Goldsmith v. National Bank of Canada

Ontario Reports

Ontario Superior Court of Justice,

Belobaba J.

May 20, 2015

126 O.R. (3d) 191 | 2015 ONSC 2746

Case Summary

Securities regulation — Action — Leave — Plaintiff seeking leave to bring action for secondary market misrepresentation under Part XXIII.1 of Securities Act against collapsed company's bank — Leave denied — Plaintiff failing to establish that there was reasonable or realistic chance that action would succeed — Provision of conventional banking services or financial advisory services not in itself making bank "promoter" — Plaintiff failing to provide evidence that defendant took steps to actually found or organize business in question — Plaintiff failing to establish that there was reasonable possibility that trial court would find that defendant "knowingly influenced" release of impugned disclosure documents even if defendant was promoter — Securities Act, R.S.O. 1990, c. S.5, Part XXIII.1.

In 2011, ORE was reorganized via a plan of arrangement into two stand-alone publicly traded companies, one of which was Poseidon. Following a successful public offering, Poseidon revealed that it had materially overstated revenues and accounts receivable. Poseidon ultimately collapsed. It was delisted and its assets were liquidated. The plaintiff moved for leave to bring an action for secondary market misrepresentation under Part XXIII.1 of the Securities Act against Poseidon's bank. She alleged misrepresentations in Poseidon's financial statements and corporate disclosure documents, and claimed that the defendant was liable for those misrepresentations on the basis that it was a "promoter" as defined in the Act and as such knowingly influenced the release of the impugned documents.

Held, the motion should be dismissed.

A plaintiff seeking leave under Part XXIII.1 of the Act has to provide the motion judge with (1) a plausible analysis of the applicable legislative provisions; [page192] and (2) sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. The "reasonable possibility" threshold requires that there be a reasonable or realistic chance that the action will succeed. The plaintiff failed to meet that threshold. A bank does not become a promoter simply by providing traditional banking services or underwriting services, or simply by providing ideas, advice and ongoing assistance. The defendant did nothing more than provide conventional banking services. It did not take the initiative in founding, organizing or substantially reorganizing either ORE or Poseidon. It did not become a promoter simply by providing loans that were "essential", in the plaintiff's word, to the success of Poseidon's equity offering. The defendant did not act as an agent of its wholly owned subsidiary, NBF, which played an important role in the reorganization. Even if there was an agency relationship between the defendant and NBF, NBF's role in the reorganization was restricted to that of financial advisor and, later, an underwriter on the public offering. It was the board of directors that initiated the reorganization through a plan of arrangement that was approved by the board, the shareholders and the court. The advisory services provided by NBF did not make NBF a promoter. Finally, the plaintiff had presented insufficient evidence that, even if the defendant and NBF were promoters, they knowingly influenced the release of the information circular and the short-form prospectus. Both disclosure documents were released under the direction and authorization of the board of directors. The defendant did not knowingly influence the release of the documents simply by providing loans to the issuer pursuant to credit agreements.

Theratechnologies Inc. v. 121851 Canada Inc., [2015] S.C.J. No. 18, 2015 SCC 18, 382 D.L.R. (4th) 600, 470 N.R. 123, 34 B.L.R. (5th) 173, 2015EXP-1230, J.E. 2015-678, EYB 2015-250782, 251 A.C.W.S. (3d) 343, apld

Other cases referred to

Bank of Montreal v. Canadian Westgrowth Ltd., 1992 ABCA 94, [1992] A.J. No. 371, 2 Alta. L.R. (3d) 221, 135 A.R. 49, 33 W.A.C. 49, 33 A.C.W.S. (3d) 561 (C.A.), affg [1990] A.J. No. 125, 72 Alta. L.R. (2d) 313, 102 A.R. 391, 19 A.C.W.S. (3d) 755, 1990 CanLII 5493 (Q.B.); Belteco Holdings Inc. (Re), 1996 LNONOSC 512, 19 OSCB 6623; Canada Life Assurance Co. v. Canadian Imperial Bank of Commerce (1974), 1974 CanLII 886 (ON CA), 3 O.R. (2d) 70, [1974] O.J. No. 1839, 44 D.L.R. (3d) 486, 1974 CarswellOnt 887 (C.A.); Di Gennaro v. BMO Nesbitt Burns Inc., [2007] O.J. No. 3934, 2007 CarswellOnt 6575, 161 A.C.W.S. (3d) 53 (S.C.J.); Dobbie v. Arctic Glacier Income Fund, [2011] O.J. No. 932, 2011 ONSC 25, 3 C.P.C. (7th) 261 (S.C.J.); Goldsmith v. National Bank Financial Inc., Court File No. CV-14-50924600CP; Gordian Financial Group Inc. (Re), 1995 LNABASC 250, 4 ASCS 1690 (Alta. Sec. Comm.); Harrington v. Dow Corning Corp., 1998 CanLII 4613 (BC SC), [1998] B.C.J. No. 831, 55 B.C.L.R. (3d) 316, 78 A.C.W.S. (3d) 903 (S.C.); In the Matter of Shawnee Chiles Syndicate, 10 S.E.C. 109 (1941); Ironworkers Ontario Pension Fund (Trustees of) v. Manulife Financial Corp., [2013] O.J. No. 3455, 2013 ONSC 4083, 44 C.P.C. (7th) 80, 230 A.C.W.S. (3d) 604 (S.C.J.); Kuefler v. National Bank Financial Inc., Court File No. CV-13-47455300CP; National Trust Co. v. Furbacher, [1994] O.J. No. 2385, 50 A.C.W.S. (3d) 1196 (Gen. Div.); Oklahoma-Texas Trust v. Securities and Exchange Commission, 100 F.2d 888 (1939); Osgoode Holdings Inc. (Re), 1992 LNONOSC 296, 15 OSCB 4586; Pioneer Distributors Ltd. v. Bank of Montreal, [1994] B.C.J. No. 2093, [1995] 1 W.W.R. 48, 97 B.C.L.R. (2d) 143, 28 C.B.R. (3d) 266, 50 A.C.W.S. (3d) 380, 1994 CanLII 1377 (S.C.); Townshend v. United States, 384 F.2d 1008, 181 Ct. Cl. 635 (1967); Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., [1997] O.J. No. 3754, 1997 CarswellOnt 3496, 74 A.C.W.S. (3d) 207 (C.A.), affg (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423, [1996] O.J. No. 1568, 2 O.T.C. 146, 62 A.C.W.S. (3d) 891 [page193]

