Source: http://www.canadiansecuritieslitigation.com/page/2
Timestamp: 2019-04-21 11:03:49+00:00

Document:
In Mask v. Silvercorp Metals Inc.  released on July 18, 2014, the Ontario Superior Court of Justice considered whether a plaintiff seeking leave to commence a secondary market liability action under the Securities Act  is permitted to obtain corporate documents from the defendant before the leave motion has been adjudicated.
After reviewing the case law applicable to Requests to Inspect Documents (the “Requests”) pursuant to Rule 30.04(2) and the broader policy concerns regarding leave motions under section 138.8 of the OSA, Justice Belobaba held that the Rule cannot be used as a fishing rod, especially before cross-examinations have been conducted in an OSA leave motion.
The plaintiff, a former shareholder of the defendant mining company, seeks to bring a class action against the company and two senior executives for alleged misrepresentations regarding the mineral resources in the defendants’ mines in China and the accounting treatment of certain third-party dealings.
The motions for leave to commence a secondary market liability action under Part XXIII.1 of the OSA and for certification of the action as a class proceeding under the Class Proceedings Act, 1992  are scheduled to be heard in September 2014.
The defendants filed affidavits opposing the plaintiff’s leave and certification motions. The plaintiff, in turn, served Requests under Rule 30.04(2) of the Rules of Civil Procedure,  asking that hundreds of documents mentioned in these affidavits be produced for inspection prior to the cross-examinations. The defendants declined to do so, arguing that the plaintiff’s Requests amounted to a fishing expedition.
As a preliminary matter, the Court noted that, at best, it was unclear that a Request to Inspect can be used by a shareholder (who is, at most, a putative plaintiff) to augment a pending OSA leave motion. Unless and until leave is granted, the defendant is not yet a “party” to the OSA action, and a “non-party” cannot be forced to produce documents pursuant to the Rule.
Apart from this preliminary issue, the Court noted that the Requests ran afoul of legal principles with respect to specificity, relevance, proportionality, timeliness, prejudice and privilege. The Court agreed with the defendants that allowing the putative plaintiff to conduct a broad examination before the leave motion “in order to rummage through a large volume of (confidential corporate) documents to find evidence that could support the proposed OSA leave motion would seriously prejudice the defendants”.
The Court further held that it would have dismissed the plaintiff’s motion in any event on the basis of broader policy concerns about the nature of the OSA leave motion. The proper scope of cross-examination on an affidavit is always defined by the context of the proceeding itself. In this case, the underlying policy of the leave motion provides some measure of protection against the potentially coercive nature of secondary market claims by discouraging investors from pursuing unsupported actions to the detriment of the shareholders of the target company.
The Court concluded that the Request to Inspect Documents must be restricted in scope and content to a “manageable dimension” that accords both with first principles of documentary production, as well as the statutory language and underlying policy of the OSA leave provisions.
In arriving at his conclusion, Justice Belobaba referred to a series of Part XXIII.1 cases where Ontario Courts have consistently restricted the examination rights of moving parties to accord with the policy behind the OSA leave motion. This case, while novel in its application to Requests to Inspect Documents, simply reaffirms an existing trend that, in the context of OSA leave motions, a moving party is restricted from compelling oral and documentary evidence from respondents in an effort to make a case from their evidence.
The truth of the matter is that Mr. Mask has been hoisted on his own procedural petard. He had the choice of proceeding to cross-examinations in accordance with the agreed schedule, but he chose instead to serve Requests to Inspect Documents with 28 separate requests, demanding thousands of pages of otherwise confidential corporate documents, and he did not file any evidence to explain the relevance of, or the necessity of, reviewing all those documents before the cross-examinations.
Mr. Mask was making a tactical maneuver to obtain an examination for discovery and advance rulings on the production of documents in a case for which leave to proceed had not been granted. It was a trip to the tackle and bait store before a fishing expedition and Justice Belobaba, for a variety of reasons, put a stop it.
 R.S.O. 1990, c. S.5 (“OSA”).
 R.R.O. 1990, Reg. 194, as amended (the “Rules”).
First, independent or third-party advice may be necessary to justify executive compensation.
Second, the business judgment rule has no application where directors and officers make decisions that have no legitimate business purpose and are in breach of their fiduciary duties.
Finally, executive compensation agreements that are inconsistent with statutory fiduciary duties will not be enforced by the courts.
The individual respondent (the “Respondent”) was the former CEO and a director of Unique Broadband Systems Inc. (“UBS”). The terms of a management services agreement provided him with enhanced termination benefits in particular situations. UBS instituted a share-appreciation rights plan (the “SAR Plan”) for its directors and members of senior management. Under the SAR Plan, unit holders would be compensated based on the market trading price of a UBS share after certain specified events.
After the share price failed to rise as expected, the directors of UBS unanimously resolved to cancel the SAR units and establish a SAR cancellation payment program that compensated unit holders, including the Respondent, based on a unit price of $0.40 per share. The market price was actually $0.15 per share. The directors also considered and awarded bonuses for the Respondent and other personnel.
UBS shareholders called a special shareholders’ meeting and removed the Respondent and others from their positions as directors of the company. The Respondent resigned as the CEO and commenced an action against UBS for, inter alia, the SAR cancellation payments, the bonus award, and enhanced termination benefits.
The Court of Appeal determined that the Respondent breached his fiduciary duties with respect to the SAR cancellation payments and the bonus award. The Court held that directors and officers must avoid conflicts of interest with the corporation and not take advantage of their position for personal gain.
