shown, in a simple and common sense way, that the adjustments were based on the application of GAAP.

[217] Rosen’s evidence to the contrary suffers from the shortcomings I have identified earlier and is based on his own assessment of the motives of those involved. It fails to take into account the perfectly reasonable explanations for the adjustments given by the defendants’ witnesses. It is also inconsistent with GAAP, and with common sense, and there is no reasonable possibility that it would be accepted at trial in preference to the evidence adduced by the defendants.

[218] In any event, I agree with the defendants that the accounting adjustments are merely a side issue. They do not detract from the irrefutable facts that WCC needed $15 million by the end of November 2007 in order to meet BNP’s demands and it did not have those funds. It also anticipated that, even if it obtained those funds, there would be a further covenant violation within twelve months. In the circumstances, the going concern note was required, whether the adjustments were made or not.

(f) Failure to Obtain a Comfort Letter from Cambrian

[219] In June, 2007, Cambrian had provided WCC with a “comfort letter” to assist WCC in satisfying PwC that it would be able to fulfill BNP’s requirement to have $10,465,000 in its collateral account.

[220] The plaintiff claims that as part of the alleged conspiracy to misrepresent WCC’s financial condition, WCC refrained from asking Cambrian for a similar letter of support in addressing its financial crisis in November of 2007, and to avoid the going concern note. He says that PwC told Redmond that the going concern language could be avoided if Cambrian provided another comfort letter, but that Redmond “never even asked Cambrian for a comfort letter in an attempt to avoid the supposed crisis”. He relies on Rosen’s evidence that “management’s efforts to seek re-financing were slow and half-hearted and fell short of expected measures for a business that was supposed to be in financial distress”.

[221] Although Rosen does not appear to be specifically referring to the comfort letter in the above statement, his report did contain the following comment on the subject:

PwC advised that going-concern disclosures could be avoided if the Company obtained an assurance letter from Cambrian, WCC’s largest shareholder. We understand that such a letter was issued by Cambrian for the first quarter of fiscal 2008 (June 30, 2007), which purportedly stated that Cambrian would provide financial support to WCC in the event that its bank debt was called. For reasons that are not yet known to us, WCC did not obtain a similar letter for the quarter ended September 30, 2007. We have not seen any evidence that WCC’s management acted appropriately upon PwC’s suggestion to avoid adverse disclosures by obtaining another support letter from Cambrian.

[222] In the paragraph immediately following, Rosen added:

Based on the documents we have seen, management’s efforts to address the company’s financing needs during the Summer and Fall of 2007 lacked the sense of urgency that would be expected of an entity facing an impending threat of insolvency.

[223] Later in his report, Rosen stated:

None of the affiants on behalf of the Defendants have articulated that efforts were made to obtain (or renew) the support letter that was suggested by Mr. Boggio. We would expect that specific, extensive efforts would have been made by WCC management to follow this seemingly simple solution to avoid adverse financial disclosures.

It is not clear why WCC seemingly did not successfully obtain a fresh support letter from Cambrian …

[224] Leaving aside Rosen’s lack of demonstrated experience or qualifications to give evidence on matters of due diligence in relation to corporate financing, and his assumption of the role of a fact-finder rather than an expert, there is evidence, adduced by the defendants in response to Rosen’s reply report, which establishes that Cambrian simply did not have the capability to give further support to WCC, whether by providing a comfort letter, lending it money, or making an additional investment in the Company. This was the evidence of Daniel Maling (Maling), the Group Corporate Finance and Treasury Manager of Cambrian at the material time.

[225] Maling’s evidence, which was not challenged, was that Cambrian itself did not have sufficient liquidity to provide this assistance and that its own lenders would not have permitted additional borrowings for the benefit of WCC. He added:

As Cambrian was not able to borrow funds for the benefit of [WCC], it follows that Cambrian would not have been permitted to provide a commitment to provide funding to [WCC] to meet its financial obligations as they came due. [Cambrian’s lenders] would certainly have objected given that Cambrian did not have adequate cash available to make that kind of commitment.

[226] Redmond’s evidence, in response to Rosen’s evidence on this issue, was that Boggio of PwC had told him that the going concern language could be avoided, either by obtaining new financing or by obtaining an unconditional twelve-month letter of support from Cambrian, as had been done in the previous quarter. Redmond’s evidence makes it clear that he was anxious to avoid the going concern language in the statements and that he would have sought a support letter from Cambrian if he had thought it would be possible to obtain one. He did not do so, because he knew that Cambrian would not be able to deliver an unconditional support letter and could not demonstrate an ability to meet WCC’s obligations for twelve months.

[227] Rosen’s negative speculations and assumptions about WCC’s conduct are, once again, clearly refuted by the evidence of those who were directly involved in the transactions.

(g) The Alleged Insider Trading

[228] The statement of claim alleges that Hogg, Brodie and Chase purchased shares in WCC “with the benefit of inside knowledge that had not been publicly disclosed, in violation of securities laws”, specifically s. 134(1) of the Securities Act.[^14] It alleges that between the November 14, 2007 announcements and the November 22 news release announcing the financing with Audley:

(a) Chase acquired a total of 61,000 shares;

(b) Brodie acquired 10,000 shares; and

[229] The statement of claim does not claim any relief as a result of this alleged insider trading, presumably because the statutory remedy is in favour of only the seller or purchaser of the securities.

[230] As I have noted earlier, in his affidavit in support of the certification and leave motions, Gould testified that after liquidating his debentures following the November 14, 2007 news release, he was surprised to learn of the Audley Financing eight days later. He swore that once he learned that some of the individual defendants had purchased “significant amounts of shares shortly before the Audley Financing was arranged”, he became suspicious that the financing had in fact been arranged well in advance of November 22, 2007 news release.

[231] The allegation of insider trading was made in Rosen’s first report, where he stated:

On November 16, 19, 20 and 21, 2007, three ‘insiders’ in WCC acquired a total of 111,000 shares of WCC in what should have been a prohibited trading period Such would be regarded for forensic accounting purposes as being oppressive to selling shareholders, given that the insiders possessed information that the sellers of the WCC shares did not know about a forthcoming financing.

[232] I pause to note that this is another example of Rosen engaging in fact-finding by concluding that the officer and directors purchasing the shares had knowledge of the forthcoming financing – a conclusion that is contrary to the unchallenged evidence given by those defendants.

[233] Rosen’s affidavit indicates that weighted average cost per share of the 111,000 shares acquired by Chase, Brodie and Hogg was 62 cents per share and the weighted average closing price of WCC for the five days following the completion of the Audley Financing was $1.19 per share.

[234] The plaintiff’s factum maintained the claim that the defendants fabricated the financial crisis in WCC, allowing the officers to “greatly increased their equity holdings in the Company at the depressed share price.” It claimed that at the same time as investors like Gould were “stampeding towards the exits”, the three individual defendants, who were privy to very different information, were moving to increase their equity stakes.

[235] The evidence of Chase, Brodie and Hogg, which has not been challenged, is that at the Board meeting of WCC on November 17, 2007 the directors discussed the possibility of personally acquiring shares in order to send a positive signal of support to the market. In fact, it was Chase’s wife and not Chase himself who bought a total of 61,000 shares on November 16 and 19, 2007. The transactions were conducted with the authorization of corporate counsel for WCC, both orally and in writing, confirming that the directors had no undisclosed information and that they were permitted to trade. This advice was set out in an affidavit of WCC’s internal counsel, which has not been challenged. The trades were reported in accordance with the System for Electronic Disclosure by Insiders (SEDI) operated by the Canadian Securities Administrators. There is no evidence that Chase, Brodie or Hogg had any material undisclosed information when they made their trades and it is their unchallenged evidence that they did not. Chase’s unchallenged evidence is that he did not give any undisclosed information to his wife.

[236] I find that the acquisition of these relatively modest quantities of shares, openly transacted by these three individual defendants, was done for perfectly appropriate reasons and in a proper manner, and was not done as part of any master plan or conspiracy. There is no evidence to support them. The allegations are inserted solely for colour, are based solely on suspicion. To the extent they were pleaded as part of the plaintiff’s theory of a conspiracy or scheme, they fall flat on their face.