Statutes referred to

Securities Act, R.S.O. 1990, c. S.5, Part XXIII.1 [as am.], ss. 1(1) [as am.], 59 [as am.], 138.1 [as am.], 138.3 [as am.], (1) [as am.], (d) [as am.], 138.8 [as am.], (1)(b)

Securities Act of 1933 (U.S.), 17 C.F.R. 230.405, s. 405

Authorities referred to

Allen, Thomas I.A., and Toronto Stock Exchange, Toward Improved Disclosure: A Search for Balance in Corporate Disclosure: Interim Report of the Committee on Corporate Disclosure (Toronto: Toronto Stock Exchange, 1995)

Companion Policy 33-105CP to National Instrument 33-105 Underwriting Conflicts

Companion Policy to National Instrument 41-101 General Prospectus Requirements

Supplement to the OSC Bulletin September 18, 2009 (2009), 32:38 O.S.C.B. (Supp-5)

MOTION for leave to bring an action under Part XXIII.1 of the Securities Act.

Dimitri Lascaris and Sajjad Nematollahi, for plaintiff.

Paul Steep, Eric Block and Byron Shaw, for defendant.

[1] BELOBABA J.: — This is one of 13 class actions that were filed in three jurisdictions after the collapse of a publicly traded energy services company called Poseidon Concepts. The lawsuits allege numerous misrepresentations in the Poseidon financial statements and corporate disclosure documents. In this action, under Part XXIII.1 of the Securities Act (the "Act")[^1] the plaintiff claims that National Bank of Canada is liable for the company's misrepresentations on the basis that the bank was a "promoter" as defined in the Act (and thus an "influential person") and as such knowingly influenced the release of the impugned disclosure documents.[^2] [page194]

[2] In most securities class actions, the primary defendant is the publicly traded corporation.[^3] Here, the primary defendant has filed for insolvency protection. Aggrieved shareholders must therefore identify other plausible targets (read "deep pockets") that were involved in the Poseidon debacle -- for example, banks, financial advisors, lawyers and accountants. But these secondary targets will only be found liable if they are shown to be an "influential person" that "knowingly influenced the responsible issuer to release the [impugned] document".[^4]

[3] The definition of "influential person" is limited to four categories: a control person; a promoter; an insider who is not a director or officer of the responsible issuer; or an investment fund manager if the responsible issuer is an investment fund.[^5] In most cases where banks or professional advisors are named as defendants, such as the case here, the only feasible liability category is "promoter." But under the Act, "promoter" is very specifically defined to mean:

[A] person or company who, acting alone or in conjunction with one or more other persons, companies or a combination thereof, directly or indirectly, takes the initiative in founding, organizing or substantially reorganizing the business of an issuer[.][^6]

[4] In other words, to succeed at trial, the plaintiff will have to show that the defendant bank or professional advisor provided more than just conventional banking or advisory services -- rather, that it directly or indirectly took the initiative in founding, organizing or substantially reorganizing the business of the issuer.

[5] But first the plaintiff must clear the leave threshold.

The Leave Threshold

[6] An action for secondary market misrepresentation under Part XXIII.1 of the Act requires leave of the court. Leave will be granted under s. 138.8 if the court is satisfied that the action is brought in good faith and "there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff".[^7] [page195]

[7] Here there is no suggestion that the action is not brought in good faith. Therefore, the only issue before this court is whether there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

[8] In Theratechnologies,[^8] the Supreme Court recently provided a much-needed clarification of the "reasonable possibility" standard. The court made clear that the leave threshold was more than a "speed bump" and that judges should undertake "a reasoned consideration of the evidence to ensure that the action has some merit".[^9] The "reasonable possibility" threshold, said the court, requires that there be a "reasonable or realistic chance that the action will succeed".[^10] The court explained:

A case with a reasonable possibility of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim. . . . A full analysis of the evidence is unnecessary . . . What is required is sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant's favour.[^11]

[Emphasis in original]

[9] Henceforth, class action plaintiffs seeking leave under Part XXIII.1 of the Act will have to provide the motion judge with (1) a plausible analysis of the applicable legislative provisions and (2) sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

[10] The Supreme Court has re-established the leave threshold as "a robust deterrent screening mechanism" to ensure "that cases without merit are prevented from proceeding".[^12] The statutory language of course remains unchanged but it is now clear that the words "reasonable possibility" have a common sense content and that the leave hurdle is more than a speed bump.

[11] In this motion for leave, the plaintiff fails to clear both prongs -- she has presented neither a plausible analysis of the applicable legislative provision nor sufficient evidence to persuade the court that there is a reasonable possibility that the action will succeed at trial. [page196]

[12] For the reasons that follow, the motion for leave is dismissed.

