Canadian Class Action Securities Claims: Legal Fees increase in Early Stage of Securities Claim

In Pennyfeather v Timminco Limited, here, the court determined that Plaintiff particulars can be compelled prior to the class action certification order, but, in turn, the statement of defence may be required prior to the order as well.

In the Pennyfeather case the plaintiff did not provide particulars, and argued that defendant’s request was premature because they are only necessary in order to plead a defence and this is not required pre-certification. He also argued that this would provide a “tactical manoeuvre for defendants, and would delay the hearing of the leave (to pursue claim under Part XXIII.1 of the Ontario Securities Act – secondary market misrepresentation) and certification motion, causing prejudice to the plaintiff and class members.”

Justice Perell decided that demanding plaintiff particulars, as well as the statement of defence pleadings, be closed “before the action moves to a certification motion” because, 1) the first of the five interdependent class action certification criteria, under s. 5 (1) of the Class Proceedings Act, 1992, is “show a cause of action”, and this would be resolved without the delay of the traditional challenge of the statement of claim, 2) early dismissal of the class would reduce costs, and, 3) it could reduce the common outcome of plaintiff’s request for leave to amend statement of claim.

If other judges apply this logic, early stage legal costs will be more expensive, but the result could be expedited decisions, earlier settlements, earlier dismissals, and shorter term distraction of management, directors and financial analysts.

This is a big case, as it pits Won Kim of Kim Orr against Alan D’Silva of Stikeman Elliott. A number of months ago both individuals were on a panel discussing Bill 198 and Secondary Market Liability and Class Actions Securities Claims, hosted by Chartis. A few of the developments they discussed included, 1) the current Canadian court split decisions on plaintiffs getting access to the defendant’s Directors’ and Officers’ liability policies, 2) the extraordinary costs of e-discovery, and 3) the significant number of Canadian class action securities claims.

The underlying action in Pennyfeather is a $520 million class action, launched in May 2009 against Timminco and certain officers and directors. It alleges that they knowingly mislead investors about growth and profit potential between March and November
2008, specifically regarding its solar-grade silicon. The case was awarded to Kim Orr in late 2009.

The D&O insurance implication are very interesting. The 2009 Management Information Circular suggested their D&O policy had a policy period of May 1 2008 to May 1 2009, with a $40 million limit and $100,000 deductible, as well as a $5 million excess Side A DIC (which commonly is a policy where the limit of liability is dedicated to non-indemnified claims against individual directors and officers,  written on a difference in conditions basis whereby the terms of the policy are broader than the underlying D&O policy.) Some information circulars will mention a split deductible for “securities” claims and for non-securities claims, which would give a good indication that the underlying policy provides considerable extensions to the corporate entity, thereby subjecting the policy to the risk of limit erosion or exhaustion to the detriment of individual Insured Persons. This circular provides no such guidance.

The 2010 circular suggests the same structure was renewed in 2009-2010 with the addition of a new additional excess limit of $5 million Side A DIC available only to independent directors. The premium increase year over year (and then again in 2011) was not extraordinary, which could suggest that the 2008-2009 policy was the one triggered by this claim. Under most common D&O policies that means that this is the only policy that would respond to all future loss “based upon, arising from, or in consequence of the prior noticed claim, including any future claims based on interrelated wrongful acts”.

A common reaction of D&O insurers to a potential limit loss claim is to extend limits of liability with each subsequent renewal and not provide a “refreshed” policy. However, even if insurers do provide a new policy, with new limits, it is rare that those new limits will have any exposure to an existing claim or related downstream claims.

Not knowing the level of “Entity Coverage” in the underlying D&O policy it is difficult to comment on the adequacy of limit in the first triggered policy. But, when the share price is $30 in mid 2008, $3 at the end of 2008, and 30 cents in 2011, and there are 196 million shares issued and outstanding, it would take an army of lawyers to make me comfortable that $45 million is going to carry this litigation over the many years it may have left.

Directors of all public companies should be requesting from their insurance broker commentary on the extent of “limit sharing” in their D&O program. The answer should not stop at Insuring Clause 3 “Entity Coverage for Securities Claims”, but should consider all extensions, endorsements, definitions and exclusion ‘carve-backs.’ Directors should also look at the precedent setting claims and seek outside legal advice on the potential cost to defend these claims and litigate their various motions and counter claims. Then directors should turn their focus internally to determine their unique circumstances to help determine appropriate limits of liability based on their priorities and insurance coverage structure. I have provided a few ideas in an earlier blog post, here.

Be wary of insurers bearing gifts, because a broad policy is not necessarily beneficial to all stakeholders in that policy. Insurers underwrite policies knowing and accepting the possibility of a limit loss. If they are going to suffer a limit loss no matter what the extent of coverage (insuring agreement A, B, C, D or 1,2,3,4) it might just be in their best interest to make the policy extremely broad, extract to most premium they can, and write their cheque very early in the claim process. Payment of the limit usually terminates their involvement in the litigation (except perhaps in Quebec where they will continuously apply to the court to end their ‘defence outside the limit’ costs), and therefore no more distraction or claim management costs, and a big pat on (their own) back for paying a limit loss.

There are many competing and conflicting interests in a D&O policy, and the only way to navigate that potential mine field is to determine coverage priorities before the policy is purchased or renewed. Entity Coverage is an extremely valuable use of premium dollars, but that value might inure only to the shareholders who are suing you.

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.

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