Court File and Parties

COURT FILE NO.: 4369-11CP

DATE: 2013/11/28

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: D. Kingsley Snelgrove (Plaintiff)

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Cathay Forest Products Corp., Anthony Ng, Luc Perron, John Duncanson, John Housser, Raymond Lo and Paul Wong (Defendants)

BEFORE: Justice H. A. Rady

COUNSEL:
Charles M. Wright & Nicholas C. Baker, for the Plaintiff

Jeremy Devereux & Jennifer Teskey for Cathay Forest Products Corp., Luc Perron, John Duncanson and John Housser

D. Gallo, for the Defendants Raymond Lo & Paul Wong

HEARD: November 22, 2013

Endorsement

[1] At the conclusion of oral submissions, I advised counsel that the proposed settlement and fees were approved. These are my reasons.

[2] This action is a class proceeding brought by and on behalf of current and former shareholders of Cathay Forest Products Corporation. Cathay is a junior forestry company incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44. It was involved in the development of tree plantations, sub-concession of harvesting rights and log trading in the People’s Republic of China and forest harvesting operations in the Russian Federation.

[3] The class action was commenced following Cathay’s restatement of certain of its financial statements that had been issued publicly in 2009 and 2010. The restatement made February 4, 2011 followed a Cathay press release on December 1, 2010 advising that there had been a delay in filing financial statements; the delay was attributable to the need to determine appropriate accounting treatment for certain timber and bamboo sales agreements entered into in 2009; and that a founding officer and director, Mr. Ng, had resigned.

[4] A further press release was released on February 7, 2011 in which reasons for the restatements were given, which led the plaintiff to conclude that the requirements for the recognition of revenue in accordance with Canadian generally accepted accounting principles had not been met.

[5] The plaintiff’s allegations in the action include the following:

• Cathay’s December 11, 2009 prospectus and the financial statements that were the subject of the February 4, 2011 restatement contained materially misleading statements about Cathay’s financial statements not in accordance with Canadian generally accepted accounting principles;

• Cathay’s accounting treatment for the timber and bamboo sold in the third quarter of 2009 was incorrect; and

• Cathay’s share price during the class period was artificially inflated.

[6] The claim pleads common law causes of action in negligence and negligent misrepresentation as well as statutory causes of action for prospectus misrepresentation, secondary market misrepresentation and oppression pursuant to the Securities Act and the Canada Business Corporations Act.

[7] Cathay’s shares were publicly traded on the TSX Venture Exchange from 2004 until February 1, 2011. Its shares were delisted from trading on February 1, 2012 and have been the subject of Provincial Securities Regulatory Cease Trade Order since May 2011.

[8] The individual defendants were senior officers and/or directors of Cathay who sat on its audit committee during all or part of the class period. None remain with Cathay today. Mr. Ng was the president, chief executive officer and a director of Cathay during all or part of the class period. He has not defended the action and he has been noted in default.

[9] On September 13, 2013, I certified the action as a class proceeding as against all defendants solely for the purposes of settlement.

[10] The terms of the settlement are the result of negotiations conducted at arm’s-length for several months. The parties were assisted by an experienced mediator who has been involved in the resolution of many securities class action disputes. A mediation session was held but did not result in an agreement. However, further settlement discussions followed, facilitated by the mediator and an agreement in principle was reached on May 16, 2013 to settle the action for a global settlement amount of $1.9 million CAD.

[11] The plaintiff urges the court to approve the settlement as a reasonable compromise, having regard to the risks of litigation, the estimated total damages suffered by class members, the legal limitations on the value of Securities Act claims advanced, the challenges of obtaining evidence in the People’s Republic of China where Cathay carries on business, Cathay’s constrained financial position, the estimated proportionate liability of the settling defendants, the availability of liability insurance in the event of a judgment and the potential enforceability of a judgment against the defendants.

[12] The settlement is being paid on behalf of the defendants. The individual defendants did not personally fund the settlement. The settling defendants’ insurer will pay the settlement amount of $1.9 million into an interest bearing account. The sum of $50,000 was segregated to be used for the purpose of paying the cost of first notice. First notice has, of course, already been given at a cost of just in excess of $21,000. The balance has been paid into the settlement fund.

