A proposed securities class action for alleged misstatements in an issuer’s disclosure has been given the go-ahead by the Court of Appeal for Ontario — rejecting arguments from the company that, the court said, would undermine the purpose of the investor protection provisions of securities law on corporate disclosure.
In June 2024, a judge with the Ontario Superior Court of Justice certified a proposed class action against Akumin Inc. — a company that trades on the TSX and Nasdaq and operates medical imaging clinics in the U.S. — and its officers and directors. They faced allegations the company made material misrepresentations in its financial statements and other public disclosures involving its accounts receivable, revenues, shareholders’ equity and internal controls.
In late 2021, the company had to restate its financials for fiscal 2019, 2020 and the first quarter of 2021 after discovering issues with its disclosures. In the lower court, the company argued the alleged misstatements weren’t material and the corrections didn’t result in the share price dropping substantially.
The court rejected those arguments, ruling shareholders have a reasonable prospect of proving their case against the company and its officers and directors — but it dismissed proposed claims against the company’s auditors, finding there was no reasonable possibility a case could be made against them.
On appeal, the company argued the lower court judge erred in granting leave to bring the proposed class action and in certifying the proceeding as a class action.
Among other things, it argued the judge erred by certifying the case as a class action on behalf of investors that bought secured notes in the secondary market, since these notes don’t trade on an efficient market, “which they allege is a requirement before granting leave under [securities law].”
“The appellants argue that a corrective statement can only constitute a ‘public correction’ for purposes of [secondary market misrepresentation] claims if the corrective statement relates to securities that trade in an efficient market. Therefore, because the secured notes did not trade in an efficient market, the motion judge erred in granting leave to proceed with this aspect of the claim,” the court noted.
The appeal court rejected this argument, upholding the lower court’s ruling that investors in the secured notes could be covered by the class action and that excluding these investors “would be inconsistent with the text of the statute as well as the underlying goals of the statutory scheme” — including the goal of protecting investors from erroneous corporate disclosures.
“In fact, it would frustrate those objectives by denying investors who had suffered losses from secondary market misrepresentation from accessing the statutory remedy merely because the market in which their securities traded was not an efficient one. There is no support for the view that the legislature intended to protect only investors in exchange-traded securities,” the appeal court said.
Similarly, the appeal court rejected the company’s argument that a statement indicating it would be late filing its financials because of possible issues with its previous disclosures didn’t amount to a public correction — an argument it made on appeal and in the lower court.
“The motion judge rightly rejected the suggestion that this was not a public correction merely because Akumin was not then in a position to specify the extent of its prior misstatements,” the appeal court said in its decision.
“As the motion judge observed, such an interpretation might well encourage issuers to make vague disclosures such as ‘something has happened, and we are looking into it’ in the hopes of escaping liability,” the court said — adding this would also be inconsistent with the purpose of providing investors with protection from material misstatements under the law.
The court found there was no error in the lower court’s rulings and dismissed the appeal.