In Mask v. Silvercorp Metals Inc., the Court of Appeal for Ontario upheld a decision refusing leave to commence an action for secondary market misrepresentation under section 138.8 of the Ontario Securities Act (the “OSA”). The Court of Appeal’s decision, released on August 24, 2016, confirms that the test for leave in statutory secondary market claims must be viewed as a substantive hurdle to such claims and that judges considering a motion for leave may weigh and evaluate the evidence before them.
Between March 1, 2010 and September 12, 2011, Silvercorp Metals Inc. (“SVM”) issued public reports regarding its mining operations in China. In September 2011, SVM became the target of anonymous internet postings which questioned the veracity of SVM’s financial accounting and public disclosure. The anonymous posts alleged that SVM had overstated its mineral resources and reserves in China. As a result of the posts, SVM’s share price dropped by approximately 30 percent.
In response to the anonymous posts, and in an effort to demonstrate that its initially reported revenue and production numbers were correct, SVM issued a press release (the “Press Release”) which included a reconciliation of mineral production to the revenue reported in SVM’s financial statements. SVM also retained AMC Mining Consultants to summarize its reported mineral production and to update SVM’s future production estimates (the “AMC Report”). The AMC Report was released in June 2012.
In May 2013, the plaintiff, a former SVM shareholder, commenced proceedings against SVM and its CEO and former CFO, alleging that a comparison of the AMC Report and the Press Release demonstrated that SVM had, in fact, overstated its production.
The Motion Judge’s Decision
The plaintiff advanced three types of claims in the certification motion heard by the motion judge: (1) a statutory and common law claim for misrepresentation; (2) a statutory claim for failure to make timely disclosure; and (3) a common law claim in negligence alleging that SVM co-authored and published public reports regarding its mineral reserves and production that it knew or should have known had not been properly audited or prepared in accordance with industry standards.
With regard to the first claim, the motion judge found that the plaintiff’s expert evidence, which posited that the AMC Report revealed inaccuracies in SVM’s public reports, was undermined by evidence proffered by SVM’s expert. SVM’s expert had demonstrated that the figures in the Press Release and other public reports were substantially the same as the figures in the AMC Report and the plaintiff did not file expert evidence rebutting SVM’s evidence. The motion judge found that there was no support for the plaintiff’s second claim based on any alleged failure to make timely disclosure and held that the plaintiff’s common law negligence claim was unlikely to succeed because it was essentially a pleading of negligent misrepresentation, and was therefore duplicative of the first claim.
The plaintiff unsuccessfully argued on appeal that the motion judge erred by misapprehending evidence and misapplying the leave test under section 138.8 of the OSA.
Application of the Theratechnologies Leave Test
The plaintiff’s primary submission was that the motion judge erred in law by applying a higher leave standard than what is required by the Supreme Court of Canada pursuant to Theratechnologies and Canadian Imperial Bank of Commerce v. Green. In Theratechnologies, the Supreme Court interpreted section 138.8 of the OSA, pursuant to which the court must be satisfied that a statutory misrepresentation claim is brought in good faith and has a reasonable chance of succeeding at trial, as requiring the plaintiff to show “a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.” A court’s assessment requires a “reasoned consideration of the evidence to ensure that the action has some merit.” The plaintiff contended that by analyzing and weighing SVM’s expert evidence against the plaintiff’s expert evidence, the motion judge incorrectly elevated the Theratechnologies leave standard and consequently turned the motion for leave into a mini-trial.
The Court of Appeal agreed with the motion judge’s approach, noting that “scrutiny of the merits of the action based on all evidence proffered by the parties” is a necessary component of the leave test. The method adopted by the motion judge was consistent with the underlying purpose of the leave test, which is to serve as a “robust deterrent screening mechanism.”
The Court of Appeal further disagreed with the plaintiff’s submission that the motion judge had made erroneous findings of fact. Instead, the Court held that “it was open to the motion judge to examine the factual underpinnings” and that, in doing so, the motion judge reasonably “concluded that the foundation [of the plaintiff’s claim] had been demolished by the defendant’s evidence and had not been repaired by the plaintiff’s.”
The Motion Judge’s Characterization of the Claim and Consideration of Evidence
The plaintiff’s second submission was that the motion judge overlooked relevant evidence and misapprehended the nature of the its negligent misrepresentation claim by construing it as a mere comparison of SVM’s public reports, Press Release, and the AMC Report. The Court of Appeal, however, agreed with the motion judge’s assessment of the claim: the focus of the plaintiff’s negligent misrepresentation claim was indeed the alleged discrepancies between the reports. Moreover, the Court held that motion judge’s reasons made express reference to the evidence that was allegedly overlooked. Ultimately, the Court of Appeal confirmed the motion judge’s finding that SVM’s evidence explained any discrepancies between the company’s public disclosure and the AMC Report and that the plaintiff had not filed evidence rebutting this explanation or cross-examined SVM’s expert on it. The Court of Appeal further rejected the plaintiff’s argument that the motion judge improperly weighed evidence and conducted a mini-trial. The Court affirmed that a judge hearing a motion is required to evaluate and weigh the merits of the proposed claim and the evidence filed by the parties.
The Court of Appeal’s decision in Mask v. Silvercorp Metals Inc. affirms the test for leave in secondary market class actions. The Supreme Court in Theratechnologies was of the view that leave applications should provide a robust screening mechanism to prospective misrepresentation claims. At the same time, the Supreme Court was wary of imposing evidentiary burdens that would “essentially replicate the demands of a trial.” The Court of Appeal in Mask v. Silvercorp Metals Inc. attempts to reconcile these opposing interests by confirming that the leave test requires the scrutiny and weighing of evidence proffered by all parties. A motion judge is not limited to examining only the plaintiff’s evidence to determine whether its claims have a reasonable prospect of succeeding at trial.
 2016 ONCA 641 (Mask).
 R.S.O. 1990, c. s.5.
 2015 SCC 60.
 Theratechnologies, supra at para 39 (emphasis added).
 Ibid, at para 38 (emphasis added).
 Mask, supra at para 36.
 Ibid, at para 41.
 Ibid, at para 42, citing Theratechnologies, supra at para 38.
 Ibid, at paras 48-49.
 Ibid, at para 53.
 Ibid, at paras 54-56.
 Theratechnologies, supra at para 38.
 Ibid, at para 39.
 Mask, supra at para 43.