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August 01, 2018 Practice Points

Canadian Jurisdiction over Cross-Border Securities Claims

Can an issuer be sued in Canada if its securities don’t trade on a Canadian exchange? if so, when?

By Byron Shaw

In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the U.S. Supreme Court held that secondary-market securities claims under section 10(b) of the Exchange Act and Rule 10b-5 are limited “to transactions in securities listed on domestic exchanges . . . and domestic transactions in other securities.” Id. at 268. In Canada, the situation is different. The securities legislation in each province provides investors with a statutory cause of action against a “responsible issuer,” which expressly includes not only a “reporting issuer” but “any other issuer with a real and substantial connection” (or, in the case of Quebec, that is “closely connected”) to the province, which has issued securities that are publicly traded. Securities Act, RSO 1990, c S.5, s 1 (emphasis added); see also Securities Act, CQLR, c V-1.1, s 225.2. Therefore, issuers that fully comply with the laws where their securities trade may nonetheless be subject to secondary-market claims in Canada. And Canadian secondary-market claims differ from claims under the Exchange Act and Rule 10b-5 in several important ways, most notably because there is no requirement in Canada that defendants act with scienter, i.e.fraudulent intent.

However, recent decisions suggest that Canadian courts are reluctant to assume jurisdiction over claims against foreign issuers and that the phrase “real and substantial connection” will be interpreted to prevent jurisdictional overreach, bringing the law in Canada closer to Morrison.

In Yip v. HSBC Holdings plc, 2018 ONCA 626, the Ontario Court of Appeal dismissed a putative class action against HSBC Holdings, the parent holding company of HSBC, which was headquartered in London, UK. HSBC Holdings’ securities had never been traded or listed on any Canadian stock exchange. The plaintiff bought his shares using a Hong Kong bank account on the Hong Kong Stock Exchange, which he accessed using his home computer in Ontario. The court held that there was no “real and substantial connection” between Ontario and HSBC Holdings.

Yip illustrates the three jurisdictional hurdles that Canadian plaintiffs must overcome to succeed in a secondary-market securities claim against an issuer whose securities trade exclusively on exchanges outside Canada:

  1. Jurisdiction in Canada must be based on one or more judicially recognized “presumptive connecting factors.” The Supreme Court of Canada has identified four presumptive connecting factors—in American parlance, “minimum contacts”—for tort claims: (a) the defendant is domiciled or resident in the province; (b) the defendant carries on business in the province; (c) the tort was committed in the province; and (d) a contract connected with the dispute was made in the province. Club Resorts Ltd. v. Van Breda, [2012] 1 S.C.R. 572 at ¶ 90.At least one factor is required for the court to assume jurisdiction against a foreign defendant on the basis of a real and substantial connection. Id. at ¶ 80. The tort factors have been extended to other claims, including statutory secondary-market misrepresentation claims. Yip at ¶ 35–50.

    Yip makes clear that a foreign holding company that merely manages a global enterprise of a group of commonly bannered companies and sets global standards does not “carry on business” in Canada. Id. at ¶ 39. Nor does an issuer carry on business in Canada merely because Canadian investors can access its disclosure online. Id. at ¶ 41. Rather, carrying on business typically requires a physical presence within the jurisdiction accompanied by a degree of sustained business activity. Yip v. HSBC Holdings plc., 2017 ONSC 5332 at ¶ 159, aff’d, 2018 ONCA 626.

  2. The presumptive connecting factors may be rebutted. A defendant may rebut a presumption of a real and substantial connection by showing that the presumptive connecting factor “does not point to any real relationship between the subject matter of the litigation and the forum or points only to a weak relationship.” Van Breda at ¶ 95. Certain connecting factors, such as commission of a tort, have been interpreted liberally, in favor of the court assuming jurisdiction, making the rebuttal stage critical. For instance, the Ontario Court of Appeal has held that the common-law tort of misrepresentation occurs in any province where the plaintiff receives and relies on the alleged misrepresentation. Central Sun Mining Inc. v. Vector Engineering Inc.,2013 ONCA 601 at ¶ 32. Yip applied this rule by analogy to the plaintiff’s statutory securities claims. Although Ontario presumptively had jurisdiction because the plaintiff received and relied on allegedly misleading information about HSBC Holdings in Ontario by downloading its disclosure, this was an “extremely weak connection” and “HSBC had no reason to believe that it was obliged” to comply with, or would be subject to, securities regulation in Ontario. Yip at ¶ 46.

  3. The defendant may show that there is a clearly more appropriate forum for the dispute. While there is no place of trading requirement under the provincial securities laws, Canadian courts have placed great weight on the place of trading in the forum non conveniens analysis as a matter of comity. Id. at ¶ 54, citing Kaynes v. BP, PLC, 2014 ONCA 580. “[T]he more appropriate forum for secondary market claims will often favour the forum of the exchange(s) where the securities trade.” Yip at ¶ 75.

While the bright-line rule in Morrison does not apply in Canada, cases such as Yip should bring some comfort to issuers that Canada will not “become the Shangri-La of class action litigation for lawyers representing those allegedly cheated in foreign securities markets.” Morrison, 561 U.S. at 270.

Byron Shaw is a partner at McCarthy Tétrault LLP in Toronto, Ontario, Canada.

Note: The defendants in Yip v. HSBC Holdings were represented by Paul Steep, Brandon Kain, and Bryn Gray of McCarthy Tétrault LLP.

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