The SAR cancellation payment program was adopted without any independent or third-party advice and was motivated by the Respondent’s self-interest at the expense of UBS. The bonus awards were equally problematic. The Respondent and the other directors failed to seek or receive any advice on appropriate bonus awards. They did not consider comparable marketplace data regarding executive compensation and did not document performance criteria. There was also no evidence to explain how the bonus awards were quantified.
Since the Respondent had not acted in the best interests of the corporation, the business judgment rule was of no assistance to him.
The Court of Appeal overturned the lower court’s decision on the only issue that the Respondent succeeded on at trial; that is, the interpretation of the management services agreement that provided the Respondent with enhanced termination benefits notwithstanding his corporate malfeasance.
Although not necessary to its decision, the Court of Appeal noted that a contract which provided a director with enhanced termination benefits which were contrary to his or her breach of fiduciary duties may constitute oppression pursuant to section 248 of the OBCA.
The Court of Appeal’s decision in Unique Broadband establishes that directors and officers will not be permitted to hide behind the business judgment rule where their conduct serves no legitimate business purpose and is in breach of fiduciary duties. Directors and officers cannot contract out of their fiduciary duties and personal employment contracts or management service agreements will be interpreted in accordance with their statutory obligations.
 Unique Broadband Systems, Inc. (Re), 2014 ONCA 538 [Unique Broadband].
 Business Corporations Act, RSO 1990, c B.16 [OBCA].
 Unique Broadband, supra note 1 at para 95.
In 2013, Justice Belobaba released five decisions that addressed legal principles relating to awards of costs on class action certification motions. These cases sent a clear message to the class action bar: “[a]ccess to justice, even in the very area that was specifically designed to achieve this goal, is becoming too expensive.” Justice Belobaba observed that, in some cases, overzealous counsel may be partially responsible for this trend. Using similar reasoning and language in Rosen v BMO Nesbitt Burns Inc.,  Crisante v DePuy Orthopaedics, Dugal v Manulife Financial,  Brown v Canada (Attorney General),  and Sankar v Bell Mobility Inc.,  (collectively called the “Pentalogy”) Justice Belobaba recommended changes to the prevailing approach to cost awards on certification motions that, if followed, would turn Ontario into a “no cost regime”.
a. For the plaintiff’s side, on average, if the costs award sought was less than $500,000 then the amount awarded would be 63% of the costs sought. However, if the costs sought were more than $500,000, then the costs awarded would be 62% of the costs sought.
By tightening the costs strings, courts potentially reduce the risk for plaintiffs in class actions to bring forward their claims and for plaintiffs’ counsel to pursue these claims. Further, a more restrictive approach to cost awards for certification motions may also make investing in plaintiffs’ class action litigation more attractive to third party investors and funders. However, some members of the plaintiffs’ class action bar have argued that by reducing costs awards, access to justice may actually be further reduced.  Some plaintiffs’ counsel have also suggested that, in fact, plaintiffs’ counsel principally bear the costs of class action litigation, and Justice Belobaba’s costs regime could result in plaintiffs’ counsel making a much greater investment in time and disbursements on certification motions than they could ever recover from the defendants.  Therefore, a more restrictive approach to awards of costs may increase the risk borne by plaintiffs’ counsel and force them to be more cautious before accepting the professional obligations associated with representation of the representative plaintiff in a class action.
On the other hand, in Justice Belobaba’s analysis of past costs awards, there is a greater disparity between the costs sought and those awarded to a successful defendant on a certification motion than between amounts sought and awarded to a successful plaintiff. For the defendants who are forced to litigate a class claim, which has yet to be tested on its merits, the prospect of a reduced recovery of costs would increase the financial risks that defendants’ lawyers or third party investors have to bear. Further, the risk of high costs awards have always acted as a reminder to plaintiffs of the penalty they may face for bringing an unmeritorious action. Therefore, reducing costs consequences could leave defendants more vulnerable to unmeritorious law suits, and possibly hold them hostage to legal proceedings without the plaintiffs risking significant financial consequences if they are unsuccessful.
How the costs regime for certification motions develops, and whether Justice Belobaba’s Pentalogy will affect the checks and balances for parties in class action litigation, can only be ascertained once other judges have had the opportunity to consider and apply, or choose not to apply, the principles laid down in the Pentalogy. However, Justice Belobaba’s Pentalogy has certainly succeeded in bringing back attention to one of the core objectives of class actions: providing access to justice at reasonable cost.
 Rosen v. BMO Nesbitt Burns Inc., 2013 ONSC 6356 [Rosen] at para 1.
 Crisante v. DePuy Orthopaedics, 2013 ONSC 6351 [Crisante].
 Dugal v. Manulife Financial, 2013 ONSC 6354 [Dugal].
 Brown v. Canada (Attorney General), 2013 ONSC 6887 [Brown].
 Sankar v. Bell Mobility Inc., 2013 ONSC 6886 [Sankar].
 Ontario Law Reform Commission, Report on Class Actions, Ministry of the Attorney General Volume 1, 1982.
(b) in the event of vexatious, frivolous, or abusive conduct on the part of any party” Nonetheless, the legislature did not adopt the OLRC’s recommendations in this regard.
Rosen, Supra note i at para. 2.
 Rosen, Supra note 1 at paras. 4-5.
 The suggested guidelines for determining hourly rates for lawyers depending upon their years of experience can be found in the Information for the Profession released by the Costs Subcommittee of the Rules of Civil Procedure.
 The Trustees of the Drywall Acoustic Lathing and Insulation Local 675 Pension Fund v. SNC Group Inc., 2013 ONSC 7122. [Drywall Acoustic].
 Ibid. at para. 16 and 18.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.