Canadian case of Kaynes vs. BP - Does Ontario has jurisdiction in a securities class action related to trades of a foreign security

Earlier this year (see blog post of March 15, 2014), we commented on the Canadian case of Kaynes vs. BP PLC, 2013 ONSC 5802, in which a judge of the Superior Court of Ontario ruled that the Province of Ontario had jurisdiction in a securities class action related to trades of a foreign security of a foreign issuer on a foreign exchange.  The decision was appealed to Ontario’s highest appellate court, which confirmed that Ontario had jurisdiction sempliciter. [1]  The Court of Appeal however recently overturned the judgement a quo on the basis of forum non conveniens.

The facts

Briefly, Kaynes, a resident of the Province of Ontario, is requesting the court’s permission to bring a class action for secondary market misrepresentation under s. 138.3(1) of the Ontario’s Securities Act (the “Act”) on the basis that BP made various misrepresentations in its investor documents before and after the notorious Deepwater Horizon oil spill in the Gulf of Mexico in April 2010.  Kaynes seeks to represent all Canadian purchasers of shares of BP in a class action, regardless of where they purchased their shares. In parallel, a proposed class action is also pending certification in the United States, based on the same allegations.

Kaynes purchased American Depository Shares (ADS) in the U.S., which traded on the Toronto Stock Exchange (the “TSX”) until August 2008, at which time BP voluntarily de-listed them.  In conjunction with its delisting, BP undertook with the Ontario Securities Commission (the “OSC”) to continue sending to its Canadian securityholders all disclosure material that it was required to send to its U.S. investors (its ADSs were still listed on the NYSE).

Although BP has several indirect Canadian subsidiaries that conduct exploration and development of energy properties in Canada, BP itself is a company incorporated in the U.K. headquartered in London. It has no property, no offices and no employees in Canada.

BP concedes that Ontario has jurisdiction to entertain the claims of those members of the proposed class who purchased their shares on the TSX, but contends that there is no “real and substantial connection” - the applicable test under Ontario’s rules of private international law as well as under the Act - between Ontario and the claims of Canadian residents who, like the plaintiff, purchased their shares on foreign exchanges

BP’s appeal

On appeal, BP argued that the motion judge erred when she determined that she had jurisdiction based on a statutory tort having been committed in Ontario.  Section 138.3(1) of the Act provides for a cause of action where an issuer “releases a document that contains a misrepresentation”.  BP argued that since it never has had a presence in Ontario, the document allegedly containing a misrepresentation could only have been issued outside of Ontario, thus locating the commission of the tort outside the jurisdiction.

The Court of Appeal upheld the motion judge’s finding of jurisdiction sempliciter, ruling that when BP released the documents containing the alleged misrepresentations, it knew by virtue of the undertaking it had given to the OSC that even if the initial point of release was outside Ontario, the document was certain to find its way to Ontario and to its Ontario shareholders. The Court rejected the “place of acting” test, which it described as being “rigid and unduly mechanical”, for determining the place of commission of a tort for purposes of determining jurisdiction.  In so doing, it referred to Moran v. Pyle National (Canada) Ltd.[2], a product liability tort case that involved a defective light bulb manufactured in Ontario causing injury in Saskatchewan, a jurisdiction where the defendant did not sell or manufacture its products or otherwise carry on business. In holding that the tort was committed in Saskatchewan, Dickson J. wrote:

“[W]here a foreign defendant carelessly manufactures a product in a foreign jurisdiction which enters into the normal channels of trade and he knows or ought to know both that as a result of his carelessness a consumer may well be injured and it is reasonably foreseeable that the product would be used or consumed where the plaintiff used or consumed it, then the forum in which the plaintiff suffered damage is entitled to exercise judicial jurisdiction over that foreign defendant….By tendering his products in the market place directly or through normal distributive channels, a manufacturer ought to assume the burden of defending those products wherever they cause harm as long as the forum into which the manufacturer is taken is one that he reasonably ought to have had in his contemplation when he so tendered his goods.”

Given BP’s undertaking to the OSC, it could not possibly argue that the place of effect of its misrepresentation, i.e. Ontario, was beyond its contemplation.

The Court of Appeal also made a provision-specific determination, indicating that for purposes of s. 138(1), a document’s point of release is to be understood as the place where the document was either released or presented.

BP’s forum non conveniens argument

It is well-established under Ontario law that if a plaintiff succeeds in demonstrating that an Ontario court has jurisdiction, the court retains the discretion to decline to exercise it under the doctrine of forum non conveniens. Quoting the Supreme Court of Canada’s decision in Van Breda[3], to succeed in a plea of forum non-conveniens, “[t]he defendant must identify another forum that has an appropriate connection under the conflicts rules and that should be allowed to dispose of the action” and “must demonstrate why the proposed alternative forum should be preferred and considered to be more appropriate.”

According to the Court of Appeal, the motion judge erred in law by failing to take into account the principle of comity[4] in assessing the effect of Ontario’s jurisdiction over claims arising from foreign traded securities. In particular, in the US: a) there is a  well-established regime governing class actions for secondary market misrepresentation, b) there is a pending class action […] based upon very similar allegations, covering substantially the same period, and embracing the claims of all BP shareholders, including the plaintiff, who purchased their shares on a US exchange; c) the law relating to jurisdiction over such claims is based on the principle that securities litigation should take place in the forum where the securities transaction took place (this is also the case with the U.K.); d) by statute, actions for secondary market misrepresentation under US securities law may only be brought by those who purchased their shares on a US exchange;  e) the Securities and Exchange Act of 1934 stipulates that “the US district courts have “exclusive jurisdiction of violations of this title or the rules and regulations thereunder” including claims for secondary market misrepresentation”; f) US law precludes US courts from entertaining private actions involving securities transactions outside the US; and g) perhaps most importantly, the plaintiff’s claim rests to a significant degree on foreign law, as the impugned document in fact consisted in the material required to be sent or provided to US resident security holders “under applicable US federal securities laws or exchange requirements”.

To further convince the Court that Ontario was not the most appropriate forum, BP submitted that 83,945 ADSs were traded on the TSX, compared with 9 billion on the NYSE and 8.7 billion on the LSE.  The Court agreed “that permitting the plaintiff to use BP’s negligible relative trading on the TSX […] as a toehold for bringing foreign exchange purchasers under the jurisdiction of an Ontario court would be both opportunistic and a classic example of the “tail wagging the dog””.[5]

In our previous blog, we pondered as to “what logic would allow a court to cast aside the substantive application of the very law that gave it jurisdiction in the first place”. We now have an answer:  forum non conveniens.  As a result of the Ontario Court of Appeal’s decision, class action plaintiffs will now likely think twice before using Ontario courts as a forum for secondary market misrepresentation claims against foreign issuers for trades of securities acquired on foreign exchanges.

For more information on the above,  please call/email Martin Aquilina at maquilina@hazlolaw.com  or at 1.613.747.2459 x 308

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[1] Kaynes v. BP, PLC, 2014 ONCA 580.

[2] Moran v. Pyle National (Canada) Ltd., [1975] 1 S.C.R. 393.

[3] Club Resorts Ltd. v. Van Breda, 2012 SCC 17.
[4] Comity can be defined as: “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” (the Court of Appeal, quoting Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077 at p. 1096 S.C.R., in which La Forest J. adopted the definition of comity set out in the 1895 American case of Hilton v. Guyot, 159 U.S. 113).

[5] For our foreign readers who may not be familiar with this idiomatic impression, it refers to a minor or secondary part of something controlling the whole.