Tucci v. Smart Technologies Inc. et al.

[Indexed as: Tucci v. Smart Technologies Inc.]

Ontario Reports

Ontario Superior Court of Justice,

Perell J.

February 4, 2013

114 O.R. (3d) 294 | 2013 ONSC 802

Case Summary

Securities regulation — Misrepresentation — Section 130(1) of Securities Act not providing statutory cause of action and remedies to purchasers in secondary market — Securities Act, R.S.O. 1990, c. S.5, s. 130(1).

The plaintiff brought a proposed class action for damages pursuant to s. 130 of the Securities Act and other remedies. He brought a motion to certify the action as a class proceeding. With the exception of one contested issue, which concerned the definition of the class, the defendants consented to the certification. The plaintiff submitted that s. 130(1) of the Act provides a remedy to purchasers in the secondary market, and proposed a class definition that included such purchasers. The defendants disagreed. [page295]

Held, the motion should be granted.

Section 130(1) of the Act does not provide a statutory cause of action and remedies to purchasers in the secondary market. The proposed class definition should be revised accordingly.

Cases referred to

Lawrence v. Atlas Cold Storage Holdings Inc., [2006] O.J. No. 3748, 34 C.P.C. (6th) 41, 151 A.C.W.S. (3d) 408 (S.C.J.), supp. reasons [2007] O.J. No. 351, 154 A.C.W.S. (3d) 1055 (S.C.J.); Pearson v. Boliden Ltd., [2002] B.C.J. No. 2593, 2002 BCCA 624, 222 D.L.R. (4th) 453, 175 B.C.A.C. 104, 7 B.C.L.R. (4th) 245, 119 A.C.W.S. (3d) 13, consd

Other cases referred to

Kerr v. Danier Leather Inc., [2007] S.C.J. No. 44, 2007 SCC 44, 286 D.L.R. (4th) 601, 368 N.R. 204, 231 O.A.C. 348, 36 B.L.R. (4th) 95, 48 C.P.C. (6th) 205, 160 A.C.W.S. (3d) 910, J.E. 2007-1969, EYB 2007-124711, affg (2005), 2005 46630 (ON CA), 77 O.R. (3d) 321, [2005] O.J. No. 5388, 261 D.L.R. (4th) 400, 205 O.A.C. 313, 11 B.L.R. (4th) 1, 144 A.C.W.S. (3d) 370 (C.A.), revg 2004 8186 (ON SC), [2004] O.J. No. 1916, [2004] O.T.C. 397, 46 B.L.R. (3d) 167, 23 C.C.L.T. (3d) 77, 132 A.C.W.S. (3d) 809 (S.C.J.); Menegon v. Philip Services Corp., 2003 36468 (ON CA), [2003] O.J. No. 8, 167 O.A.C. 277, 31 B.L.R. (3d) 29, 119 A.C.W.S. (3d) 525 (C.A.), affg 2001 28396 (ON SC), [2001] O.J. No. 5547, [2001] O.T.C. 989, 23 B.L.R. (3d) 151, 111 A.C.W.S. (3d) 1090 (S.C.J.); Tucci v. Smart Technologies Inc., [2012] O.J. No. 1862, 2012 ONSC 2091 (S.C.J.)

Statutes referred to

Business Corporations Act, R.S.A. 2000, c. B-9 [as am.]

Class Proceedings Act, 1992, S.O. 1992, c. 6 [as am.], ss. 5, 24, 26(9)

Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 128, 129

Securities Act, R.S.O. 1990, c. S.5, ss. 59 [as am.], 130 [as am.], (1) [as am.], Part XXIII.1 [as am.]

MOTION to certify an action as a class proceeding.

Michael Robb and Anthony O'Brien, for plaintiff.

Michael A. Eizenga, Christiaan A. Jordaan and Michael J. Paris, for SMART Technologies Inc., APAX Partners L.P., APAX Partners Europe Managers Ltd., School S.a.r.l., David A. Martin, Nancy L. Knowlton, Salim Nathoo, Michael J. Mueller, Robert C. Hagerty and G.A. (Drew) Fitch.

Peter H. Griffin, Linda L. Fuerst and Melanie K. Baird, for defendants Intel Corporation and Arvind Sodhani.