Some Background

[13] In the summer of 2011, Open Range Energy Corp. was reorganized via a plan of arrangement into two stand-alone publicly traded companies: one, the spin-out, continued the oil and gas exploration business under the name Open Range Energy; and the other, renamed Poseidon Concepts, continued the tank rental business. The plan of arrangement (the "arrangement") was approved by the company's board of directors, the shareholders and the Alberta Court of Queen's Bench in the fall of 2011.

[14] Following a successful public offering, Poseidon revealed in a series of corrective disclosures made between November 2012 and February 2013 that it had materially overstated revenues and accounts receivable. In April 2013, Poseidon collapsed and filed for CCAA protection with more than $94 million in liabilities. Poseidon's market cap, once in excess of $1.2 billion, evaporated within months. The company was cease-traded in February 2013 and was delisted in May 2013. Its assets have been liquidated and it is no longer a going concern.

[15] With the primary corporate target no longer available, aggrieved shareholders who had acquired or disposed of Poseidon shares during the period between the time when the impugned documents (the information circular and proxy statement of Open Range and the short-form prospectus of Poseidon)[^13] were released and the misrepresentations publicly corrected, have targeted the banks, investment advisors and accounting firms that were involved in this corporate collapse. As I have already noted, 13 actions have been commenced in three jurisdictions. This one is directed at the National Bank of Canada (the "bank").

Positions of the Parties

[16] The plaintiff says that the bank, acting in conjunction with others, including its capital markets subsidiary National [page197] Bank Financial ("NBF"), directly or indirectly took the initiative in reorganizing Open Range Energy and in founding and organizing the business of Poseidon. The bank was therefore a "promoter" as defined in the Act ("promoter") and thus an "influential person" of Poseidon, within the meaning of s. 138.3 of the Act. Further, says the plaintiff, the bank knowingly influenced the release of the impugned documents and is therefore liable for the misrepresentations. Or at the very least (and this is all the plaintiff is required to show on this leave motion) that there is a reasonable possibility that this claim against the bank will succeed at trial.

[17] The defendant bank responds that the plaintiff's claim has no reasonable possibility of success and the motion for leave should be dismissed. The evidence is clear, says the bank, that it did nothing more than provide conventional banking services. It did not take the initiative in founding, organizing or substantially reorganizing either Open Range Energy or Poseidon. Therefore it was not a promoter. Its wholly owned subsidiary, NBF, played an important role in this reorganization but only as a financial advisor and later as an underwriter on the public offering. But it was the board of directors, says the bank, that initiated the reorganization of Open Range (and the founding of Poseidon) through a plan of arrangement that was approved by the board, the shareholders and the Alberta court. It was the board that made the decision to offer shares in Poseidon following the approval of the arrangement. Simply because NBF provided investment advisory services to the board on the public offering, argues the bank, did not make it a promoter.

[18] And even if the bank (or NBF) is found to be a promoter, adds the bank, there is no evidence that either of them "knowingly influenced" the issuer to release the documents containing the alleged misrepresentations. The leave test in s. 138.8 of the Act, says the bank, was included in the legislation precisely to prevent speculative claims of this sort from proceeding.

[19] For the reasons that follow, I agree with the bank.

Analysis

[20] As already noted, the only issue before me is whether this court is satisfied that "there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff".[^14] It is important to remember that the evidentiary hurdle is not the very low "some basis in fact" or "some evidence" standard that [page198] applies in certification motions. Here, there is an actual preliminary merits analysis -- the plaintiff must satisfy the court on the evidence presented that there is a reasonable possibility that she will succeed at trial.

[21] In Theratechnologies,[^15] the Supreme Court noted that the leave threshold can only be cleared by presenting a plausible analysis of the applicable legislative provisions, and sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. In my view, there is really only one hurdle -- sufficient evidence of a reasonable possibility that the action will succeed at trial. But in clearing this hurdle, the plaintiff must necessarily relate the evidence to a reasonable interpretation of s. 138.3 of the Act. In most cases, the correlation will be self-evident or at least plausible. Not so in this case.

(1) Has the plaintiff offered a plausible analysis of the applicable legislative provisions?

[22] As already noted, the plaintiff must satisfy the court that its argument that bank was a promoter who knowingly influenced the release of the impugned documents has a reasonable possibility of succeeding at trial. I am not concerned with the legal plausibility of the "knowingly influence" component. It is certainly plausible that a promoter could knowingly influence the release of the impugned disclosure documents.

[23] My concern is with the promoter component and whether the plaintiff has offered a plausible analysis of this particular provision in the context herein. I find that she has not. I say this because most of the plaintiff's submissions impugn everyday commercial conduct that does not fall within any plausible interpretation of promoter.

[24] For example, the plaintiff points repeatedly to the fact that the bank played a key role as a commercial lender and that NBF's ideas and involvement as the financial advisor and underwriter were "essential" to the success of the arrangement and the founding of Poseidon. However, as even the plaintiff eventually concedes, a bank does not become a promoter simply by providing traditional banking services. Nor does a professional advisor become a promoter simply by providing ideas, advice and ongoing assistance. To show that the bank or NBF were promoters, the plaintiff must show that they took the initiative in founding or organizing the business of Poseidon. [page199]

[25] Everyone understands the plain meaning of "taking the initiative" -- that is, doing something without being asked to do so. For example, after a snow storm, I may take the initiative and shovel my elderly neighbour's sidewalk. However, if I do no more than tell my neighbour about an easy-to-use snow shovel that is now available at the corner hardware store and he goes and buys the shovel and clears the snow himself, the most I can say is that I took the initiative to provide some snow shovel advice. I cannot say that I took the initiative to shovel his sidewalk. It was my neighbour who made the decision to act on my advice, purchase the shovel and clear the snow himself.