3. Conclusions on the Leave Motion

[237] This is a case in which there is conflicting expert opinion on the central issue of whether WCC’s financial statements contained a misrepresentation and were prepared in accordance with GAAP. A similar situation existed in Green v. Canadian Imperial Bank of Commerce, above, in which I concluded that there was a reasonable possibility that the evidence of the plaintiff’s experts would be accepted in preference to the defendants’ experts – at para. 249:

At the end of the day, however, on virtually all issues, I am unable to say, applying the requisite low threshold, that there is no possibility that the evidence of the plaintiffs' expert witnesses will not be accepted in preference to some or all of the evidence of the defendant's witnesses.

[238] Accordingly, in that case, I granted the plaintiff leave to pursue the statutory misrepresentation claim under the Securities Act.

[239] In this case, I have come to a different conclusion. I have concluded that the plaintiff’s claim has no reasonable possibility of success at trial and that there is no reasonable possibility that a trial judge would accept Rosen’s evidence in preference to the defendants’ expert evidence. There are a number of reasons for my conclusion.

[240] First, I have concluded Boggio’s advice to Redmond and the Audit Committee about the need to make the going concern note was consistent with GAAP and with WCC’s legal obligations. The note was factual. It disclosed the requisite doubt about the Company’s ability, using its own resources, to meet its obligations, but expressed management’s confidence that outside financing would be obtained. To paraphrase the language of Binnie J. in Kerr v. Danier Leather Inc., 2007 SCC 44, [2007] 3 S.C.R. 331, [2007] S.C.J. No. 44 at para. 55, this would give potential investors the current facts, along with management’s business judgment about the future outcome, and investors would be entitled to accept – or reject – management’s opinion. As Binnie J. went on to observe, in the same paragraph, “the disclosure requirements under the [Securities] Act are not to be subordinated to the exercise of business judgment.”

[241] In accurately stating the circumstances facing WCC, without embellishment, and also stating management’s belief that funds would be available in the future, as they had been in the past, the Company was doing precisely what the law required it to do. It was not for the directors of WCC to suppress disclosure of the risk because they believed, in the exercise of their business judgment, that financing would be obtained.

[242] Second, Rosen’s evidence to the contrary is not consistent with the plain meaning of the relevant GAAP principles and accounting standards. Specifically, Handbook section 1400, para. 8A, requires the disclosure of “material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern”. Rosen’s evidence that the disclosure of doubts about the Company’s ability to continue as a going concern was not appropriate under GAAP flies in the face of the language of the Handbook and is inconsistent with the uncontroverted evidence that the reclassification of WCC’s long-term debt put it in a position where it was not able to meet its liabilities as they came due, without obtaining additional debt or equity financing.

[243] In this regard, Rosen’s second report made the following statement:

An unavoidable threat to WCC’s ability to continue operations as a ‘going concern’ in late 2007 simply did not exist. Thus, in our opinion, management’s decision to mention strong words, such as ‘going concern’ was not justified, as would have been prohibited or at least be highly unusual under Canadian GAAP as it existed at the time.

[244] This misstates the requirement of the Handbook – the going concern note disclosure is not triggered by an “unavoidable threat” – it is triggered by “material uncertainties” related to “events or conditions” that “may cast significant doubt upon the entity’s ability to continue as a going concern”. The evidence is clear that there were material uncertainties about WCC’s ability to raise financing which, if not resolved in a positive manner and in a timely fashion, would indeed cast significant doubt on WCC’s ability to continue as a going concern.

[245] I accept the evidence of Wayland that the going concern note does not portray an “impending insolvency” or an “unavoidable threat” of insolvency, as suggested by Rosen. It simply states, in accordance with GAAP, that the statements have been prepared on a going concern basis, but that readers should be alerted to the fact that uncertainty exists concerning events or conditions that cast significant doubt upon the ability of the Company to continue as a going concern. This ensures that the reader is not misled if those uncertainties or risks materialize. Handbook s. 1000.19 permits the issuer of financial statements to assume that “readers have a reasonable understanding of business and economic activities and accounting, together with a willingness to study the information with reasonable diligence.” Reading Note 1 fairly, in context, and in conjunction with the information contained in the statements, a reasonably informed reader would not assume that the Company was facing impending insolvency, although he or she would understand, quite properly, that funding was required to avoid that possibility. It would be up to the reader to make an assessment, based on the information disclosed, whether that possibility was likely to be avoided or not.

[246] I also accept Wayland’s evidence that where the available evidence raises doubts about the validity of the going concern assumption, management has a positive duty to ensure that those doubts are fairly presented to readers, because those doubts could impact the appropriateness of the carrying values and classifications used in the financial statements.

[247] The going concern note could only have been avoided if there were no material uncertainties related to events or conditions that cast significant doubt on WCC’s ability to continue as a going concern. While WCC management was confident in the Company’s future, they were simply unable to convert a leap of faith into a representation on the financial statements and they quite properly in my view, on the advice of their auditors, included the note.

[248] Rosen suggested that there was no need for the going concern note in light of the relatively small amount of WCC’s debt that required re-financing, in comparison to its total and net assets. Wayland pointed out, however, that the key circumstances at the time were the breach of the debt covenant resulting in the re-classification of the long-term debt to current, the lack of liquidity to pay the debt on its due date, and the failure to raise the equity demanded by the lender as a condition of the waiver of the prior default. The fact remained that WCC rightly concluded that it would not have sufficient liquid assets to pay the debt as it came due, the debt was secured against the Wolverine Mine, and default would entitle the lender to obtain control over the Company’s most important asset. Any attempt to restructure the debt, or to sell assets to discharge it, would be regarded as outside the normal course of business, which in itself would reinforce the doubt about the going concern assumption.

[249] Rosen’s evidence is also inconsistent with OSC Staff Notice 52-7194, discussed earlier, which recommends that there be a specific link between the material uncertainties affecting the entity and the effect of those uncertainties in creating doubt about the entity’s ability to continue as a going concern.

[250] Moreover, Rosen’s evidence on this issue simply does not make sense. Rosen contends that the use of “strong words” or “harsh references” such as “going concern” was not justified. How else could the Company explain that there were uncertainties about events or conditions that may cast doubt upon its ability to continue as a going concern, notwithstanding that the statements had been prepared on a going concern basis? The proper thing to do was to make the required disclosure, express management’s opinion, and leave it to the reader to assess the risk. It would have been entirely wrong for WCC to have sugar-coated the disclosure based on management’s assessment of the risk.

[251] Elsewhere, as I have noted earlier, Rosen stated that the going concern disclosure should not be made “unless failure was unavoidable”. This statement makes no sense, in my view, because it would mean that the issuer would be expressing uncertainty about the going concern assumption in circumstances in which insolvency was inevitable. Disclosure of this kind would be both confusing and inadequate.

[252] Third, Rosen plays fast and loose with terminology and at times equates the going concern note disclosure with the abandonment of going concern accounting. WCC did not abandon going concern accounting for Q2 2008 – the statements were prepared on a going concern basis. Nor did it threaten to change its accounting basis. It simply alerted the reader to the fact that the statements had been prepared on a going concern basis, but that there was significant doubt about its ability to continue as a going concern, due to the events and conditions identified in the note.

[253] Similarly, Rosen categorizes the disclosures as being claims of “impending insolvency”, suggesting that the language used in the disclosures (that the Company “… does not expect to have sufficient funds in the near term to meet its financial obligations as they come due”) was close to a declaration of bankruptcy. This is simply not accurate. The disclosures were accurate statements of the events and conditions that were confronting WCC. A reasonably informed reader of the financial statements would understand that there were a number of positive factors favouring the long term prospects of WCC. The same reader would also understand that there were serious short term issues that had to be resolved, failing which there was in fact a risk of insolvency proceedings by the Company’s principal secured creditor.

[254] Rosen improperly focuses on evidence that WCC was not insolvent as of November 15, 2007. That is not the issue. It is not impeding insolvency that triggers the “going concern” obligation. It is the existence of “material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern”. The existence of “uncertainty” about the use of the going concern assumption is not a statement that the company is on the verge of insolvency.

[255] The plaintiff makes much of the fact that he was not the only one who believed that WCC’s financial statements portrayed a company on the brink of insolvency. He notes that Mark Potter, one of the principals of Audley, stated that on reading Note 1 to the financial statements he understood that WCC was facing potential insolvency. Julian Treger of Audley testified that when he read WCC’s financial statements he believed that WCC was on the verge of bankruptcy.

