Securities Class Actions are On the Rise: Fight or Flight?

Securities Class Actions are On the Rise: Fight or Flight? The Canadian Institute s 19 th Annual Securities Superconference February 18, 2009 JOSEPH GROIA JENNIFER LEE GROIA & COMPANY THE STERLING TOWER 372 BAY STREET, SUITE 1000 TORONTO, ONTARIO M5H 2W9 TELEPHONE: (416) 203-2115 FAX: (416) 203-9231

Securities Class Actions are on the rise: Fight or Flight? Joseph Groia, Principal, Groia & Company PC Jennifer Lee, Student-at-Law, Groia & Company PC To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting. Sun-Tzu, The Art of War (~500 BCE) Introduction American investors have long embraced the use of class actions to advance investor interests and redress investor losses. So much so that Congress passed the Private Securities Litigation Reform Act of 1995 ( PSLRA ) in response to criticisms that too many unmeritorious claims and strike suits were being filed. 1 Not surprisingly, the phenomenon of securities class actions has been well-studied in America. Institutions like Stanford Law School in conjunction with Cornerstone Research, Pricewaterhouse Coopers, and NERA Economic Consulting frequently publish studies on trends in securities class actions in the U.S., and have been doing so for many years. 2 1 One of the purposes of the PSLRA that Congress identified was the desire to end the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer s stock price, without regard to any underlying culpability of the issuer, with the faint hope that the discovery process might eventually lead to some plausible cause of action. See H.R. Rep. No. 104-369 at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 730 as referred to in footnote 1 of John C. Coffee, Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 Columbia Law Review 1534 at 1534. 2 Pricewaterhouse Coopers for example, has conducted an annual study on private securities class action suits for the past 12 years. See Pricewaterhouse Coopers Securities Litigation page, online: Pricewaterhouse Coopers <http://10b5.pwc.com/public/default.aspx>. 2

Formal studies in Canada have generally been hard to come by until very recently. 3 On January 26, 2009, NERA Economic Consulting released its first ever study of the Canadian landscape: Trends in Canadian Securities Class Actions: 1997-2008. 4 To mark this event, we wanted to begin this short paper with a review of some of the more significant findings of the Canadian NERA Report and to compare them with the results of NERA s latest study on the American landscape. 5 Of most interest to us was the finding that there has been a surge in the number of securities class actions filed in both Canada and the United States this past year. The focus of the balance of the paper will be on settlement of class actions, in light of the fact that a large portion of securities class actions have historically been resolved through settlement and that trend will likely continue in the future. A. The Number of Securities Class Actions to Date The Canadian NERA study reports that there have been 42 securities class actions filed in Canada, the first being Carom v. Bre-X Minerals Ltd. in 1997. 6 There was one other action filed that year. Since then the number of securities class actions filed in Canada 3 For example, the Canadian Bar Association has a database of class action filings. As the CBA cautions, however, the database only posts information that is voluntarily submitted by class action counsel. The database therefore may not be an accurate or exhaustive record of all of the class actions filed in Canada. See The Canadian Bar Association, National Class Action Database, online: The Canadian Bar Association <http://www.cba.org/classactions/main/gate/index/about.aspx>. Michael Carabash recently undertook a study of securities class actions in Ontario, collecting his data from court files and interviews with lawyers and class proceedings staff at the Toronto office of the Ontario Superior Court of Justice. See Michael Carabash, Shareholder Class Actions in Ontario Putting John C. Coffee Jr. s Findings to the Test, (2008) 4:2 The Canadian Class Action Review 328 at 328. 4 Mark Berenblut, Bradley Heys & Svetlana Starykh, Trends in Canadian Securities Class Actions: 1997-2008 ( Canadian NERA report ), online: NERA Economic Consulting <http://www.nera.com/image/pub_recent_trends_canada_0109_final.pdf>. 5 Stephanie Plancich & Svetlana Starykh, 2008 Trends in Securities Class Actions ( American NERA report ), online: NERA Economic Consulting at <http://www.nera.com/image/pub_recent_trends_report_1208.pdf>. 6 Carom v. Bre-X Minerals Ltd. (1998), 41 O.R. (3d) 780 (Ont. Ct. (Gen. Div.)). See Canadian NERA study at 3. 3