[26] A bank that provides conventional banking services, however important they may be to the borrower is not without more a promoter. An investment bank that makes presentations, pitches ideas to company executives, provides advisory services for a fee and plays a central or even crucial role in a client's reorganization is not without more a promoter. Why? Because lending money or providing financial and corporate advice, even if it is absolutely essential to the success of the project, cannot reasonably be described as "taking the initiative to found or organize" the business of the borrower/client.

[27] As the Alberta Securities Commission noted in Gordian Financial Group[^16] when comparing the professional advisor to Mr. Bucci, who was the owner of the company:

It is not contemplated that persons who are casually connected to the company or who are advisers would be promoters[.]

[The advisor] did not have any authority to take any action with respect to the reorganization. He did not have any decision-making power. He was merely researching and advising Mr. Bucci.

. . . The promoters are those who are central to the reorganization, and as the Act says, they must take the initiative in the reorganization . . . they are the ones who are at the very heart of the reorganization.

Taking the initiative in finding target companies for the reorganization is not enough. Those are just methods of doing the reorganization. Gordian Financial was Mr. Bucci's company, and he was the one who would make the decisions as to what would happen by way of reorganization, and he was the one who was taking the initiative within the meaning of the Act.

Furthermore, merely coming up with the idea that there should be a reorganization does not make one a promoter . . . if the definition was that wide, [page200] many lawyers and tax accountants would become promoters within the meaning of the Act, and that is clearly not what was intended.[^17]

[28] Just because the idea of Open Range's reorganization was "hatched" (the plaintiff's word) sometime in July 2011 between Open Range's then CFO Lyle Michaluk, and NBF's lead investment banker Sandy Edmonstone, does not make either the bank or NBF a promoter.

[29] Nor does being an underwriter make NBF a promoter. The provision of underwriting services does not constitute founding, organizing or substantial reorganization of an issuer's business. Indeed, the Act specifically excludes underwriters from the "influential person" definition.[^18] As the Ontario Securities Commission noted in a bulletin in relation to the offering memorandum exemptions:

Under securities legislation, persons who receive consideration solely as underwriting commissions or in consideration of property and who do not otherwise take part in the founding, organizing or substantially reorganizing the issuer are not promoters. Simply selling securities, or in some way facilitating sales in securities, does not make a person a promoter under the offering memorandum exemptions.[^19]

[30] Both sides agree, however, that given certain facts a bank or a professional advisor may well cross the definitional line and become a promoter.[^20] What are these additional facts -- what is the "something more" -- that will allow this court to conclude that there is a reasonable possibility that the "promoter" characterization will succeed at trial? In my view, the plaintiff must provide evidence that the bank or the professional advisor itself [page201] took steps, directly or indirectly, to (actually) found or organize the business in question -- for example, by funding the required incorporations, organizing the board of directors, actively managing the company or making the key business decisions. In other words, being at the "very heart"[^21] of the endeavour.

[31] I say this not only because of the plain meaning of the statutory language but also because the definition of "promoter" in Canadian securities legislation has a very specific history. The concept was adopted verbatim from s. 405 of the United States' Securities Act of 1933.[^22] The mischief being targeted in the American depression-era securities law was the "get rich quick" mining promoter -- the enterprising hustler who acquires a mining property, vends it into a publicly traded shell, promotes its potential with misrepresentations, pumps up the stock price and then dumps his own holding, leaving aggrieved shareholders searching for wrongdoers.

[32] The promoter liability provision is obviously no longer confined to mining scams. Today, the reach is much broader and the interpretive context is generally more legitimate. But the continuing theme as set out in the American case law remains -- a promoter is a person who "brings about the incorporation and organization of the corporation . . . brings together the persons who become interested in the enterprise, aids in procuring subscriptions, and sets in motion the machinery which leads to the formation of the corporation itself".[^23]

[33] I return then to my original point. Merely providing conventional banking services or financial advisory services without more does not make the bank or the advisor a promoter. And, to the extent that the plaintiff tries to suggest otherwise, she is not offering a plausible interpretation of the promoter provision.

[34] To be fair, the plaintiff also points to evidence that she says provides the "something more" that transforms the conventional bank or advisor into a promoter. I agree with counsel that the question whether a person is a promoter is ultimately a question of fact.[^24] It is now time to turn to the (additional) [page202] evidence presented by the plaintiff. I will first deal with the promoter evidence and then the "knowingly influence" evidence.

(2) Has the plaintiff presented sufficient evidence to persuade the court that there is a reasonable possibility that the trial court will find that the bank was a promoter as defined in the Act?

[35] The bank. As I have already explained, I accept the submission that the bank discharged ordinary commercial banking functions by providing loans to Open Range and Poseidon, on its own and as part of a lending syndicate. It is relevant to note, as well, that the bank was not even at the centre of Poseidon's banking relationship. In late 2011, Poseidon began looking to other banks for financing and in the spring of 2012, Poseidon negotiated a $100 million credit facility led by TD. The bank had the smallest participation in that facility of any of the syndicate banks.