PERELL J.: —

I. Introduction

[1] This is a proposed class action under the Class Proceedings Act, 1992, S.O. 1992, c. 6 (the "CPA") by the plaintiff, Frank Tucci, and except for one contested issue, which concerns the definition of the class, the defendants consent to the certification of the action. [page296]

[2] In these reasons for decision, I will determine the contested issue, which involves interpreting s. 130(1) of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the "Act"), and I shall certify Mr. Tucci's action in accordance with the consent of the parties. I conclude that once the contested issue is resolved, the action satisfies all the criteria for certification under s. 5 of the Class Proceedings Act, 1992.

II. Factual Background

[3] The defendant Smart Technologies Inc. is a company incorporated under the Alberta Business Corporations Act, R.S.A. 2000, c. B-9 with its registered and principal executive offices in Calgary. Its business is designing, manufacturing and selling interactive technology products. Its products are sold primarily to schools and other educational institutions in North America. Its Class A shares are listed for trading on the Toronto Stock Exchange and on the NASDAQ.

[4] The defendant David Martin with his wife, the defendant Nancy Knowlton, founded Smart Technologies and have been directors since 1987. At the relevant time, Mr. Martin was the executive chairman and Ms. Knowlton was chief executive officer and president. The defendant Drew Fitch was Smart Technologies' vice-president, finance and chief financial officer.

[5] School S.a.r.l. is a company incorporated under the laws of Luxembourg. It is affiliated with the defendants Apax Partners L.P., which is a limited partnership organized under the laws of Delaware, and Apax Partners Europe Managers Ltd., a company incorporated under the laws of England.

[6] The defendant Intel Corporation is a company incorporated under the laws of Delaware.

[7] The defendants Salim Nathoo, Arvind Sodhani, Michael Mueller, Robert Hagerty were all directors of Smart Technologies. Mr. Nathoo is also a partner of the defendant Apax Partners LP and a director of the defendant School S.a.r.l. Mr. Sodhani is also executive vice-president of Intel.

[8] For the purposes of an initial public offering ("IPO"), on July 15, 2010, Smart Technologies filed with Canadian securities regulators a final supplemented prep prospectus dated July 14, 2010, for the distribution of 38,830,000 Class A shares. At the same time, in the United States, it filed with the Securities and Exchange Commission a registration statement dated June 24, 2010, as amended on June 28, 2010 and July 12, 2010, and made effective as of July 14, 2010, and which incorporated a prospectus dated July 14, 2010. [page297]

[9] The only material difference between the Canadian prospectuses and the American registration statement was that the prospectuses filed in Canada contained certificates executed by each of School S.a.r.l, Intel, Martin, Knowlton, Nathoo, Fitch and the underwriters confirming that they contained "full, true and plain disclosure" of all material facts relating to the securities being issued thereunder which were not included in the American registration statement.

[10] The IPO involved the sale to the public of 38,830,000 Class A shares at US$17 per share. Smart Technologies sold 8,800,000 Class A shares for gross proceeds of approximately US$150 million. Intel was a selling shareholder in the IPO, disposing of 10,036,711 Class A shares for gross proceeds of approximately US$170 million. School S.a.r.l. was a selling shareholder in the IPO, disposing of 19,993,289 Class A shares for gross proceeds of approximately US$340 million.

[11] On July 15, 2010, Mr. Tucci, who lives in Ontario, purchased 850 Class A shares at US$17 per share in the IPO. The order settled on July 20, 2010. Mr. Tucci alleges that the Canadian prospectuses and the American registration statement contained misrepresentations that did not become apparent until a corrective disclosure was made on November 9, 2010. Mr. Tucci continued to hold the Class A shares at the time of the alleged corrective disclosure.

[12] The IPO closed on July 20, 2010, and on that date purchasers in the IPO received Class A shares.

[13] However -- and this is the important point for the contested issue -- the Class A shares began trading on the TSX and the NASDAQ on July 15, 2010, in advance of the IPO closing. In other words, there was secondary trading in the Class A shares during the IPO.

[14] In this proposed class action, Mr. Tucci alleges that the disclosure in the offering materials was materially deficient, and that he and the other proposed class members suffered damages as a result of acquiring Smart Technologies shares at an inflated price. Mr. Tucci advances a claim for prospectus misrepresentation under s. 130 of the Ontario Securities Act and other Canadian securities legislation against all of the defendants.