has ranged from a low of 1 case in 2000 to a record high of 9 cases this past year. 7 In contrast, there have been 3,144 federal securities class action cases filed in the United States since 1996. 8 (i) Why the disparity in the numbers? The difference between the American and Canadian numbers is explained in part by the fact that Canada is a much smaller market than the U.S. As the NERA researchers noted, Canada has about one quarter the number issuers that the U.S. has. As well, Canadian issuers are one tenth as large as American issuers in terms of capitalization. The result is that there are, in the words of the researchers, fewer targets in Canada. Further, the few targets we do have are not very attractive. 9 Even after controlling for market-size, however, the researchers found that securities class actions are less common north of the border. 10 What else might account for the difference in the numbers? The Canadian securities class action bar is still a young one in comparison to that of the United States. The U.S. passed their modern class action legislation in 1966. 11 In contrast, except for in Québec where class action legislation came into force in 1978, 12 class action 7 Canadian NERA study at 3. See also Figure 1 at 4 of the Canadian NERA study. 8 American NERA study, Figure 1 at 2. 9 Canadian NERA study at 3. 10 Canadian NERA study at 3. 11 U.S. Federal Rules of Civil Procedure, Rule 23 promulgated at (1966), 383 U.S. 1029. 12 Code of Civil Procedure, R.S.Q. c. C-25, Book IX ( Québec Code ). 4

legislation only started to appear in Canada in the early 1990s. 13 Prince Edward Island and the three Canadian territories have yet to enact class action legislation. Kerr v. Danier Leather Inc., 14 which the Supreme Court of Canada resolved in 2007 in favour of the defendant, is the first and only certified securities class action that has proceeded to trial. 15 There remains too little experience with securities class actions in Canada, too little precedent available and too much uncertainty for all but the boldest plaintiff investors to consider using class actions to redress their losses. This is a regrettable feature of the Canadian capital markets as a fair and efficient marketplace needs a balance of civil, criminal and administrative proceedings rather than our current overreliance on regulators to do the job of policing them. The Danier case raises another issue. The Supreme Court of Canada decided to uphold the Court of Appeal s decision to order the representative plaintiff to pay more than $1 million of the defendant s costs. Costs awards are allowed in class actions in Canada at the discretion of the court. 16 This factor coupled with the fact that Canada has historically 13 Ontario was the first province after Québec to enact class action legislation, Class Proceedings Act, 1992, S.O. 1992, c. 6 ( Ontario Act ). Soon after, British Columbia enacted their Class Proceedings Act, R.S.B.C. 1996, c. 50 ( B.C. Act ). A few years later, Saskatchewan (Class Actions Act, S.S. 2001, c. C- 12.01 ( Saskatchewan Act )), Newfoundland & Labrador (Class Actions Act, S.N.L. 2001, c. C-18.1 ( Newfoundland Act )), Manitoba (Class Proceedings Act C.C.S.M. c. C130 ( Manitoba Act )), the Federal Court (Federal Court Rules, 1998, SOR/98-106, Part 5.1, as amended by Rules Amending the Federal Court Rules, 1998, SOR/2002-417, as amended by Rules Amending Certain Rules Governing Practice and Procedure Applicable to the Federal Court (Representative Pleadings, Class Proceedings and Other Amendments), SOR/2007-301 ( Federal Act )) followed suit and then Alberta (Class Proceedings Act, S.A. 2003, c. C-16.5 ( Alberta Act )), and New Brunswick (Class Proceedings Act, S.N.B. 2006, c. C- 5.15 ( New Brunswick Act )). Nova Scotia s act, Class Proceedings Act, S.N.S. 2007, c. 28 ( Nova Scotia Act ), has not yet been proclaimed into force. 14 [2007] 3 S.C.R. 331 (S.C.C.) ( Danier ). 15 Canadian NERA study at 9. 16 See section 31 of the Ontario Act; sections 37-38 of the B.C. Act; section 37 of the Alberta Act; section 40 of the Saskatchewan Act; section 37 of the Manitoba Act; sections 477 and 1050.1 of the Québec Code; section 37 of the Newfoundland Act; section 39 of the New Brunswick Act; and section 40 of the Nova Scotia Act. See also section 334.39 of the Federal Act. 5