[36] The bank did not become a promoter simply by providing loans that were "essential" (plaintiff's word) to the success of Poseidon's equity offering. Nor would the bank become a promoter even it knew (as alleged by the plaintiff) that a disproportionate and unsustainable amount of debt had been allocated in the arrangement to Poseidon and that Poseidon was thus doomed to fail -- all of which, by the way, is strongly denied by the bank.[^25]

[37] The plaintiff's "something more" line of argument appears to focus almost completely on what was said or done by the bank's wholly owned subsidiary, NBF. [page203]

[38] An agency relationship? I pause at this point to note that the only way, on the evidence before me, that the bank can be found even possibly liable under s. 138.3 of the Act is if it can be shown that, in its dealings with Open Range or Poseidon, it was acting through NBF as its agent. In my view, however, the agency argument cannot succeed.

[39] NBF carries on business providing traditional investment banking services including financial advisory services, underwriting and equity research. While NBF is a wholly owned subsidiary of the bank, it is a separate corporate entity from the bank. The bank and NBF carry on different and distinct businesses. In its corporate structure, the bank is organized no differently than any of the other major Canadian financial institutions. All of the Canadian "Schedule 1" banks also own investment banks and dealers, such as CIBC/Wood Gundy, BMO/ Nesbitt Burns and Scotia Bank/Scotia Capital.

[40] For a parent corporation to be liable for the acts of its subsidiary (i) the parent must have complete control of the subsidiary such that the subsidiary exercises no discretion independently of the parent; and (ii) the subsidiary must have been incorporated for a fraudulent purpose or is being used as a shield for improper activity.[^26]

[41] There is no allegation that the bank exercised complete control over NBF or that it was incorporated for a fraudulent purpose. The evidence establishes that investment bankers and advisors at NBF exercised discretion independently and discharged separate functions, providing standard investment brokerage services. That NBF is a subsidiary of the bank does not per se establish an agency relationship.[^27] Nor does the fact that [page204] the bank and NBF have overlapping management or board committees establish an agency relationship.[^28]

[42] In short, I find that the plaintiff has not established an agency relationship between the bank and NBF. Therefore, NBF's actions cannot be used to support the argument that the bank was a promoter. Given that NBF is not a defendant[^29] and given that I have already determined that the bank's actions alone are not enough to bring it within the definition of promoter, I could stop here and dismiss this motion. However, for the sake of completeness, I will continue my analysis on the assumption that there was an agency relationship between the bank and NBF, making the bank liable if NBF was indeed a promoter. I will consider the evidence presented by the plaintiff that by words and action NBF crossed the definitional line and became a promoter.

[43] NBF. The plaintiff says there are seven categories of evidence that in combination transform NBF from a conventional financial advisor into a promoter: (1) the close personal relationships between NBF and Poseidon; (2) the conflicts of interest; (3) the e-mails; (4) the termination of negotiations with Peyto; (5) the NBF fairness opinion; (6) the actions of an NBF analyst; and (7) the force of the lead investment banker's personality.

[44] In my view, none of this evidence, alone or in combination, transforms NBF into a promoter. Nor is it enough to clear the "reasonable possibility of success" hurdle. I will consider each of these seven categories in turn.

[45] The close personal relationships. I agree there were close relationships. Sandy Edmonstone, the lead NBF advisor, and [page205] Lyle Michaluk, the Poseidon CEO, were college classmates and remained close friends. Two insiders of Poseidon at the time of the arrangement were former employees of either the bank or NBF. A senior bank executive persuaded Poseidon to hire his son. But this is not evidence that the bank (or NBF) took the initiative in founding, organizing or substantially reorganizing Poseidon's business.

[46] The conflicts of interest. The plaintiff argues that there was no separation between the bank's lending and investment banking functions. She also argues that Mr. Edmonstone had a major personal stake in Poseidon and, by his own account, may have been the largest individual shareholder other than Poseidon's insiders. This explains, says the plaintiff, why the lead NBF advisor was urging Poseidon to increase dividends, the payment of which led to the company's collapse. This latter correlation is vehemently denied by the defendant. But even if it is true, and even if the bank and NBF's involvement in this reorganization was riddled with conflicts of interest, this again is not evidence that either the bank or NBF were Promoters as defined in the Act. Nor does it come close to dislodging the evidence that shows that it was the board of directors that made the required business decisions (including the decisions about the level and payment of dividends) and that it was therefore the board that took the initiative in founding or organizing Poseidon.

[47] The e-mails. The plaintiff obtained a large number of non-public business records, including dozens of emails, from Poseidon (or more accurately from the insolvent company's monitor under the CCAA filing). This evidence, says the plaintiff, shows that the bank and NBF were at the very heart of the corporate reorganization and were thus promoters and "influential persons" and clearly liable for the misrepresentations in question. But here again, there is no proof in the pudding. The e-mail exchanges certainly shed light on the close relationships, the alleged conflicts of interest and the progress of the overall transaction. But there is little to nothing in the way of evidence that would support the plaintiff's argument that the bank and/or NBF were promoters.

[48] Consider, for example, some of the more colorful e-mails referred to by the plaintiff:

(i) Lyle Michaluk, then CFO of Open Range, commenting to Sandy Edmonstone, the lead NBF advisor, about the Poseidon marketing: "Marketing went well. Guys drinking the Poseidon koolaid . . . And hopefully asking your boys for refills!" [page206]

(ii) Sandy Edmonstone, NBF, to Scott Dawson, Poseidon chairman, about how NBF helped build the company: "Here are the trade stats for new and old open range. I have highlighted Altacorp's standing. As promised I have put some thought into their inclusion and frankly their performance doesn't justify it. When we started at NBF it was prove it and we did. I have a very difficult time supporting a firm that tried, and went out of their way, to harm the franchise we built."