[256] In contrast to this, however, Rosen’s own report indicated that “the financial statements of WCC for the interim period ended September 30, 2007 did not portray the image of an insolvent or soon-to-be insolvent entity”.

[257] In my view, these apparently conflicting statements can be reconciled largely on the basis of a “glass half full”/“glass half empty” analysis. There is no doubt that from one perspective WCC’s substantial assets, highly-regarded coal and business opportunities, including the potential FMC acquisition, augured well for the future. There is equally no doubt – and there was no doubt at the time – that without financing it would default on its obligations to BNP with potentially disastrous consequences. The evidence establishes that the possibility of a CCAA filing was being actively pursued by WCC in the event external financing was not obtained. The disclosures looked at the glass from both perspectives and attempted to paint a fair balance. The fact that some people, like Mr. Gould, focused on the part of the glass that was half empty does not mean that the disclosures were inappropriate.

[258] Fourth, Rosen’s opinion is inconsistent with the law and policy underlying disclosure obligations and distorts the standards of disclosure. The law, as expressed in Danier Leather, is that shareholders and investors are entitled to the facts and they are entitled to management’s assessment of the facts. Armed with this information, they are able to make their own decisions. It would be wrong for management to withhold bad news to avoid upsetting shareholders. Doing so would only serve to confuse and mislead shareholders. The issue was confronted head-on by WCC and PwC and the decision was made, correctly in my view, to give shareholders and the markets the facts and management’s assessment of the facts, and to let them make their own decision.

[259] Fifth, the evidence of those directly involved in the preparation of the financial statements and public disclosures, particularly Redmond the acting CFO, Boggio of PwC, Brodie, the Chair of the Audit Committee and Chase, who was a member of the Audit Committee, satisfies me that the Q2 2008 financial disclosures made by WCC, particularly the going concern note, were the product of a reasoned, thorough and careful consideration of WCC’s financial circumstances, the requirements of GAAP and the Company’s obligations to its shareholders and investors. The individuals involved in the preparation, review and approval of these disclosures were knowledgeable and experienced in such matters and discharged their obligations in a conscientious manner. Further, there is no evidence that would support Rosen’s suggestions that the disclosures were made with the intent to misrepresent WCC’s financial condition and in fact they did not represent WCC’s financial condition. I have found that there is no merit to the plaintiff’s complaints about the other adjustments made in the financial statements.

[260] Sixth, the evidence of the defendants’ expert, Wayland, accords with the facts, with GAAP and with basic common sense.

[261] Seventh, and last, the evidence of Rosen does not come close to the standard for acceptable expert evidence and his evidence is, in any event, unsupported by the facts, inconsistent with GAAP and does not make sense. For the reasons expressed above, Rosen’s evidence is severely compromised by his failure to stick to matters within his expertise, by engaging in impermissible fact-finding and by becoming an advocate on behalf of his client, rather than an impartial expert seeking to assist the court. Rosen’s exaggerated and speculative assertions only serve to undermine his credibility and independence. In light of these infirmities, I have no confidence whatsoever in his evidence and there is no reasonable possibility that his evidence will be accepted at trial.

[262] For all these reasons, I am satisfied that there is no reasonable possibility that the claim under s. 138.3 of the Securities Act will be resolved at trial in favour of the plaintiff. The plaintiff’s claim has been shown to be based purely on “speculation or suspicion rather than evidence”, to employ the words of van Rensburg J. in Silver v. Imax (Leave) at para. 330, and has been demonstrated to be unfounded. Accordingly, leave will not be granted.

4. The Reasonable Investigation Defence

[263] The defendants relied on the reasonable investigation defence contained in s. 138.4(6) of the Securities Act. Although it is not necessary to do so in light of my findings, I will briefly set out my conclusions on this issue.

[264] Section 138.4(6) provides, in part:

(6) A person or company is not liable in an action under section 138.3 in relation to,

(a) a misrepresentation if that person or company proves that,

(i) before the release of the document or the making of the public oral statement containing the misrepresentation, the person or company conducted or caused to be conducted a reasonable investigation, and

(ii) at the time of the release of the document or the making of the public oral statement, the person or company had no reasonable grounds to believe that the document or public oral statement contained the misrepresentation …

[265] Subsection (7) identifies the factors to be considered by the court in determining whether an investigation was reasonable:

(7) In determining whether an investigation was reasonable under subsection (6), or whether any person or company is guilty of gross misconduct under subsection (1) or (3), the court shall consider all relevant circumstances, including,

(a) the nature of the responsible issuer;

(b) the knowledge, experience and function of the person or company;

(d) the presence or absence of another relationship with the responsible issuer, if the person was a director;

(e) the existence, if any, and the nature of any system designed to ensure that the responsible issuer meets its continuous disclosure obligations;

(f) the reasonableness of reliance by the person or company on the responsible issuer’s disclosure compliance system and on the responsible issuer’s officers, employees and others whose duties would in the ordinary course have given them knowledge of the relevant facts;

(g) the period within which disclosure was required to be made under the applicable law;

(h) in respect of a report, statement or opinion of an expert, any professional standards applicable to the expert;

(i) the extent to which the person or company knew, or should reasonably have known, the content and medium of dissemination of the document or public oral statement;

(j) in the case of a misrepresentation, the role and responsibility of the person or company in the preparation and release of the document or the making of the public oral statement containing the misrepresentation or the ascertaining of the facts contained in that document or public oral statement; and

(k) in the case of a failure to make timely disclosure, the role and responsibility of the person or company involved in a decision not to disclose the material change.

[266] The defence has two requirements: (1) the person or company must have conducted a reasonable investigation or caused such investigation to be conducted; and (2) the person or company had no reasonable grounds to believe that the document contained a misrepresentation.

[267] In Silver v. Imax (Leave), van Rensburg J. summarized the elements of the defence at paras. 361-363:

The first part of the "reasonable investigation" defence involves a consideration of such matters as the measures and systems in place at the Company respecting the recognition of revenue for financial reporting, the roles and responsibilities of various persons in the revenue recognition and reporting processes, policies and procedures, and oversight and assurance measures, including the performance of audit functions by PwC.

Factors applicable to the individual respondents are also relevant, including their qualifications, knowledge and experience and their roles and responsibilities within or in relation to the organization and in connection with the Company's financial reporting.

The second part of the "reasonable investigation" defence involves a consideration of the specific knowledge of each respondent and the knowledge someone in his or her position ought to have had with respect to the misstatement of the Company's financial results. The second part of the test focuses on a consideration of the true state of affairs -- what was known to whom, and which of the respondents, if any, ought to have known that when the Representation and misstatements were made, they were untrue?

[268] I have found that there was no intentional attempt to misrepresent WCC’s financial circumstances. I have also found that the language of Note 1 was the product of active and informed discussion and debate between WCC management, the auditor and the Audit Committee. The evidence establishes that the note was included on the advice of the auditor based on a careful analysis of the requirements of GAAP and after consultation with other professionals at PwC.

[269] The onus on this issue is on the defendants. The defendants have adduced substantial evidence, from the very people involved in the disclosure process, to show that there was a rigorous procedure for the preparation of the Q2 2008 disclosures, including:

• initial fact-finding and preparatory work by WCC management;

• discussions among management, the Audit Committee and the auditor;

• preparation of draft financial statements by management;

• review of the draft statements by the auditor and further discussions with management;

• delivery of the draft statements and the auditor’s report to the Audit Committee;

• discussions of the issues (including, specifically in this case, the going concern issue) within the Audit Committee, with the participation of management (including Redmond) and the auditor, Boggio;

• further review and discussion of the going concern issue between the auditor and management;

• revisions to the financial statements;

• further discussions in the Audit Committee at its November 13, 2007 meeting;

• review and approval by the full board of WCC; and

• certification of the accuracy of the financial statements by management.

[270] It is of particular note that Redmond was a chartered accountant and Brodie, the Chair of the Audit Committee, was also a C.A. with considerable experience in audit standards. Chase, who was also a member of the Audit Committee, was also a C.A. and also had extensive experience with audits, GAAP and disclosure issues. These professionals were in a position to challenge – and did challenge – the advice of the auditor and did not blindly accept his advice. They were ultimately persuaded on a reasoned analysis of the issue that the auditor’s recommendations were appropriate and should be followed and that management’s views should be expressed in the MD&A and the news release, as well as in Note 1.