awarded lower damage awards than the United States will also undoubtedly deter plaintiffs from class actions. 17 Finally, there may have been fewer securities class actions in Canada because until recently it was very difficult for plaintiffs in the secondary market to bring claims for misrepresentation, as they had to demonstrate reliance on the alleged misrepresentation causing their loss. 18 On the other hand, plaintiffs in the United States did not have to prove individual reliance on the misrepresentation. 19 All of the Canadian provinces and territories have now enacted statutory civil liability provisions for misrepresentations in the secondary market. 20 Many experts expected a torrent of shareholder class actions would be unleashed and sought various explanations 17 C. William Hourigan and Sarah J. Armstrong, Two Countries, Two Class-Action Systems LEXPERT (November 2008) at 93-94, online: Fasken Martineau <http://www.fasken.com/files/publication/5faf9698-123c-4713-9d43-78b1a4c7137f/presentation/publicationattachment/bd605914-0c42-439f-8047-8aa312716320/two%20countries%20two%20class-action%20systems.pdf>. 18 Ibid. at 94-96. 19 Ibid. at 95. Most American claims for misrepresentations in secondary market disclosure materials have been brought under Rule 10b-5 of the Securities and Exchange Act of 1934, 48 Stat. 881, 15 U.S.C. s.78a, which does not require individual reliance. In fact, the American courts rebuttably presume that investors purchasing securities in the secondary market relied on disclosure documents when the market price of the securities reflects the misrepresentation. 20 Ontario was the first province in Canada to adopt a statutory civil liability regime for secondary market disclosure. The relevant provisions are found in Part XXIII.1 of the Securities Act, R.S.O. 1990, c. S.5, sections 138.1 to 138.14 ( Ontario Securities Act ). See also Part 16.1, sections 140.1 to 140.94 of the Securities Amendment Act, S.B.C. 2007 c. 37 ( B.C. Securities Act ), Part 17.01 of the Securities Act, R.S.A. 2000, c. S-4 ( Alberta Securities Act ); Part XVIII.1, sections 136.01 to 136.7 of the Securities Act, 1988, S.S. 1988-89, c. S-42.2 ( Saskatchewan Securities Act ); Part XVIII, sections 174 to 196 of The Securities Act C.C.S.M. c. S50 ( Manitoba Securities Act ); Title VII, Chapter II, Division II, sections 225.2 to 225.33 of the Securities Act, R.S.Q. c. V-1.1 ( Québec Securities Act ); Part 11.1, sections 161.1 to 161.9 of the Securities Act, S.N.B. 2004, c. S-5.5 ( New Brunswick Securities Act ); sections 146A to 146N of the R.S.N.S. 1989 c. 418 ( Nova Scotia Securities Act ); Part 14, sections 122 to 135 of the Securities Act, R.S.P.E.I. 1988, Cap. S-3.1 ( P.E.I. Securities Act ); Part 14, sections 124 to 135 of the Securities Act, S.Y. 2007, c.16 ( Yukon Securities Act ); Part 14, sections 122 to 135 of the Securities Act, S.N.W.T. 2008,c.10 ( Northwest Territories Securities Act ); and Part 14, sections 122 to 135 of the Securities Act, S.Nu. 2008, c.12 ( Nunavut Securities Act ). 6