(iii) Matt McKenzie, Poseidon CFO, to Dave Belcher, Poseidon VP finance, complaining that a hitherto quiescent and "rubber stamp" board was now coming to life and demanding management's time on the collectability of bad debts: "These guys have been a rubber stamp Board and completely ignored their fiduciary duty for a year, only now to panic."

[49] The plaintiff argues that Mr. Edmonstone's statement about how NBF built or helped build Open Range/Poseidon is some evidence that NBF was indeed a promoter that took the initiative to found or organize Poseidon. Even if this innocent boast amounts to some (self-serving) evidence of the undeniably important role that NBF played in the founding of Poseidon, I cannot seriously conclude on the basis of this one e-mail alone that there is a reasonable possibility that the promoter argument will succeed at trial.

[50] Next, the plaintiff argues that Mr. McKenzie's "rubber stamp" e-mail shows that the board was not an independent decision-maker and boldly asks that an inference be drawn that that the corporate decisions were really being made by Mr. Edmonstone and NBF, who thus became promoters.

[51] In my view, no such inference can be drawn from an e-mail that was sent more than a year after the reorganization, by a company executive who was obviously expressing frustration at the apparent change in the board's administrative style. I cannot reasonably find on the basis of this one e-mail that the board had abdicated its responsibilities for the arrangement a year earlier and were de facto letting NBF make all the decisions. Indeed, when I review the "Background to the arrangement" portion of the circular, I note that there was a proper board process and that the shareholders voted on and approved the arrangement, as did the Alberta Court. I also agree with the bank that even if one were to assume that the Open Range or Poseidon board was a "rubber stamp," the implication would be that it was a rubber stamp for "management", not for third parties such as the bank. [page207]

[52] In short, other than providing some colour, the e-mails add nothing by way of persuasive evidence that would help the plaintiff clear the leave threshold. None of the communications between NBF and OpenRange/Poseidon taken alone or in combination makes NBF a promoter.

[53] The termination of negotiations with Peyto. The plaintiff says that Mr. Edmonstone "influenced" the arrangement by "causing" Open Range to terminate negotiations with Peyto Exploration & Development Corp. There is no evidence for this assertion. The actual e-mails show that Mr. Edmonstone was providing financial advice that is typical of investment bankers in these circumstances. He communicated with Peyto regarding the terms of the proposed transaction, received e-mails from Peyto expressing their disappointment that the transaction did not close (which he shared with Open Range executives) and advised Open Range executives after the failure of the Peyto transaction that Peyto's share price had fallen. In any event, the decision not to negotiate further with Peyto was a decision made by Open Range not by Mr. Edmonstone.

[54] The NBF fairness opinion. In September of 2011, NBF provided a fairness opinion to the Open Range board of directors advising that from a financial point of view the reorganization was fair to the shareholders. As I have already noted, both the shareholders and the Alberta Court approved the arrangement. The fairness opinion disclosed the Bank's and NBF's role in the transaction and the fact that NBF was being paid a fee for its services as a financial advisor, including the preparation of the fairness opinion. There is no evidence that the bank (directly, or through NBF) had any knowledge of, or involvement in, the financial assumptions made by Open Range on which NBF expressly relied and on which the fairness opinion was expressly conditioned.

[55] The plaintiff alleges that the fairness opinion failed to disclose that members of the NBF banking and advisory team held shares of Open Range. But a failure to disclose a shareholding does not make NBF a promoter. The real point, however, is this. The provision of a fairness opinion, however important to the success of the transaction, is not evidence that NBF took the initiative of founding, organizing or substantially reorganizing the business.

[56] The actions of an NBF analyst. The plaintiff says that the bank is a promoter because NBF analyst Greg Colman published earnings estimates for Poseidon that exceeded the guidance provided by Poseidon management. The defendant points out that many analysts, including RBC Capital Markets and [page208] BMO Capital Markets, were also expressing optimism that earnings would exceed the estimates of management. In any event, an analyst's optimistic outlook on future share earnings is not "promotion" within the meaning of the Act. Commenting on future earnings has nothing to do with organizing or substantially reorganizing the business of the issuer.[^30]

[57] The force of personality. In an e-mail dated December 10, 2012, one outside director warned another outside director that NBF advisor Sandy Edmonstone had some influence over the Poseidon board chairman, Scott Dawson: "I think we need to be wary of Sandy and his influence on Scott." But here again, even if such were the case, a forceful personality does not by itself transform an investment advisor or his employer into a promoter. Indeed, counsel for the plaintiff could provide no legal support for the proposition that a forceful personality alone can make an investment banker or his employer a promoter. The excerpt from the Allen committee report, relied on by the plaintiff, mentions "force of personality" but in the context of someone who is already a promoter and declines an official position with the company, but continues to exert influence over the company through economic leverage or "force of personality".[^31] This is obviously not the case here.

[58] The advisory services provided by NBF do not make NBF a promoter. The decisions to spin out the oil and gas exploration business and to take Poseidon public were decisions made by the boards of Open Range and Poseidon. Even if the bank could be liable for the actions of NBF, none of the services provided by NBF constitute taking the initiative of founding, organizing or substantially reorganizing the issuer's business. The additional seven categories of evidence discussed above add nothing to the analysis. [page209]

(3) Has the plaintiff presented sufficient evidence to persuade the court that there is a reasonable possibility that the trial court will find that the bank knowingly influenced the release of the disclosure documents?