[271] The plaintiff has adduced no evidence to show that WCC’s system relating to continuous disclosure was deficient in any way. He says, however, that the reasonable investigation defence is not available for a variety of reasons, which I will briefly discuss.

[272] First, he says that there was no “investigation” – I disagree. The issue was thoroughly investigated by management, the audit committee and the Board, assisted by the auditor.

[273] Second, he says that the individual defendants were directly involved in the operation of the system. This is true, but it is not a defect in the system. The presence of independent directors with accounting experience enhanced the system.

[274] Third, he claims that the decisions made by the defendants were aimed at exaggerating a financial crisis. I have found that this allegation is wholly without merit.

[275] Fourth, he argues that management was aware that the disclosure contained material facts that were not true. That is not the case. Concerns were expressed by Redmond that the proposed wording might be misleading, but he and the Audit Committee were satisfied that the disclosure was required and that the going concern note could be balanced by the reference to management’s expectations that financing would be obtained, as well as by the full discussion of WCC’s circumstances that was contained in the MD&A.

[276] Fifth, he claims that by virtue of their roles in the release of the Q2 2008 statements the defendants ought reasonably to have known that the disclosure contained material facts that were untrue. There is no factual basis for this allegation.

[277] Sixth,, and finally, Gould alleges that the responsibility for the preparation and release of the financial statements rested with WCC and not with PwC and could not be abdicated to PwC. That is true, but the defendants were entitled to rely, as part of the system, on the expert and specialized advice of the auditor.

[278] I have found that there was no intent on the part of the defendants to represent WCC’s financial position. If the going concern note, taken in its context together with the other information in the financial statements, is found to have painted an unduly bleak picture of WCC’s financial circumstances, as asserted by Rosen, it was the result of a bona fide attempt of the defendants, guided by an independent and experienced professional and after careful investigation and full discussion, to comply with their obligations to their shareholders and investors.

[279] This case is nothing like Silver v. Imax (Leave). In that case, there were admitted deficiencies in Imax’s internal controls that contributed to the accounting errors and there was specific knowledge on the part of the individual defendants that some of the information in the disclosures was false. In this case, WCC and the individual defendants made a reasonable investigation of the issue and came to a bona fide and reasoned decision that the disclosure was accurate and required.

[280] I find that the second part of the reasonable investigation defence has been met – the Company and the individual defendants had no reasonable grounds to believe that the disclosures contained the alleged misrepresentation. The disclosures were factual. The Company and the individual defendants had reasonable grounds to believe, based on management’s advice and the recommendations and advice of the auditors, that the disclosures were true and that they were required to be made in the form in which they were made.

[281] I also find that it was reasonable for the Company and the individual defendants to rely on WCC’s disclosure compliance system and on management, particularly Redmond, and on the Audit Committee, which was composed of experienced accounts and business people, and on the experience and advice of the auditor.

[282] For these reasons, I would have found that there is no reasonable possibility that the defendants’ reasonable investigation defence would be unsuccessful.

B. The Conspiracy Claim

[283] I have found that there is no reasonable possibility that the statutory misrepresentation claim will be resolved at trial in favour of the plaintiff. I now turn to the conspiracy claim.

1. The Conspiracy Allegations

[284] This action was originally commenced by statement of claim filed on November 20, 2009. The claim named only WCC, Hogg, Chase and Brodie. The claim asserted the cause of action for misrepresentation under Part XXIII.1 of the Securities Act. There were also claims for negligence and negligent misrepresentation. There was no claim for either oppression or conspiracy. The pleading alleged that the defendants knew, at the time of the release of the Q2 2008 disclosures on November 14, 2007, that WCC would obtain financing from Audley or was likely to obtain financing from Audley. It was alleged that the three individual defendants profited from the alleged misrepresentation by purchasing shares at artificially depressed prices after release of the disclosures and before the Audley Financing was generally disclosed.

[285] The plaintiff subsequently delivered a fresh as amended statement of claim, dated May 28, 2010. It added Audley, Cambrian, Byrne, Conlon and Pitcher as defendants. It also added the claims for oppression and conspiracy. The conspiracy allegations are made only against WCC, Cambrian and Audley and not against the individual defendants.

[286] Under the heading “The Nature of the Action”, the pleading described a “scheme”, whereby WCC, Audley and Cambrian were alleged to have “misrepresented the true state of [WCC’s] finances to enable Audley, together with Cambrian, to acquire a controlling interest in WCC on highly favourable terms.” It added that the scheme had the effect of significantly diluting the shareholdings of the class members.

[287] As I have noted in the discussion of the misrepresentation claim, the pleading alleged selective write-downs and misrepresentation of the financial situation of the Company through the going concern note and by failing to disclose details of the allegedly pre-arranged Audley Financing.

[288] The allegations of conspiracy in the fresh as amended statement of claim are that part of the conspiracy consisted of misrepresenting WCC’s finances in order to reduce its share price, enabling the defendants to increase their interests in WCC and diluting the interests of class members. It is alleged that the misrepresentation “served a strategic purpose” for WCC, Cambrian and Audley, because they knew that it would result in a “precipitous drop” in the share price and would enable them to acquire control of WCC “on highly favourable terms.” It alleged that the Audley Financing, the FMC acquisition and the Cambrian loan resulted in a dilution of the interests of class members.

[289] The acts undertaken in furtherance of the conspiracy allegedly included:

• causing WCC to make a number of accounting write-downs in Q2 2008 to create a greater loss;

• structuring WCC’s accounting to “manufacture a financial crisis”;

• causing WCC to make its November 14, 2007 disclosures to misrepresent the true state of its finances and to cause a reduction in its share prices;

• providing convertible debentures to Audley Europe and warrants to Audley Capital Management at 75 cents per share;

• avoiding obtaining shareholder approval of the issuance of securities under the Audley Financing; and

• re-pricing the Cambrian Loan to increase its entitlement to shares in WCC.

[290] The plaintiff pleads that this conduct was unlawful, because, among other things, it resulted in an artificial price for the securities of WCC, included an untrue or misleading misrepresentation and breached s. 126.1 and 126.2 of the Securities Act.[^15] He pleads that the conspiracy was directed towards the plaintiff and the other class members.

[291] He also alleges, alternatively, that the predominant purpose of the conspiracy was to (a) profit financially, (b) increase the defendants’ shareholding in WCC at reduced prices and (c) control a greater proportion of WCC.

[292] There is no question that the alleged misrepresentation is at the root of the conspiracy claim. The plaintiff acknowledges this in his factum, where he states:

The alleged misrepresentations which make up the foundation of the misrepresentation claim are integral to the Plaintiff’s claim for oppression and conspiracy. The same set of facts applies to all of these causes of action.

[293] As I have noted earlier, by the time the plaintiff delivered his factum, the allegation that the Audley Financing had been pre-arranged, and was part of the “scheme” or conspiracy, had evaporated. On the hearing of the motion, the plaintiff’s submission was that WCC had “delayed” obtaining financing until after the release of the Q2 2008 results. This softening of the plaintiff’s position was undoubtedly due to the overwhelming evidence that Audley had no prior knowledge of, or involvement in, the disclosures on November 14, 2008, and that it did not become involved in financing discussions until after the Q2 2008 results had been released.

[294] The defendants contend that since the plaintiff’s misrepresentation claim is based on a “scheme” to enhance their interests by misrepresenting WCC’s condition and since I have found that there is no reasonable possibility of establishing that misrepresentation, the conspiracy and oppression claims must fall with it.