when it appeared that the predictions had not come true. 21 It may be that the torrent was merely delayed. Of the 9 securities class actions filed this year, 6 were class actions filed by Siskinds LLP under the civil liability for secondary market disclosure misrepresentation provisions of the Ontario Securities Act. 22 Class actions for misrepresentations in continuous disclosure documents may continue to increase in the future, especially once we learn whether Silver v. Imax, Court File No. CV-06-3257-00 will be certified. As a general statement, securities class actions seem to be on the rise. The 9 securities class actions filed in Canada in 2008 represent a 125% increase over the 4 actions filed in 2007. 23 Similarly, 255 securities class actions were filed in the U.S. in 2008, whereas 195 actions were filed in 2007. There was a 31% increase in the number of filings in 2008. 24 A possible explanation for the increase in the Canadian number has already been provided. Plaintiffs may be more prepared to test the secondary market liability provisions than in the past. The onset of the credit crisis may however, also accounts for the increase in the number of filings this past year. Nearly half of the cases filed in American courts in 2008 were related to the credit crisis. In contrast, only one fifth of all filings in 2007 were credit- 21 Julian Melnitzer, Is the Bill 198 bear finally coming out of its cave? Law Times (August 27/September 3, 2007), online: Siskinds LLP <http://www.siskinds.ca/pdfs/bill_198.pdf>. See also Stephen Zolnay, Securities Class Action Update: One Year After Bill 198 Mergers & Acquisitions Brief (Spring 2007) at 7, online: Lang Michener <http://www.langmichener.ca/uploads/content/lm_m&abrief_spring2007.pdf>. 22 See the Siskinds website: <http://www.classaction.ca/content/actions/index.asp#securities> for brief descriptions of their current securities class actions. 23 Canadian NERA study at 3. 24 American NERA study at 2. 7

related. 25 The after-effects of the American credit crisis have been felt globally and Canada is no exception. The fact that 2 of the 9 cases filed in 2008 in Canada were creditrelated cases may be a reflection of this. 26 Although likely good for investors, the madein-canada ABCP solution was a bad day for the Canadian plaintiffs bar. B. Settlement of securities class actions The authors were also interested in the results of NERA s study of the outcomes of securities class actions. The researchers found that 20 of the 42 (47%) of the securities class actions in Canada have resulted in full or partial settlement. 27 Of the 729 American securities class actions that were filed between December 14, 2001 and December 14, 2006 and that arrived at some resolution, 55% ended in a settlement. 28 It is clear from these results that a large portion of securities class actions are settled. Settlements are necessarily attractive for both sides numerous reasons, some of which we will outline. Often, they are more cost-effective for defendants than a trial. As the number of securities class actions that are initiated increases, the authors expect that the number of settlements that are agreed to and approved will certainly also increase, especially in light of current economic conditions. 25 Ibid. 26 Canadian NERA study at 6. 27 Ibid. at 10. 28 American NERA study at 7. 8

(i) Why settle? (a) The pros to settling There are many reasons why parties choose to settle a case. The most obvious reason is that settlement allows the parties to arrive at a resolution without the risks and expense of a trial. It is trite to say that litigation is often a long and expensive process. This may be especially true of complex corporate and securities class action litigation for several reasons. Class actions have an extra procedural step not required in other civil actions, namely the certification motion. Cases being brought forward under the secondary market civil liability have another step on top of that; they may only go forward with leave of the court. 29 Extra procedural steps increase the cost of litigation. As well, parties will likely spend significant amounts retaining expert valuations and damage estimates. Plaintiffs will likely ask for large damage awards, and defendants will likely contest the amounts being claimed. Costs are an important consideration for all parties. As mentioned, a party who is unsuccessful at trial may be liable for the costs of the successful party. 30 Settlements, especially if achieved early, allow parties to achieve resolution in a less costly manner than trial. 29 See section 138.8 the Ontario Securities Act; section 140.8 of the B.C. Securities Act; section 211.08 of the Alberta Securities Act; section 136.4 of the Saskatchewan Securities Act; section 191 of the Manitoba Securities Act; section 225.4 of the Québec Securities Act; section 161.41 of the New Brunswick Securities Act; section 146H of the Nova Scotia Securities Act. As mentioned, Prince Edward Island and the three territories do not yet have class action legislation. However, they have enacted legislation providing for civil liability for misrepresentations in the secondary market. The leave provisions in these acts can be found in section 129 of the P.E.I. Securities Act; section 129 of the Yukon Securities Act; section 129 of the Northwest Territories Securities Act; and section 129 of the Nunavut Securities Act. 30 See note 16, supra. 9