[15] There is a parallel class action, McKenna v. SMART Technologies Inc., pending in the United States District Court for the Southern District of New York against all of the defendants, except School S.a.r.l.

[16] With my emphasis added, Mr. Tucci proposes the following class definition for his class action. The highlighted words are the subject matter of the one contested issue. [page298]

All persons, other than Excluded Persons*, wherever resident, who purchased or otherwise acquired securities of SMART offered by SMART's Supplemented Base Prospectus dated July 14, 2010 as defined in paragraph 2(y) of the Third Fresh as Amended Statement of Claim (the "Prospectus")

(i) from an underwriter domiciled in Canada; or

(ii) on the TSX, Pure Trading, Alpha or Chi-X Canada trading platforms between July 15, 2010 and 20, 2010;

and continued to hold any of those securities on or after November 10, 2010.

• Excluded Persons means the defendants and the Underwriters, and the past and present subsidiaries, affiliates, officers, directors, senior employees, legal representatives, heirs, predecessors, successors and assigns of SMART, the Selling Shareholders, Apax Partners or the Underwriters, and any member of the families of the Individual defendants. For greater clarity, Excluded Persons shall also mean any member of the class certified in the related class proceeding titled McKenna v. SMART Technologies Inc. in the United States District Court Southern District of New York and certified pursuant to the Order of District Judge Katherine B. Forrest dated January 11, 2013.

[17] The claims asserted on behalf of the class are (i) an action for damages pursuant to s. 130 of the Ontario Securities Act, and (ii) actions for damages pursuant to the equivalent provisions of the other Canadian securities legislation as defined in para. 2(w) of the third fresh as amended statement of claim.

[18] The relief sought by the class is (i) a declaration that the prospectus contained a misrepresentation within the meaning of the Ontario Securities Act or other Canadian securities legislation; (ii) a declaration that Smart Technologies is vicariously liable for the acts and/or omissions of the individual defendants and each of its other officers, directors and employees; (iii) general and special damages in a sum as this honourable court finds appropriate at the trial of the common issues or at a reference or references; (iv) an order directing a reference or giving such other directions as may be necessary to determine issues not determined at the trial of the common issues; (v) prejudgment and post-judgment interest, compounded, or pursuant to ss. 128 and 129 of the Courts of Justice Act, R.S.O. 1990, c. C.43; (vi) costs of this action on a substantial indemnity basis or in an amount that provides full indemnity plus, pursuant to s. 26(9) of the Class Proceedings Act, 1992, the costs of notice and of administering the plan distribution of the recovery in this action plus applicable taxes; and (vii) such further and other relief as this honourable court may deem just. [page299]

[19] The proposed common issues are as follows:

(i) Did the prospectus contain a misrepresentation within the meaning of the Ontario Securities Act or other Canadian securities legislation?

(ii) If the prospectus contained the misrepresentation, are the defendants, or any of them, liable to the Class Members in damages pursuant to s. 130 of the Act (or equivalent provisions of the other Canadian securities legislation)?

(iii) What damages per share are payable by each of the defendants found to be liable?

(iv) Can the liability of the defendants, or any of them, in damages be determined in the aggregate or in part pursuant to s. 24 of the CPA?

(v) Is SMART vicariously liable or otherwise responsible for the acts and/or omissions of the individual defendants or any of them?

(vi) Should the defendants, or any of them, found to be liable pay the costs of administering and distributing the damages recovered? If so, which defendants should pay, and in what amount?

III. The Issue to be Decided and the Parties' Arguments

[20] The contested issue to be decided is a matter of interpreting s. 130(1) of the Securities Act, which states:

Liability for misrepresentation in prospectus

130(1) Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

(b) each underwriter of the securities who is required to sign the certificate required by section 59;

(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;

(d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and [page300]

(e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),

or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter.

[21] The conventional understanding of s. 130(1) of the Ontario Securities Act is that it provides a statutory cause of action and remedies to purchasers buying securities in the primary market for misrepresentations in the prospectus used during distribution to the public.