2. Pleading Conspiracy

[295] Canadian law recognizes two forms of conspiracy – what has been referred to as “predominant purpose” conspiracy or conspiracy to injure, and unlawful means or unlawful conduct conspiracy: Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., 1983 CanLII 23 (SCC), [1983] 1 S.C.R. 452. In Normart Management Ltd. v. West Hill Redevelopment Co., 1998 CanLII 2447 (ON CA), [1998] O.J. No. 391, 37 O.R. (3d) 97 (C.A.), the Court of Appeal approved the following statement about the requirements for a pleading of conspiracy, at para. 21:

The statement of claim should describe who the several parties are and their relationship with each other. It should allege the agreement between the defendants to conspire, and state precisely what the purpose or what were the objects of the alleged conspiracy, and it must then proceed to set forth, with clarity and precision, the overt acts which are alleged to have been done by each of the alleged conspirators in pursuance and in furtherance of the conspiracy; and lastly, it must allege the injury and damage occasioned to the plaintiff thereby.[^16]

[296] More recently, the elements of these two types of conspiracy were nicely summarized by Perell J. in EnerWorks Inc. v. Gelnbarra Energy Solutions Inc., 2012 ONSC 414, [2012] O.J. No. 2272 at paras. 66-69:

The elements of a claim of conspiracy are: (1) two or more defendants make an agreement to injure the plaintiff; (2) the defendants (a) use some means (lawful or unlawful) for the predominate purpose of injuring the plaintiff, or (b) use unlawful means with knowledge that their acts were aimed at the plaintiff and knowing or constructively knowing that their acts would result in injury to the plaintiff; (3) the defendants act in furtherance of their agreement to injure; and, (4) the plaintiff suffers damages as a result of the defendants' conduct. See: Hunt v. T & N plc, 1990 CanLII 90 (SCC), [1990] 2 S.C.R. 959; Canada Cement Lafarge Ltd. v. British Columbia Lightweight Aggregate Ltd., 1983 CanLII 23 (SCC), [1983] 1 S.C.R. 452; Normart Management Ltd. v. West Hill Redevelopment Co (1998), 1998 CanLII 2447 (ON CA), 37 O.R. (3d) 97 (C.A.).

The elements of conspiracy to injure are: (1) the defendants acted in combination; (2) the defendants intended to harm the plaintiff; and (3) the defendants' conduct caused harm to the plaintiff.

The elements of conspiracy to perform an unlawful act are (1) the defendants acted in combination; (2) the defendants committed an unlawful act, i.e. a crime, tort, or breach of statute; (3) the defendants knew or should have known that injury to the plaintiffs was likely to occur from their misconduct; and (4) the defendants' misconduct in furtherance of the conspiracy caused harm to the plaintiff.

[297] A pleading of the first form of conspiracy, conspiracy to injure, must assert a predominant purpose of the infliction of harm on the plaintiff: see Harris v. GlaxoSmithKline Inc., 2010 ONCA 872, [2010] O.J. No. 5546 at para. 39:

To make out a conspiracy to injure, the defendant's predominant purpose must be to inflict harm on the plaintiff. It is not enough if harm is the collateral result of acts pursued predominantly out of self-interest. The focus is on the actual intent of the defendants and not on the consequences that the defendants either realized or should have realized would follow.

[298] I agree with the defendants that the plaintiff has not properly pleaded conspiracy to injure, because there is no allegation that the predominant purpose of the conspiracy was to injure the plaintiff. On the contrary, the pleading is to the effect that the predominant purpose of the alleged conspirators was to enrich themselves: see Harris v. GlaxoSmithKline Inc., at paras. 41 and 44. Where the predominant purpose of the defendants is to advance their own commercial interests, there cannot be a predominant purpose conspiracy, even though it may have an adverse economic impact on others.

[299] The elements of the "unlawful means" conspiracy were set out by the Court of Appeal in Agribrands Purina Canada Inc. v. Kasamekas, 2011 ONCA 460, 334 D.L.R. (4th) 714 at para. 26:

For the appellants to be liable for the tort of unlawful conduct conspiracy, the following elements must therefore be present:

(a) they act in combination, that is, in concert, by agreement or with a common design;

(b) their conduct is unlawful;

(d) the [defendants] should know that, in the circumstances, injury to the [plaintiffs] is likely to result; and

(e) their conduct causes injury to the [plaintiffs].

[300] The pleading of unlawful means conspiracy must be set out with particularity. In Normart Management Ltd. v. West Hill Redevelopment Co., above, the Court of Appeal observed, at para. 21:

[301] I agree with the defendants’ submission that the pleading of unlawful means conspiracy is deficient and I respectfully adopt the observations of Horkins J. in Martin v. Astrazeneca Pharmaceuticals PLC, 2012 ONSC 2744, [2012] O.J. No. 2033, at paras. 168 - 170:

Claims for conspiracy have been struck out where they were bald, overly speculative, or simply restated legal principles rather than pleaded material facts. As the court stated in Penson Financial Services Canada Inc. v. Connacher, 2010 ONSC 2843 at para. 15:

Rule 25.06(1) mandates a minimum level of material fact disclosure and if this level is not reached, the remedy is a motion to strike out the pleading. A proper pleading of conspiracy should enable a defendant to know the case he or she must meet. Conspiracy is a serious claim. A recitation of a series of events coupled with an assertion that they were intended to injure the plaintiff is insufficient, nor is it appropriate to lump some or all of the defendants together into a general allegation that they conspired: Normart Management Ltd. and J. G. Young & Son Ltd. v. Tec Park Ltd. [Emphasis added and footnotes omitted.]

The plaintiffs are not entitled to plead a deficient case in conspiracy on the theory that more detailed evidence of the claim will arise from discovery. The "plaintiff cannot go on a fishing expedition at discovery to gather the facts to make a proper plea": see Research Capital Corp. v. Skyservice Airlines Inc., 2008 CanLII 30703 (ON SC), [2008] O.J. No. 2526 (S.C.J.) at para. 23, var'd on other grounds, 2009 ONCA 418 ("Research Capital").

The pleading of conspiracy in this case offends all of the above requirements. It lacks clarity, precision and the material facts necessary to support the constituent elements. For the reasons set out below, it is plain and obvious that the conspiracy claim will fail.

[302] The pleading fails to set out the alleged agreement with particularity, lumps the defendants together, fails to provide full particulars of the unlawful acts committed by each defendant and gives no particulars of damages.

[303] In view of my conclusion that there is no basis for the existence of common issues arising from the conspiracy claim, I need not consider whether the plaintiff should be given leave to amend.

3. The Conspiracy Common Issues

[304] The plaintiff proposes the following common issues arising from the conspiracy claim:

Did the Defendants, or any two or more of the Defendants, act in combination to create a scheme to enable the Audley Defendants, together with Cambrian, to acquire a controlling interest in [WCC]?
Did the Defendants, or any two or more of the Defendants, act in combination to cause a temporary collapse in [WCC’s] share price?
If the answer to [either or both of the preceding questions] is yes, was the Defendants’ conduct unlawful, in that it resulted and/or contributed to an artificial price for WTN securities, it involved a Misrepresentation that was misleading, untrue and did not state a fact that was required to be stated or that was necessary to make the statement not misleading, and/or it breached sections 126.1 and 126.2 of the Securities Act?
Should the Defendants have known that, in the circumstances, injury to the Class was likely to occur as a result of the Defendants’ actions?

[305] Common issue #5, which relates to the alleged misrepresentation, is at the core of the conspiracy claim and focuses on the allegedly unlawful conduct of the defendants in breach of the Securities Act.

4. Should the Conspiracy Common Issues be Certified?

[306] Section 5(1) of the CPA requires that the claims or defences of class members raise “common issues”. These are defined in s. 1 as common but not necessarily identical issues of fact; or (b) common but not necessarily identical issues of law that arise from common but not necessarily identical facts. The common issues requirement has been described as a “low bar”.

[307] The underlying foundation of a common issue is whether its resolution will avoid duplication of fact-finding or legal analysis: Rumley v. British Columbia, 2001 SCC 69, [2001] 3 S.C.R. 184 at para. 29. Many of the principles applicable to the common issues were set out in McKenna v. Gammon Gold Inc., 2010 ONSC 1591, [2010] O.J. NO. 1057, at paras. 125-126, var’d 2011 NSC 3782, [2011] O.J. No. 3240 (Div. Ct.).

[308] There must be a basis in the evidence before the court to establish the existence of common issues. The plaintiff is required to establish "a sufficient evidential basis for the existence of the common issues", in the sense that there is some factual basis for the claims made by the plaintiff and to which the common issues relate: Dumoulin v. Ontario (2005), 19 C.P.C. (6th) 234, [2005] O.J. No. 3961 at para. 27 (S.C.J.).

[309] A certification motion is a procedural step and not a merits-based analysis. That said, the application for leave to pursue an action (whether an individual action or a class action) under s. 138.3 of the Securities Act is merits-based, albeit using a screen wider than the balance of probabilities. In determining whether to certify claims that are derivative of a claim that has failed to pass through this generous screen, I cannot ignore the fact that the cornerstone of the claim has been assessed and found wanting. If the claim of misrepresentation has no reasonable possibility of success, how can a claim of conspiracy to make the misrepresentation have any reasonable possibility? And if it has no reasonable possibility of success, why would I put the defendants, the court and class members through the time, expense and disruption of a complicated class proceeding?