Settlements also bring certainty and finality to the parties much sooner than a trial, allowing the parties to move forward with their respective business lives more quickly. This may be especially beneficial for corporate defendants and their investors. As Peter Chapman, executive director of the Shareholder Association for Research and Education, observed: the downside of a class action is that it takes the resources both the management s attention and the financial resources of the company away from its primary aims, and so that can be quite destructive for both the company and its investors. 31 This statement has certainly proved true in the Hollinger case. Hollinger International, Inc. and its parent Hollinger Inc., and certain of their former directors and officers, faced and continue to face numerous proceedings against them in relation to excessive management fees paid to their executives. There were class actions in Illinois, Ontario, Saskatchewan and Québec, various other related civil actions, as well as regulatory and criminal proceedings. The companies have been criticized for placing too much focus on litigation and not enough on running the businesses, leaving shareholders out to dry. 32 By 2003, Hollinger International, Inc. had spent more than $198.6 million USD in legal fees while only being able to recover $157.6 million USD from the settlements achieved by that time. 33 Hollinger Inc. has faired even worse. It was ordered to cease trading on July 23, 2008 and is now subject to proceedings under the Companies Creditors 31 David Dias, Rush for Judgment National Post Business (1 September 2004) 72, online: Toronto Public Library <http://proquest.umi.com.ezproxy.torontopubliclibrary.ca/pqdweb?index=176&did=691636031&srchmod e=3&sid=1&fmt=3&vinst=prod&vtype=pqd&rqt=309&vname=pqd&ts=1233933770&clientid =1525&aid=4>. 32 Theresa Tedeso, Hollinger shareholders left out to dry, Financial Post (10 December 2007), online: Financial Post <http://www.financialpost.com/story.html?id=152738>. 33 Ibid. 10

Arrangement Act (Canada) and Chapter 15 of the U.S. Bankruptcy Code. 34 It is certainly arguable that if a greater effort had been made by new management to settle many of the actions early on, the Hollinger entities would have avoided much of their litigation cost and thereby focused on rebuilding their business on behalf of their shareholders. This may be an opportune time to examine just how much money settlement can save defendants in a securities class action. The Canadian and American NERA reports studied settlement amounts in comparison to the size of the damages being claimed. The researchers found that the median percentage recovery in Canadian cross-border cases was 11.2% and that the average percent recovery in such cases was 12.6%. The median percentage recovery in Canadian domestic cases was 7.2% and the average percent recovery in such cases was 18.0%. 35 Using investor losses 36 as a proxy for plaintiffstyle damages, the researchers found that the median ratio of settlement to investor loss has been 2-3% since 2002. 37 Settlements provide certainty because they can dispose of all the claims, present and future against the defendants by the plaintiff settlement class; settlements serve as res judicata. The authors note that class action legislation allows class members to opt out of 34 Hollinger Inc., Press Release, Hollinger Inc.: Settlement of Shareholder Class Action Receives Preliminary Approval of Ontario Court (16 November 2008), online: Hollinger Inc. <http://www.marketwire.com/press-release/hollinger-inc-tsx-hlg.c-920981.html>. 35 Canadian NERA study at 11-13. See also Tables 1 and 2 at 11-12 of the Canadian NERA study. 36 Investor losses were measured by comparing a company s return to the return on the S & P 5000 over the class period and using the proportional decay tracing model to estimate the number of affected shares of common stock. See American NERA study at 12. 37 American NERA study at 15. See also Figure 15 at 14 of the American NERA study. 11