[13] There is no right of reversion of the settlement amount unless the agreement is terminated. No credit is available to the defendants’ insurer where opt-outs occur. The settlement amount will be distributed to class members who submit a valid claims form to an administrator who is being proposed to administer the settlement. The defendants are to receive a full and final release.

[14] It is proposed that NPT RicePoint Class Actions Services Inc. be appointed as administrator. NPT RicePoint is a company that has experience in the administration of claims and it has administered similar kinds of settlements in the past. It has already provided advice on one of the forms of notice to be published. I commented during the hearing that what was being proposed was innovative and eye-catching.

[15] The first notice advised class members that they had the right to opt-out of the action or to object to the settlement agreement. No opt-outs or objections were received.

[16] Mr. Robb, in his affidavit filed in support of the motion, sets out a number of the factors which influenced his firm’s recommendation of the settlement. In particular, counsel received information from Cathay’s counsel, which suggested that the third quarter 2009 sales agreement may have been affected by “improper conduct”, an allegation that is vigorously denied by Mr. Wong and Mr. Lo. However, this development was important because if fraud were alleged and proved, the defendants’ D&O Policy would not respond to the claim. Insurance is often an important source of recovery for class members in securities class actions. As a result, there was concern that the ability to recover on a judgment in the action might be compromised by its continued prosecution. The plaintiff effectively was in a Catch-22 situation.

[17] It is important to note that the D&O insurance is a wasting policy, and defence costs are drawn against the limits, reducing what is available to fund a settlement or judgment.

[18] In addition, Cathay appears to be in a difficult financial situation and it probably does not have the capacity to satisfy a judgment. A number of other factors were considered in arriving at a decision to recommend the settlement, including the liability limits under the Securities Act for secondary market purchasers; risks relating to the claims asserted and proposed to be asserted; risks relating to the scope of any certified class and the risks of prolonged litigation.

[19] The case law respecting the factors to be considered in whether to approve a proposed settlement is well-developed. The court must be satisfied that it is fair, reasonable and in the best interests of the class. Fairness is not assessed against a standard of perfection but rather reasonableness, which allows for a range of possible resolutions: Dabbs v. Sun Life Assurance Co. of Canada, 1998 14855 (ON SC), [1998] O.J. No. 2811 (Gen. Div.).

[20] In considering whether to approve a settlement agreement, courts have set out the following non-exhaustive list of factors which a court may consider:

• the likelihood of monetary recovery or success for the class in the proceedings;

• the amount and nature of discovery evidence or investigation required to prosecute the action;

• the terms and conditions of the settlement agreement;

• the recommendation and experience of class counsel;

• the future expense and likely duration of litigation and risks;

• the number of objectors and the nature of their objections;

• the presence of good faith, arm’s-length bargaining and the absence of collusion;

• information conveyed to the court regarding the dynamics of and the positions taken by the parties during negotiations; and

• the degree and nature of communications by counsel and the representative plaintiff with class members during the litigation.

[21] See Parsons. v. Canadian Red Cross Society, [1999] O.J. No. 3572 (S.C.J.) and Kidd v. Canada Life Assurance Company, 2012 ONSC 740, [2012] O.J. No. 506 (S.C.J.).

[22] Having given consideration to the submissions of counsel and the factors enumerated above, I was satisfied that the proposed settlement was fair, reasonable and in the best interests of the class. The settlement was therefore approved.

[23] In addition, I approved the fees being proposed by counsel. There was a contingency fee agreement by the terms of which the firm was entitled to recovery of 25% of any settlement or judgment. In fact, the firm has agreed to reduce its percentage to approximately 21% to recognize the fact that it did not achieve precisely the level of success that it had wished. In addition, it is entitled to reimbursement for disbursements incurred and interest at the Courts of Justice Act which coincides with the prevailing commercial rate. As a result, the firm is not reaping a windfall.

[24] Finally, a modest honorarium of $500 is to be provided to the plaintiff, Mr. Snelgrove, and the proposed added plaintiff, Mr. Peidl. I was advised that Messrs. Snelgrove and Peidl provided considerable assistance to counsel during the course of this proceeding. To my mind, a modest honorarium is entirely appropriate if for no other reason but to encourage plaintiffs to be involved in the litigation in a meaningful rather than notional way.

[25] For these reasons, both the settlement and the fees are approved.

“Justice H. A. Rady”

Justice H. A. Rady

November 28, 2013