[310] The “basis in fact” requirement answers this question. There is simply no basis in the evidence for the proposition that the defendants conspired to cause a collapse of WCC’s share price by misrepresenting its financial position so that they could enhance their positions in WCC. In fact, the evidence is so clearly against this proposition that the plaintiff was forced to re-position his case in argument to the effect that WCC “delayed” obtaining financing. Gone was the suggestion that the financing had been pre-arranged as part of the conspiracy. Indeed, the plaintiff now alleges, not that there was a deliberate misrepresentation of WCC’s financial condition, but rather that the statement of its condition was too harsh.

[311] I am not prepared to certify the conspiracy claim because there is absolutely no basis in fact for the existence of:

(a) a combination, agreement or scheme by any two or more of the defendants to enable Audley and Cambrian to acquire a controlling interest in [WCC] (common issue 3);

(b) a combination, agreement or scheme by any two or more of the defendants to cause a temporary collapse in [WCC’s] share price by making inappropriate write downs, manufacturing a financial crisis or misrepresenting [WCC’s] financial condition; (common issue 4); or

(c) the making of a misrepresentation under Part XXIII.1 or of fraud or market manipulation under s. 126.1 or the making of misleading or untrue statements under s. 126.2 of the Securities Act.

[312] The core of the conspiracy claim, the alleged misrepresentation, has been shown to be groundless and has no reasonable prospect of success. The suggestion that there was a conspiracy to spread alarm about WCC’s financial condition is inconsistent with the expression of management’s belief in the disclosures that financing would be obtained. It is also inconsistent with the evidence of Byrne that the directors wanted to ensure that management’s confidence in the Company was expressed in the news release.

[313] The allegation that the Audley Financing had been secretly pre-arranged has been shown to be groundless and it has been conclusively established that Audley had no dealings with WCC before November 15, 2007. The financial crisis facing WCC in November, 2007, was not “contrived” or manufactured. It was real. This is demonstrated by the extensive efforts made by WCC and Cambrian before and after November 14, 2007 to obtain financing. It is also demonstrated by the evidence of Chase that between November 15 and 30, 2009, WCC took steps to prepare for a potential CCAA filing in the event that the financing could not be obtained.

[314] The plaintiff’s fall-back position, that WCC’s efforts to find financing were intentionally delayed or were half-hearted is refuted by the evidence of Redmond, Byrne, Burridge and Chase concerning the extensive efforts they made to obtain financing. In the period prior to November 14, 2007, Endeavour Financial International Corporation made a concerted effort to obtain financing on behalf of WCC and various proposals were discussed at WCC’s board meetings on October 24 and 25, 2007. Other attempts were made by both WCC and Cambrian.

[315] In the period between November 15 and 22, 2007, WCC made real and substantial efforts to obtain financing from sources other than Audley, including Mitsui, Baosteel, Canaccord, Gibraltar, GMP (Griffiths McBurney) and Cenkos PLC. These efforts are described in the affidavits of Byrne, Burridge, Chase and Redmond. They ultimately resulted in proposals from both Audley and Canaccord and a subsequent proposal from Second City. This evidence is entirely inconsistent with the allegation that the Audley Financing had been pre-arranged. On the contrary, the evidence clearly establishes that the Audley Financing was the result of a highly organized and thorough competitive bidding process that produced the best available offer.

[316] The process established for the approval of the Audley Financing was fair and independent. An independent committee of non-executive and non-Cambrian directors, chaired by Chase, together with Pitcher and Brodie, was established to review the proposals received from Audley and Canacccord and recommended that WCC proceed with the Audley proposal, subject to any more favourable proposal that might be obtained. A subsequent proposal received from Gibraltar’s subsidiary, Second City, was received on November 22, 2007, after the issuance of a news release announcing the Audley Financing. The independent committee considered that Second City proposal and concluded that it was not more favourable than Audley’s proposal. In addition, the Audley, Canaccord and Second City financing proposals were reviewed by Cenkos PLC, which was WCC’s nominated advisor (“NOMAD) under the rules of the AIM exchange and was required to determine whether the financing was fair and in the best interests of WCC. Cenkos determined that the Audley Financing was superior to the other two and approved it as fair and reasonable and in the interests of WCC’s shareholders. The conclusion that the Audley Financing was the best available financing was supported by the expert evidence of Mr. Lowe of Deloitte who gave an opinion on the fairness of the transaction.

[317] It was a condition of Audley’s agreement to provide financing that WCC exercise its option to acquire FMC from Cambrian pursuant to an agreement made with Cambrian in April 2007. The negotiation of the terms of the acquisition was a matter of real negotiation between Burridge on behalf of Cambrian and Chase on behalf of WCC. Chase was required to report to the independent committee, which included Pitcher and Brodie, with respect to the negotiations. The agreement ultimately reached was the subject of a fairness opinion given by Capital West and was recommended by the special committee. The shareholders of WCC ultimately, by a 99.9% vote almost unanimously approved the FMC acquisition and approved the amendment of the Cambrian Loan by about a 74% majority.

[318] In light of my finding that there is no factual basis for the existence of common issues of conspiracy, I do not propose to deal with the defendants’ alternative submissions that the claim is barred based on issue estoppel and abuse of process.

C. The Oppression Claim

[319] The claim for oppression is set out in para. 90 of the statement of claim, which alleges that the affairs of WCC were conducted, and the powers of the individual defendants were exercised, in a manner that was oppressive to and unfairly prejudiced the rights of class members. In particular, the plaintiff pleads that the following actions diluted class members’ holdings in WCC:

(a) the terms of the Audley Financing allowed Audley to acquire a higher percentage of WCC securities than it would have been able to acquire prior to the alleged misrepresentations;

(b) WCC issued 4.24 million warrants to Audley at a price of $0.75 per share; during the nine month period ended December 31, 2009, Audley exercised 2,431,833 warrants;

(c) as part of WCC’s acquisition of FMC from Cambrian, WCC issued Cambrian 18,740,898 shares for a total value of $13,306,000, which represented approximately $0.71 per share; at that time, the market price of WCC shares on the TSX was $5.85;

(d) the February 2008 amendment to the Master Agreement between WCC and Cambrian, which provided Cambrian with the option to elect the manner in which the deferred payment for FMC would be satisfied, was ultimately valued at $1,134,000;

(e) on June 30, 2008, Cambrian elected to take a further 4,534,088 common shares of WCC to satisfy the deferred payment of $14,056,000; these share represented a total value of $15,190,000 or approximately $3.35 per share; on that date, the market price of WCC shares on the TSX was $8.96; and,

(f) as a result of the re-pricing of the September 2007 Cambrian loan from $2.35 per share to $0.75 per share, Cambrian received approximately 3.13 times more shares than it would have received under the original terms of the loan agreement.

[320] The plaintiff’s oppression claim is based upon s. 227 of the British Columbia Business Corporations Act. Section 227(1) provides that a shareholder or “any other person whom the court considers to be an appropriate person” may make an application under the section. Subsection (2) provides:

(2) A shareholder may apply to the court for an order under this section on the ground

(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant. [Emphasis added.]

[321] Section 1 of the Business Corporations Act defines “court”, for the purposes of s. 227, as “the Supreme Court”, which is in turn defined in the British Columbia Interpretation Act, RSBC 1996, c. 238, as “the Supreme Court of British Columbia”.

[322] The defendants contend that the s. 227 claim is purely statutory, that the statute confers exclusive jurisdiction on the Supreme Court of British Columbia, and that the Ontario Superior Court of Justice has no subject-matter jurisdiction over the claim.

[323] The primary submission of the plaintiff in response is based on the recent decision of the Supreme Court of Canada in Club Resorts Ltd. v. Van Breda, 2012 SCC 17, [2012] S.C.J. No. 17. In particular, he relies on the observation of LeBel J., who delivered the judgment of the Supreme Court, to the effect that if there is a “real and substantial connection” with the forum in respect of a particular factual and legal situation, the court can – indeed must – assume jurisdiction over all aspects of the case. LeBel J. stated, at para. 99:

I should add that it is possible for a case to sound both in contract and in tort or to invoke more than one tort. Would a court be limited to hearing the specific part of the case that can be directly connected with the jurisdiction? Such a rule would breach the principles of fairness and efficiency on which the assumption of jurisdiction is based. The purpose of the conflicts rules is to establish whether a real and substantial connection exists between the forum, the subject matter of the litigation and the defendant. If such a connection exists in respect of a factual and legal situation, the court must assume jurisdiction over all aspects of the case. The plaintiff should not be obliged to litigate a tort claim in Manitoba and a related claim for restitution in Nova Scotia. That would be incompatible with any notion of fairness and efficiency.