class actions. 38 Such plaintiffs may pursue further litigation against the defendants. Practically speaking however, the risk of this occurring is said to be relatively small 39 and is usually included as a condition to the settlement such that the agreement falls apart if there are too many opt outs. 40 Settlement also means that defendant corporations do not have to disclose in their financial statements and other disclosure materials that they are facing pending litigation and to provide a reserve for that litigation. They can therefore avoid the negative effect such reports have on the value of the shares of defendant corporations and the ability of these corporations to obtain financing. 41 Settlement may also help improve the public image of the defendant corporations if it appears that the corporation is settling in good faith. 42 (b) The cons of settling Settlement is an attractive option for parties. However, it is important to keep in mind that there are also disadvantages to settling. For one, most claims are settled before examinations for discovery. As such, the facts and issues of a case are not fully examined 38 See section 9 of the Ontario Act; section 16 of the B.C. Act; section 17 of the Alberta Act; section 16 of the Manitoba Act; section 18 of the Saskatchewan Act; section 1007 of the Québec Code; section 18 of the New Brunswick Act; section 17 of the Newfoundland Act; section 19 of the Nova Scotia Act; and section 334.21 of the Federal Act. 39 McCarthy Tétrault, Defending Class Actions in Canada, 2 nd ed. (Toronto: CCH Canadian Limited, c. 2007) at 248 ( McCarthy Tétrault ). Among the factors considered when deciding whether to approve a settlement, courts consider the support of the members of the class. See note 63, infra. It is unlikely that the court will approve a settlement with substantial opposition from class members. Further, defendants can negotiate the settlement such that they have the right to terminate the settlement if a certain portion of class members opt out of the agreement. 40 See note 52, infra. 41 Ward K. Branch, James H. MacMaster, and John C. Kleefeld, Class Action Settlements: Issues and Approaches (May 2002) at 4, online: Branch MacMaster <http://www.branmac.com/go/download/classactions_settlements.pdf>. 42 McCarthy Tétrault, supra note 39 at 246. 12

or considered. The parties will not know with certainty the full class size, the estimated damages, or each defendant s proportionate damages. 43 Plaintiffs may be entitled to more than they settle for. Conversely, it is possible that defendants in certain cases could have been successful on the certification motion, or not be liable at all to the plaintiffs. As well, settlements may be disadvantageous to defendants in the short term, as defendants would be incurring a financial obligation sooner than if they let the litigation proceed. Defendants are also usually responsible for the costs of administering the settlement. 44 Finally, rather than see it as an act of good faith, the public may perceive the settlement as an admission of liability by the defendants. 45 (ii) Lessons learned? It of course goes without saying that parties must weigh the likelihood of their success at trial together with the costs of defending with the benefits and disadvantages that settlements offer. If after all of these factors have been considered the parties decide to settle the claim, what practical suggestions can we make as they negotiate a settlement? (a) When should parties settle? The earlier parties settle the fewer legal expenses they will incur. While settlement at the pre-filing stage may be premature, as parties are unlikely to have enough information to determine the merits of the claims and arrive at a reasonable settlement offer, this is 43 Joseph Groia and Alexandrea Jones, Class Action Settlements: A New Era is Upon Us (Presented at the Law Society of Upper Canada s CLE, The Twelve-Minute Securities Lawyer 2008, 18 May 2008) at 11-2 ( Groia ). 44 McCarthy Tétrault, supra note 39 at 247. 45 Ibid. at 248. 13

usually a good time to reach a settlement. 46 The best time to settle however, seems to be after filing but before certification. The plaintiffs will have shown that they are serious about their claim and can avoid the risks of not being certified as a class. Defendants can use the risk of not being certified as a bargaining chip to negotiate lower settlement amounts. 47 Success on a certification motion inevitably shifts the bargaining power in favour of the winning side. 48 (b) Are there any special terms that should be included in the settlement agreement? Because settlement agreements act as res judicata against further claims by the settling class members, defendants will want to define the settlement class as broadly as possible. As such, defendants should consider including provisions in the settlement agreement to preclude actions by future claimants, those who at the time of settlement do not know that they have a claim. Plaintiffs may also require defendants to set funds aside to redress future claimants. 49 46 Groia, supra note 43 at 11-3. 47 Ibid. at 11-3. 48 The various class action legislations prescribe that courts consider the following factors when determining whether to certify a putative class: (a) whether the pleadings or the notice of application discloses a cause of action; (b) whether there is an identifiable class of two or more persons that would be represented by the representative plaintiff or defendant; (c) whether the claims or defences of the class members raise common issues; (d) whether a class proceeding would be the preferable procedure for the resolution of the common issues; and (e) whether there is a representative plaintiff or defendant who (i) would fairly and adequately represent the interests of the class, (ii) has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and (iii) does not have, on the common issues for the class, an interest in conflict with the interests of other class members. See section 5(1) of the Ontario Act. Similar provisions are found in section 4(1) of the B.C. Act; section 5(1) of the Alberta Act; section 6(1) of the Saskatchewan Act; section 4(1) of the Manitoba Act; section 1003 of the Québec Code; section 6(1) of the New Brunswick Act; section 5(1) of the Newfoundland Act; section 7(1) of the Nova Scotia Act; and section 334.16 of the Federal Act. 49 McCarthy Tétrault, supra note 39 at 261-263. 14