[59] Here again, the plaintiff has presented insufficient evidence that even if the bank or NBF were promoters that they knowingly influenced the release of the information circular and the short-form prospectus. The short answer is that both disclosure documents were released under the direction and authorization of the board of directors. The bank did not knowingly influence the release of the circular or prospectus simply by providing loans to the issuer pursuant to credit agreements, either alone or as part of a syndicate. I also agree with the defendant that even if NBF is found to be the bank's agent that knowing influence cannot be inferred merely from the fact that NBF was a financial advisor, provided a fairness opinion or was the lead underwriter in the public offering.

[60] In a search for additional evidence, the plaintiff points to the "connected issuer" disclosure[^32] and to the fact that NBF signed the prospectus. Connected issuer disclosure under NI 33-105 is made to acknowledge that a relationship may exist between an issuer and registrant that "might give rise to a perception that they are not independent of each other in connection with a distribution".[^33] Here, the connected issuer disclosure advised the market that the bank was a lender to Poseidon. But as I have already determined, the lending relationship between the bank and Poseidon does not make the bank or NBF an "influential person", nor is it evidence that the bank or NBF "knowingly influenced" the disclosure of the circular or prospectus. And the fact that NBF signed the prospectus qua "underwriter" as it was obliged to do under s. 59 of the Act is also not evidence that NBF "knowingly influenced" its release.[^34] [page210]

[61] It is certainly possible for a promoter to knowingly influence the release of corporate disclosure documents. But here no such evidence was presented.

Conclusion

[62] I believe it was Otto von Bismarck who said that there are two things you never want to see being made: sausages and laws. Perhaps it's time to add a third: investment banking transactions. There have been too many stories in recent years about ethical breaches and conflicts of interest at both institutional and individual levels, especially south of the border. But even if that were the case here, and I do not suggest that it was, it still would not be germane to the issue at bar which concerns only the leave threshold.

[63] I have now completed "a reasoned consideration of the evidence to ensure that the action has some merit" as required by the Supreme Court in Theratechnologies.[^35] I find that the plaintiff has not satisfied the reasonable possibility of success test either with regard to the promoter issue or the "knowingly influenced" issue.

Disposition

[64] The motion for leave under s. 138.8 of the Act is dismissed.

[65] If the parties cannot agree on costs, they should forward brief written submissions -- the defendant bank within ten days and the plaintiff within ten days thereafter.

[66] I am obliged to counsel on both sides for the quality of their written and oral advocacy and for their supplementary written submissions.

Motion dismissed.

Notes

[^1]: Securities Act, R.S.O. 1990, c. S.5 (the "Act").

[^2]: Section 138.3 of the Securities Act provides that a person who acquires or disposes of the issuer's security during the period between the time when the impugned document was released and the misrepresentation publicly corrected has a right of action for damages (without having to prove reliance) against "each influential person . . . who knowingly influenced the responsible issuer . . . to release the [impugned] document". "Influential person" is defined in s. 1(1) to include a "promoter" and "promoter" is defined to mean "a person or company who . . . directly or indirectly, take the initiative in founding, organizing or substantially reorganizing the business of an issuer".

[^3]: See, for example, Ironworkers Ontario Pension Fund (Trustees of) v. Manulife Financial Corp., 2013 ONSC 4083, [2013] O.J. No. 3455, 44 C.P.C. (7th) 80 (S.C.J.).

[^4]: Section 138.3(1)(d) of the Act.

[^5]: The definition is set out in s. 138.1 of the Act.

[^6]: The definition is set out in s. 1(1) of the Act.

[^7]: Section 138.8 of the Act.

[^8]: Theratechnologies Inc. v. 121851 Canada Inc., [2015] S.C.J. No. 18, 2015 SCC 18.

[^9]: Ibid., at para. 38.

[^10]: Ibid., at para. 38.

[^11]: Ibid., at para. 39.

[^12]: Ibid., at para. 38.

[^13]: The information circular and proxy satement of Open Range dated September 30, 2011 and released in connection with the arrangement, and the short-form prospectus of Poseidon dated January 26, 2012 and released in connection with the $82.5 million equity offering, incorporated by reference the financial statements which (allegedly) contained numerous misrepresentations.

[^14]: Section 138.8(1)(b) of the Act.

[^15]: Supra, note 8.

[^16]: Gordian Financial Group (Re), 1995 LNABASC 250, 4 ASCS 1690 (Alta. Sec. Comm.), cited by this court in Dobbie v Arctic Glacier Income Fund, [2011] O.J. No. 932, 2011 ONSC 25 (S.C.J.).

[^17]: Ibid., at paras. 34-35 and 37-39.

[^18]: Recall that the definition of "influential person" includes "an insider who is not a director or officer of the responsible issuer". The definition of "insider" includes a person or company that has "beneficial ownership of, or control or direction over . . . securities of a reporting issuer carrying more than 10 per cent of the voting rights . . . excluding . . . any securities held by the person or company as underwriter in the course of a distribution". This exception is necessary because underwriters will sometimes hold securities during a distribution ù for example, in a bought deal where the issuer receives the proceeds of the distribution from the underwriters at a contractually agreed upon price and the underwriters accept the market risk of selling the offering at that price.

[^19]: Supplement to the OSC Bulletin September 18, 2009 (2009), 32:38 O.S.C.B. (Supp-5), at 108 (emphasis added).

[^20]: For an example where a lawyer was found to also be a promoter, see Osgoode Holdings Inc. (Re), 1992 LNONOSC 296, 15 OSCB 4586; referred to in Belteco Holdings Inc. (Re), 1996 LNONOSC 512, 19 OSCB 6623.

[^21]: Gordian Financial, supra, note 16, at paras. 34-35.