[22] In other words, the conventional understanding of s. 130(1) is that it provides purchasers in the primary market, a remedy of rescission against (1) the issuers of the security (like Smart Technologies in the case at bar); (2) selling security holders (like Intel and School S.a.r.l. in the case at bar); and (3) underwriters (the action was discontinued against the underwriters in the case at bar, Tucci v. Smart Technologies Inc., [2012] O.J. No. 1862, 2012 ONSC 2091 (S.C.J.)).

[23] Section 130(1) also provides purchasers in the primary market the alternative remedy of damages against (1) the issuer; (2) a selling security holder; (3) each underwriter who is required to sign the s. 59 [of the Act] certificate; (4) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed; (5) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and (6) every person or company who signed the prospectus or the amendment to the prospectus.

[24] The conventional understanding of s. 130(1) is that it does not provide a remedy for any purchasers in the secondary market. Rather, subject to the court granting leave, purchasers in the secondary market have a statutory cause of action for misrepresentations pursuant to Part XXIII.1 of the Ontario Securities Act.

[25] In the case at bar, Mr. Tucci challenges the conventional understanding of s. 130(1) of the Ontario Securities Act. He submits that "a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public" includes not only primary market purchasers but also some secondary market purchasers. [page301]

[26] Further, he submits that in order to give s. 130 its plain meaning and in order to not make portions of the section have no meaning, which would be contrary to the canons of statutory interpretation, the scope of s. 130(1) must include some purchasers in the secondary market.

[27] Based on this unconventional interpretation of s. 130(1), Mr. Tucci, who himself purchased in the primary market, proposes to add as members of the class, purchasers "on the TSX, Pure Trading, Alpha or Chi-X Canada trading platforms between July 15, 2010 and 20, 2010".

[28] Mr. Tucci concedes that as a matter of jurisprudence, there are cases that reflect the conventional understanding of the scope of s. 130 and of the different roles for s. 130 (primary market misrepresentation) and for Part XXIII.1 (secondary market misrepresentation) of the Ontario Securities Act.

[29] See Menegon v. Philip Services Corp., 2001 28396 (ON SC), [2001] O.J. No. 5547, [2001] O.T.C. 989 (S.C.J.), at para. 38, affd 2003 36468 (ON CA), [2003] O.J. No. 8, 167 O.A.C. 277 (C.A.), at para. 4; Kerr v. Danier Leather Inc., 2004 8186 (ON SC), [2004] O.J. No. 1916, [2004] O.T.C. 397 (S.C.J.), at paras. 111-13, revd on different grounds (2005), 2005 46630 (ON CA), 77 O.R. (3d) 321, [2005] O.J. No. 5388 (C.A.), affd [2007] S.C.J. No. 44, 2007 SCC 44. However, Mr. Tucci argues that these cases are distinguishable because on their facts they were about secondary market purchasers who purchased after the distribution in the primary market had been completed and thus the courts in those cases did not actually address and did not need to address his interpretation of s. 130(1), which he submits is the correct interpretation, both as a matter of statutory interpretation and as a matter of the public policy of the Act.

[30] As a matter of public policy, he submits that during the period of the distribution of securities in the primary market, purchasers in the primary market and in the secondary market are similarly situated and, therefore, it is good public policy to treat these similarly situated persons the same rather than imposing a leave requirement on the purchasers in the secondary market.

[31] Mr. Tucci concedes that the British Columbia Court of Appeal decision in Pearson v. Boliden Ltd., [2002] B.C.J. No. 2593, 2002 BCCA 624 stands against his interpretation of s. 130(1).

[32] Pearson v. Boliden cannot be factually distinguished since it did address the precise issue of whether purchasers in the secondary market during the currency of the primary market distribution had a claim under the British Columbia equivalent of Ontario Securities Act s. 130. [page302]

[33] The B.C. court held that the statutory rights of action for prospectus misrepresentation were available only to investors who purchased directly from an underwriter, issuer or selling security holder, and not to others who purchased "during the period of distribution". However, Mr. Tucci submits that the case is not binding on this court and was wrongly decided.

[34] Mr. Tucci also relies on Lawrence v. Atlas Cold Storage Holdings Inc., [2006] O.J. No. 3748, 34 C.P.C. (6th) 41 (S.C.J.), at para. 42, supp. reasons [2007] O.J. No. 351, 154 A.C.W.S. (3d) 1055 (S.C.J.). He submits that in this certification motion case, Justice Hoy was not prepared to find that a proposed plaintiff that had purchased shares on the TSX did not have a claim under s. 130.