[324] The plaintiff says that, following this rationale, and because this court clearly has jurisdiction over the defendants for the Securities Act and conspiracy claims, “fairness and efficiency” require the court to assume jurisdiction over the oppression claim.

[325] The plaintiff refers to this, perhaps infelicitously, as the “bootstrap” argument – that if the plaintiff establishes that the court has jurisdiction over the defendants for the purposes of one claim, the other claims over which it does not have jurisdiction can be pulled up by the bootstrap into the action.

[326] In my view, Van Breda is not on point. The issue in Van Breda was territorial jurisdiction or jurisdiction simpliciter. The issue here is jurisdiction over the subject matter. The distinction was noted by the British Columbia Court of Appeal in Conor Pacific Group Inc. v. Canada (Attorney General), 2011 BCCA 403, 343 D.L.R. (4th) 324at para. 38:

It is important to appreciate the distinction between territorial jurisdiction and subject-matter jurisdiction. Territorial jurisdiction, known at common law as jurisdiction simpliciter, is concerned with the connection between the dispute and the court's territorial authority. A Canadian court may only assume territorial jurisdiction over a proceeding where there is a real and substantial connection between the action and the territory over which the court exercises jurisdiction: Morguard Investments Ltd. v. De Savoye, 1990 CanLII 29 (SCC), [1990] 3 S.C.R. 1077; Hunt v. T&N plc, 1993 CanLII 43 (SCC), [1993] 4 S.C.R. 289. In contrast, subject-matter jurisdiction is concerned with the court's legal authority to adjudicate the subject-matter of the dispute. For example, the Provincial Court does not have subject-matter jurisdiction with respect to claims for libel, slander or malicious prosecution: Small Claims Act, R.S.B.C. 1996, c. 430, s. 3(2).

[327] The fact that a court may have territorial jurisdiction over a particular party in relation to a particular cause of action cannot give it jurisdiction over that party in relation to a subject matter that is outside its jurisdiction.

[328] There is substantial recent authority of this court and of other Canadian and American courts directly on point and against the plaintiff’s submission. In Ironrod Investments Inc. v. Enquest Energy Services Corp. 2011 ONSC 308, [2011] O.J. No. 544, C.L. Campbell J. was concerned with a claim for negligent misrepresentation and oppression against two Alberta corporations. The individual plaintiff had acquired convertible debentures in a corporation that was a predecessor of one of the defendants and pleaded that, as a result of misrepresentations by the president of the predecessor company, he had been induced to convert his debentures to shares. The plaintiffs argued that the oppression claims could be brought in Ontario by invoking the jurisdiction of the Ontario Superior Court under the oppression remedies of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16, which were similar, if not identical, to the Alberta statute.

[329] Justice Campbell found, at para. 14, that only an Alberta court had jurisdiction to grant a remedy for oppression brought in respect of an Alberta corporation. He concluded, at para. 16:

In this case, not only is Alberta the place of incorporation but the Alberta Business Corporations Act give the Courts or [sic] that Province complete jurisdiction of the regulation and governance over that corporation. Section 1(m) defines "Court" for the purpose of the statute, including the oppression remedy, to mean "the Court of Queen's Bench of Alberta."

[330] While there were other grounds on which the action was stayed, the conclusion of Campbell J. on subject matter jurisdiction stands on its own – the court simply had no jurisdiction over the oppression claim.

[331] A similar conclusion was reached by Killeen J. in Incorporated Broadcasters Ltd. v. Canwest Global Communications Corp. 2001 CanLII 28395 (ON SC), [2001] O.J. No. 4882, (2001), 20 B.L.R. (3d) 289 (S.C.J.), at paras. 97-100 and 112-11, affd on other grounds, 2003 CanLII 52135 (ON CA), [2003] O.J. No. 560, 63 O.R. (3d) 431 (C.A.), leave to appeal to S.C.C. refused, [2003] S.C.C.A. No. 186. The action involved an oppression claim against a Manitoba company. The defendants moved to dismiss or stay the action on jurisdictional grounds. In connection with the “substantial connection” principle, Killeen J. held that the reasonable expectations of the corporation’s shareholders were that their affairs, and disputes, would be dealt with by the Manitoba courts.

[332] Killeen J. also discussed the effect of the Manitoba Companies Act, R.S.M. 1987, c. 225, which he described as a “complete code for corporate life in Manitoba” (at para. 109). The relevant provision dealing with the oppression remedy was similar to the British Columbia statute and conferred jurisdiction on the Manitoba Court of Queen’s Bench.[^17] He concluded, at para. 113:

Thus, it seems inescapable but to conclude that only the Manitoba Court of Queens Bench has jurisdiction to grant a remedy for oppression brought in respect of a Manitoba corporation such as Broadcasting.

[333] While the Court of Appeal affirmed the decision of Killeen J., holding that Manitoba was the “convenient forum” for the resolution of the litigation, it held that the motion judge failed to consider that the plaintiffs were invoking a remedy under the Canada Business Corporations Act, R.S.C. 1985, c. 44, not the Manitoba statute. It found, however, that his reasoning on the exclusive jurisdiction of the Manitoba court was sound – at para. 53:

If the availability of the s. 241 remedy [under the CBCA] was before the motions judge and if he was correct in his conclusion that the remedy was not available to these appellants then his conclusion on convenient forum is unassailable. In fact, if he is correct, it is not a question of choosing the forum with the closest connection to the action and the parties, since only Manitoba is the appropriate forum. [Emphasis added.]

[334] Similar views were expressed by Marrocco J. in Cae Wood Products GP v. Coe Newnes/McGehee ULC, 2011 ONSC 1617, [2011] O.J. No. 1140 at para. 31:

The plaintiffs allege oppression. They rely upon the BCBCA. The plaintiffs have suffered no harm if they were not owed Contingent Consideration. Quite separately, issues surrounding the determination of the reasonable expectations of the plaintiffs and the extent to which those expectations were frustrated are matters assigned by the Legislature of British Columbia to the jurisdiction of the Supreme Court of British Columbia, not the Ontario Superior Court of Justice (see the definition of "court" in ss. 1 and 227 of the BCBCA).

See also the conclusions of the New Brunswick Court of Queen’s Bench in Nord Resources Corp. v. Nord Pacific Ltd., 2003 NBQB 201, [2003] N.B.J. No. 192 (2003), (N.B.Q.B.) at para. 14, and of the British Columbia Supreme Court in Voyage Co. Industries v. Craster, [1998] B.C.J. No. 1884 at para. 12.

[335] The same result was reached by the Supreme Court of Delaware in concluding that it had no jurisdiction to grant an oppression remedy under s. 241 of the Canada Business Corporations Act: Taylor v. L.S.I. Logic Corp., 715 A.2d 837, 1998 Del. Lexis 326 (Del. 1998); see also Locals 302 and 612 of Intern. Union of Operating Engineers – Employers Const. Industry Retirement Trust v. Blanchard, 2005 WL 2063852 (S.D.N.Y. Aug. 25, 2005) (No. 04 CIV. 5954 (LAP)) at paras. 12-14.

[336] In Zi Corp. v. Steinberg., 2006 ABQB 92, [2006] A.J. No. 313, Wittman A.C.J. considered a number of the above authorities (as well as the decision of Ground J. in Ciro v. Rico Resources Inc. (2004), 2004 CanLII 18394 (ON SC), 41 B.L.R. (3d) 206 (S.C.J.)) and concluded, at paras. 76-79:

These cases demonstrate that there are two considerations that drive the conclusion that the domicile of the corporation is the proper jurisdiction to deal with matters of internal corporate governance and the status of the corporation: the language of the governing statute and considerations of comity and, perhaps more generally, public policy.