As well, putative class members are entitled to opt out of the action. 50 Opting out means that they are not bound by the settlement and that they may therefore pursue further litigation against the defendants. If a large portion of plaintiffs decide to opt out of the settlement, it becomes inutile for defendants. While the risk of this actually happening may be small, 51 defendants will usually consider reserving a right to reduce the settlement fund if a certain number of class members drop out of the settlement. Alternatively, defendants may want to reserve the right to terminate the settlement agreement if a certain proportion of the settlement class members opt out of the agreement. The latter type of provision is known as a blow provision. Another form of the blow provision is the right to terminate the settlement in a multi-jurisdictional class action if the settlement is not approved in the other jurisdictions. 52 In the case of partial settlements, settling defendants should make sure that the settlement clearly and fully extinguishes their liability from all claims by the plaintiffs. They may also want to preclude non-settling defendants from pursuing claims against them. This may be done through bar orders, provisions in the settlement preventing non-settling defendants from making claims for contribution or indemnity. 53 To protect their goodwill and reputation, defendants may also want to include provisions in the settlement agreement which explicitly state that settlement was a business decision, 50 See note 38, supra. 51 See note 39, supra. 52 McCarthy Tétrault, supra note 39 at 277. As we will discuss, settlements generally require court approval. See note 62 infra. 53 McCarthy Tétrault, supra note 39 at 265-266. 15

and not an admission of liability. 54 Plaintiffs on the other hand will want to make it clear that the settlement was in the best interest of the class members and not due to a concern about their chances of success. (c) How should the settlement be structured? There are several ways a settlement may be structured. Parties may decide to use a fundbased settlement, where defendants establish a fund of a prescribed amount of money. Usually this will be a one-time contribution from which all the plaintiffs will be entitled to claim compensation. To determine what the appropriate settlement amount is, the defendants may rely on estimates of class size and damage claims and/or statistical studies. The parties may also agree to hold-back a certain amount from the fund if they are unsure of whether there is enough money in the fund for all the claims. If there is a hold-back provision plaintiffs will initially receive a reduced damage award; if the court is satisfied that there is sufficient money in the fund to cover all the claims they will then be paid the amount that was held back. Fund-based settlements offer defendants the advantage of capping their liability. As well, defendants may be able to negotiate the return of any funds that are unclaimed. 55 The parties may opt for a mechanism-based settlement. In this type of structure, there is no cap on what plaintiffs may recover from the defendants. Instead the plaintiffs recovery depends on proof of the extent of their damages. This type of settlement 54 Ibid. at 276. 55 Ibid. at 271, 273. 16

structure may be risky for defendants if the number of claimants and the extent of their claims are unknown at the time of the settlement. 56 The parties may also agree to a mixed structure blending fund-based settlement and mechanism-based settlement structures. The most common type of mixed structure is a one time fund that caps the defendants liability but from which the plaintiffs can recover differing amounts depending on the extent of their losses. 57 Finally, while settlements are most often paid out in cash, the parties may agree to nonmonetary compensation including stocks, warrants to buy stock or credits against future transactions with the defendants. 58 For example, TD Waterhouse was faced with class actions in British Columbia and Ontario several years ago by plaintiff clients who made trades on foreign exchanges between May 1994 and November 2001. The plaintiffs sued TD Waterhouse for making profits from the currency conversions required for these trades. 59 After approximately 8 months of negotiations, TD Waterhouse settled both actions. Instead of setting up a cash settlement fund, however, TD offered the plaintiffs trade credits which could be applied against the costs of future trades in a TD 56 Ibid. at 271-272. 57 Ibid. 58 These sorts of arrangements seem to be widely accepted in the United States. See Alba Conte & Herbert Newberg, Newberg on Class Actions, 4 th ed. (St. Paul, Minn. : Thomson West, c2002) at 284-290 for a review ( Newberg ). 59 Scott and Ballingall v. TD Waterhouse Investor Services (Canada) Inc. and TD Securities Inc., Supreme Court of British Columbia Action No. S002736, Vancouver Registry and Chisholm v. TD Waterhouse Investor Services (Canada) Inc. and TD Securities Inc., Ontario Superior Court of Justice Court File No. 03-CV-481. 17