[35] For their part, all the defendants disagree with Mr. Tucci's interpretation of s. 130(1) of the Ontario Securities Act.

[36] The defendants submit that the conventional interpretation, and not Mr. Tucci's interpretation, is the correct interpretation. They argue that the conventional interpretation gives the section its plain meaning and is compliant with the principles of statutory interpretation.

[37] The defendants submit that although Pearson v. Boliden Ltd. is not binding on this court, it was correctly decided, and it is a persuasive judgment that should be adopted and followed in Ontario. In this regard, they note that in Pearson, the British Columbia Court of Appeal relied on Ontario authorities.

[38] The defendants submit that while the factual circumstances of the timing of the secondary market sales was different in Menegon v. Philip Services Corp., supra, and Kerr v. Danier Leather Inc., supra, the courts in those cases were clear that s. 130(1) is exclusively for claims in the primary market. And, they submit that, properly read, Lawrence v. Atlas Cold Storage Holdings Inc., supra, does not assist Mr. Tucci's argument about the interpretation of s. 130(1).

IV. Discussion

[39] The discussion can be quite brief. I agree with the submissions of the defendants and not those of Mr. Tucci.

[40] Mr. Tucci's interpretation of s. 130(1) is unnecessary and it is a strained interpretation.

[41] Under his interpretation, for s. 130(1) to include some secondary market purchasers, those purchasers would need to both (1) purchase "during the period of distribution or during distribution to the public"; and (2) purchase "a security offered by the prospectus". However, a secondary market purchaser does not purchase a security offered by a prospectus. Rather, a [page303] secondary market vendor. The price of the security being sold and the terms of sale for the secondary market sale may and likely will be different in the primary market from the secondary market.

[42] Mr. Tucci's interpretation would have the anomalous result that some s. 130 claimants; i.e., those who purchased in the secondary market during the period of distribution of the primary market would not have the remedy of rescission that is available to those s. 130 claimants who purchased in the primary market. This follows because the right to elect rescission is available only against (1) the issuers of the security; (2) selling security holders; and (3) underwriters. Vendors in the secondary market are none of these classes of vendors.

[43] Mr. Tucci's interpretation is not necessary to serve the purposes of the Act which offers (1) a s. 130 cause of action for purchasers in the primary market; and (2) with leave, a Part XXIII.1 cause of action for purchasers in the secondary market. There is no legislative purpose to be served by adding a special class of secondary market purchasers whose purchases happen to occur during the primary market's operation.

[44] I agree with the conclusion of the British Columbia Court of Appeal in Pearson v. Boliden Ltd., supra.

[45] I agree with the defendants that Lawrence v. Atlas Cold Storage Holdings Inc., supra, does not assist Mr. Tucci's argument about the interpretation of s. 130(1) of the Ontario Securities Act. Justice Hoy's supplementary reasons, at para. 10, make it clear that she was not addressing the point raised in Pearson v. Boliden.

[46] However, to be fair to Mr. Tucci's argument, it also appears that in Lawrence v. Atlas Cold Storage Holdings Inc., a purchaser of shares sold through the TSX -- Canada's major secondary marketplace for securities -- was allowed to advance a s. 130(1) claim. The explanation for this part of the decision in Lawrence v. Atlas Cold Storage Holdings Inc. was that the vendor using the TSX might have been an underwriter making the first sale -- a primary market sale -- of the shares. If, however, the decision in Lawrence v. Atlas Cold Storage Holdings Inc. thus means that some secondary market purchasers have s. 130(1) claims, then I would not follow the decision and I would regard Lawrence v. Atlas Cold Storage Holdings Inc. as wrongly decided on this particular point. [page304]

V. Conclusion

[47] For the above reasons, the proposed class definition should be revised to delete the words "(i)" and the words "or (ii) on the TSX, Pure Trading, Alpha or Chi-X Canada trading platforms between July 15, 2010 and 20, 2010".

[48] I conclude that with that revision, this action should be certified as a class action under the Class Proceedings Act, 1992.

[49] I have signed the "narrow" version of the certification order.

[50] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the defendants' submissions within 20 days of the release of these reasons for decision followed by Mr. Tucci's submissions within a further 20 days.

Motion granted.

End of Document