In relation to the first consideration, section 180 of the Act designates the "Court of Queen's Bench" as the court to which application should be made for relief under that section. Section 28(k) of the Interpretation Act, R.S.A. 2000, c. I-8 states that: "[the] Court of Queen's Bench' means the Court of Queen's Bench of Alberta".

The wording of the section, together with the authorities cited above, lead to the conclusion that the intent of the legislature was to provide this Court with exclusive jurisdiction in relation to the relief available under section 180 of the Act.

As to the second consideration, I agree with Ground J. [in Ciro v. Rico Resources Inc.], the requisition of shareholders' meetings and the provision of shareholders' lists for the purpose of allowing majority shareholders to elect their own slate of directors, are matters of internal governance. As such, they should be dealt with in the jurisdiction in which the corporation is domiciled.

[337] In response, the plaintiff relies on 620637 Ontario Ltd. v. Axton, [1992] O.J. No. 13 (Gen. Div.) and Factor Gas Liquids Inc. v. Jean, [2007] O.J. No. 2883 (S.C.J.). These were distinguished by Campbell J. in Ironrod Investments, above, at para. 15, on the basis that the issue of the jurisdiction of the province of incorporation had not been raised in those cases. I distinguish them for the same reasons.

[338] Nor do I find Jasinski v. Jasinski, 2006 BCSC 878, [2006] B.C.J. No. 1325, of assistance. The issue in that case, discussed at paras. 24-26, was the application of a contractual choice of law clause, incorporating the law of another province. Where the law of another province is the proper law, there is no question that an Ontario court is entitled to apply that law, just as it is entitled to apply the law of another foreign jurisdiction, based on conflict of laws principles, in an appropriate case. There is a difference, however, between applying another jurisdiction’s law and assuming an adjudicative jurisdiction that can only be exercised by a court of another province or state. The constraint is more than just comity, in my view. It is a matter of constitutional competence.

[339] The oppression remedy applicable to this dispute is a creation of a British Columbia statute. The statute confers the remedy and describes the manner in which it is to be enforced. I have no jurisdiction to grant the remedy because the statute expressly grants jurisdiction to the British Columbia Superior Court. It is irrelevant that the defendants may be otherwise subject to this court’s jurisdiction, or may have attorned to the jurisdiction. I have no jurisdiction over the subject matter. The oppression claim should therefore be struck.

V. CONCLUSION

[340] For these reasons, the plaintiff’s motion for leave pursuant to s. 138.3 of the Securities Act is dismissed. The motion for certification is also dismissed. Costs may be addressed by written submissions to me, care of Judges’ Administration.

G.R. Strathy J.

Released: September 14, 2012

[^1]: The issue of the three-year limitation period in s. 138.14 of the Securities Act, raised by the decision of the Court of Appeal in Sharma v. Timminco Ltd., 2012 ONCA 107, [2012] O.J. No. 719, does not arise in this case because the parties entered into a tolling agreement which was approved and incorporated by reference into an order of this court.

[^2]: The statement of claim summarizes the claim as follows in para. 6: “This action alleges a scheme by which, among other things, Western Coal, the Audley defendants and Cambrian misrepresented the true state of Western Coal’s finances to enable Audley, together with Cambrian, to acquire a controlling interest in WC on favourable terms.” The plaintiff’s factum contains a similar summary: “This action involves claims against the Defendants based on their fabrication of a supposed financial crisis in November 2007 at the Defendant Western Coal Corporation (“WCC” or the “Company”), which artificially drove down WCC’s share price and allowed the other Defendants, who were major insider shareholders and officers at WCC, to greatly increase their equity holdings in the Company at the depressed share price.”

[^3]: SEDAR is the System for Electronic Document Analysis and Retrieval, a filing system developed for the Canadian Securities Administrators to, among other things, facilitate the electronic filing of securities information as required by the securities regulatory agencies in Canada.

[^4]: A company’s current ratio represents its current assets divided by its current liabilities. It is an indication of the company’s ability to meet its short term debt obligations.

[^5]: The Perry Creek Mine referred to in this note was a deposit forming part of the Wolverine Project.

[^6]: “Financial statements are prepared on the assumption that the entity is a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations. Different bases of measurement may be appropriate when the entity is not expected to continue in operation for the foreseeable future.”

[^7]: These provisions, in para. 8A of section 1400, and para. 8B, were issued as amendments in June 2007 and were stated to be applicable to financial statements related to fiscal years on or after January 1, 2008; however, earlier adoption was encouraged and it was therefore appropriate for WCC to consider these provisions in connection with the preparation of its Q2 2008 financial statements.

[^8]: Handbook section 1400 – General Standards of Financial Statement Presentation, para. 8A: “When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties shall be disclosed. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.”

[^9]: Handbook section 1400, para. 8B: “In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts of each case. When an entity has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.”

[^10]: Where there is covenant violation on the balance sheet date, giving the creditor a right to demand repayment, the committee concluded that the debts should be reclassified as a current liability unless both the following conditions are satisfied: “(i) the creditor has waived in writing, or subsequently lost, the right, arising from violation of the covenant at the balance sheet date, to demand repayment for a period of more than one year from the balance sheet date; or the debt agreement contains a grace period during which the debtor may cure the violation, and contractual arrangements, which significant economic consequences to the parties if breach, and which the parties have little, if any, discretion to avoid, have been made which ensure that the violation will be cured within the grace period; and (ii) a violation of the debt covenant giving the creditor a right to demand repayment at a future compliance date within one year of the balance sheet date is not likely.”

[^11]: As discussed above, Rosen’s report frequently engaged in advocacy, using pejorative and exaggerated language to score points. The use of quotation marks around “liquidity crisis” was presumably intended to emphasize his opinion that the liquidity crisis was contrived.

[^12]: Section 1000.21 is entitled “Reliability” and provides, in part: “For the information provided in financial statements to be useful, it must be reliable. Information is reliable when it is in agreement with the actual underlying transactions and events, the agreement is capable of independent verification and the information is reasonably free from error and bias. Reliability is achieved through representational faithfulness, verifiability and neutrality. Neutrality is affected by the use of conservatism in making judgments under conditions of uncertainty … When uncertainty exists, estimates of a conservative nature attempt to ensure that assets, revenues and gains are not overstated and, conversely, that liabilities, expenses and losses are not understated …”

[^13]: Rosen made a number of excessive comments in this regard, as noted in Deloitte’s second report, including references such as an “unavoidable threat” and “impending insolvency”. He stated that, “[M]any indications exist that WCC was not insolvent …” when the note made no such statement. He stated that, “[A]dmissions of insolvency (and invalidity of the ‘going concern’ assumption) are tantamount to a company declaring imminent business failure.” He went on to say that, “[D]isclosure of financial distress would not be made unless it was unavoidable and plainly required in the circumstances.”

[^14]: The remedy for insider trading under s. 134(1) of the Securities Act is in favour of the “seller or purchaser of the securities”. The plaintiff was not a seller or purchaser of securities from the defendants and does not seek any remedy on behalf of the class for the alleged insider trading. The section provides: “134. (1) Every person or company in a special relationship with a reporting issuer who purchases or sells securities of the reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is liable to compensate the seller or purchaser of the securities, as the case may be, for damages as a result of the trade unless, (a) the person or company in the special relationship with the reporting issuer proves that the person or company reasonably believed that the material fact or material change had been generally disclosed; or (b) the material fact or material change was known or ought reasonably to have been known to the seller or purchaser, as the case may be.”

[^15]: 126.1 A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know, (a) results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative; or (b) perpetrates a fraud on any person or company.

126.2 (1) A person or company shall not make a statement that the person or company knows or reasonably ought to know, (a) in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; and (b) would reasonably be expected to have a significant effect on the market price or value of a security, derivative or underlying interest of a derivative.

[^16]: Per O’Brien J. in H.A. Imports of Canada Ltd. v. General Mills Inc. (1983), 1983 CanLII 1722 (ON SC), 42 O.R. (2d) 645 at 646-7 (H.C.), quoting from Bullen, Leake and Jacob's Precedents of Pleadings, 12th ed. (London: Sweet & Maxwell, 1975).

[^17]: Section 234 conferred the oppression remedy. Section Section 234(1) provided that "[a] complainant may apply to a court for an order under this section." Section 1(1) defined "court" as "the Court of Queens Bench".

Wayne B. Gould v. Western Coal Corporation et al., 2012 ONSC 5184

Case Summary