Waterhouse account. 60 Non-monetary settlements can be attractive options for defendants because they allow defendant corporations to protect their cash reserves. 61 (d) Other considerations Settlements require court approval. 62 As such, the authors want to conclude this section of the paper by reviewing the factors courts consider when deciding whether to approve a settlement agreement. The overarching consideration is whether a settlement is fair, reasonable and in the best interests of the class as a whole. 63 To be more specific, however, it is now well-accepted that the courts consider the following factors on an approval motion: o the likelihood of recovery or of success; o the amount and the nature of discovery evidence; o the terms and conditions of the settlement; o the recommendations and experience of counsel; o future expense and the likely duration of the litigation; o the recommendations of any neutral parties; o the number of objectors and the nature of their objections; 60 A copy of the approval order from Justice Brockenshire of the Ontario Superior Court can be found online: Sutts, Strosberg, LLP <http://www.strosbergco.com/td_waterhouse//documents/116734_judgment.pdf>. 61 Newberg, supra note 58 at 296. 62 The class actions legislation in each of Ontario, Québec, and New Brunswick require court approval of settlements whether they are agreed to before or after certification. The same is true of Nova Scotia. See section 29(2) of the Ontario Act; sections 1016 and 1025 of the Québec Code; sections 1 and 37 of the New Brunswick Act; and sections 2(d) and 38 of the Nova Scotia Act. The other jurisdictions only require court approval of post-certification settlements. See sections 1 and 35 the B.C. Act; sections 1 and 35(1) of the Alberta Act; sections 1 and 38 of the Saskatchewan Act; sections 1 and 35 of the Manitoba Act; sections 2 and 25 of the Newfoundland Act; and section 334.29 of the Federal Act. 63 Dabbs v. Sun Life Assurance Co. of Canada, [1998] O.J. No. 1598 (Ct. J. (Gen. Div.)) (QL) at paras. 11 and 25 ( Dabbs ). 18

o the presence of good faith and the absence of collusion; 64 o the degree and the nature of communications by counsel and the representative plaintiff with class members during the litigation; and o information conveying to the court the dynamics of, and the positions taken by the parties during the negotiation. 65 Courts will also consider whether the settlement has been approved in other jurisdictions. 66 These factors will also serve as a guide to the parties during settlement negotiations. Conclusion The authors are pleased to see that Canadian securities actions hit the big time as evidenced by the new study by NERA on Canadian securities class actions. We hope it will encourage further studies in the future. Securities class actions, while still very new to Canada, seem to be catching on and are likely to continue to gain momentum in the near future as investors grapple with the market. 67 To quote Frank Sinatra: who knows where the road may lead us? Only a fool may say, but let s make all the stops along the way. 64 Justice Sharpe adopted these factors from American law in paragraph 13 of Dabbs, supra note 63. 65 These last two factors were added by Justice Winkler in paragraph 72 of Parsons v. Canadian Red Cross Society, [1999] O.J. No. 3572 (Sup. Ct.) (QL). 66 Dabbs, supra note 63 at para. 10. 67 Larry Bodine, Litigation Will Lead the Legal Profession Out of the Recession in 2009 Lawmarketing Portal (19 January 2009), online: Lawmarketing Portal <http://www.lawmarketing.com/pages/articles.asp?action=article&articlecategoryid=58&articleid=846>. 19