[^22]: Securities Act of 1933, 17 C.F.R. 230.405.

[^23]: Oklahoma-Texas Trust v. Securities and Exchange Commission, 100 F.2d 888 (1939), at pp. 893-94. Also see In the Matter of Shawnee Chiles Syndicate, 10 S.E.C. 109 (1941), at pp. 114-15; and Townshend v. United States, 384 F.2d 1008, 181 Ct. Cl. 635 (1967), at p. 1012 F.2d.

[^24]: See Companion Policy to National Instrument 41-101 General Prospectus Requirements, at s. 2.7: "The question of whether a particular person or company is a 'promoter' of an issuer is ultimately a question of fact to be determined in light of the particular circumstances."

[^25]: The bank says that the terms of the arrangement agreement, including the allocation of debt between Open Range and Poseidon, were determined by the board and the special committee of Open Range, and ultimately approved by the shareholders and the Alberta Court. There is no evidence that the bank, directly, or through individuals at NBF, had any knowledge that Poseidon would not be able to sustain the debt that was allocated to it in the arrangement. Further, says the bank, the plaintiff's argument does not make sense. The bank was a lender to Poseidon. Poseidon ultimately chose a syndicate led by TD, and the bank had the smallest participation in that syndicate. But like all the banks who lent to Poseidon, its loan was secured against Poseidon's assets. No bank would want to compromise its position by allocating unnecessary intercompany debt to Poseidon.

[^26]: Transamerica Life Insurance Co. of Canada v. Canada Life Insurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423, [1996] O.J. No. 1568 (Gen. Div.), at para. 22, affd [1997] O.J. No. 3754, 1997 CarswellOnt 3496 (C.A.); Harrington v. Dow Corning Corp., 1998 CanLII 4613 (BC SC), [1998] B.C.J. No. 831, 55 B.C.L.R. (3d) 316 (S.C.), at para. 5.

[^27]: Canada Life Assurance Co. v. Canadian Imperial Bank of Commerce (1974), 1974 CanLII 886 (ON CA), 3 O.R. (2d) 70, [1974] O.J. No. 1839, 1974 CarswellOnt 887 (C.A.), at para. 44; Pioneer Distributors Ltd. v. Bank of Montreal, [1994] B.C.J. No. 2093, 1994 CanLII 1377 (S.C.), at p. 19 (QL). As this court stated in Di Gennaro v. BMO Nesbitt Burns, [2007] O.J. No. 3934, 2007 CarswellOnt 6575 (S.C.J.), at paras. 8-9:

There is also no basis for implying an agency relationship where the parent and subsidiary have separate and distinct entities . . . Here, the wholly-owned subsidiary company is separate and distinct from the parent corporation. The companies have separate assets and separate entities[.]

The fact that the plaintiffs were clients of both BMO and Nesbitt does not create a claim against BMO on the facts pleaded. BMO was a lender and Nesbitt was an investment advisor with separate dealings with the same client. While the plaintiffs may have a claim against Nesbitt and its employee in negligence or breach of contract, no such claim can be founded against BMO.

[^28]: National Trust Co. v. Furbacher, [1994] O.J. No. 2385, 50 A.C.W.S. (3d) 1196 (Gen. Div.), at para. 13; Canada Life Assurance, supra, note 27, at para. 42. Also see Bank of Montreal v. Canadian Westgrowth, [1990] A.J. No. 125, 1990 CanLII 5493 (Q.B.), at paras. 8-22, affd 1992 ABCA 94, [1992] A.J. No. 371, 2 Alta. L.R. (3d) 221 (C.A.).

[^29]: There are two actions against NBF in this jurisdiction, one against NBF alone (Goldsmith v. National Bank Financial Inc. (CV-14-50924600CP) and the other against NBF and other members of the underwriting syndicate (Kuefler v. National Bank Financial Inc. (CV-13-47455300CP). If the plaintiff wants to pursue the argument that NBF was a promoter, she can do so in the Goldsmith v. National Bank Financial action.

[^30]: As the Alberta Securities Commission noted in Gordian Financial Group Inc., supra, note 16, at para. 30: "the definition of promoter in the statute is very precise and specific. It does not correspond to the colloquial meaning of the word. In street parlance, a promoter is considered to be somebody who is touting shares or recruiting investors, but that is not the meaning in the Act."

[^31]: Toward Improved Disclosure: A Search for Balance in Corporate Disclosure: Interim Report of the Committee on Corporate Disclosure (Toronto: Toronto Stock Exchange, 1995), at s. 6.30.

[^32]: The prospectus disclosed that "NBF is an indirect wholly-owned subsidiary of a Canadian chartered bank that is a lender to [Poseidon] under the Credit Facilities . . . [Poseidon] may be considered to be a 'connected issuer' of NBF under applicable Canadian securities legislation."

[^33]: Companion Policy 33-105CP to National Instrument 33-105 Underwriting Conflicts, at 1.

[^34]: The plaintiff's reliance on Dobbie v. Arctic Glacier Income Fund, [2011] O.J. No. 932, 2011 ONSC 25 (S.C.J.) is misplaced. Dobbie involved the relationship between an income fund and its parent company, Arctic Glacier. The court found that "the Income Fund has no separate business and is entirely dependent upon the operations of Arctic". The documents at issue were business reports relating to Arctic. These reports were signed by Arctic's officers. "It follows" concluded the court (in my view, correctly) "that Arctic must have influenced the release of the impugned documents" (at para. 141). This reasoning has no application to the facts at bar.

[^35]: Supra, note 8, at para. 38.

End of Document