Overview
In Mask v. Silvercorp Metals Inc. [1] released on July 18, 2014, the Ontario Superior Court of Justice considered whether a plaintiff seeking leave to commence a secondary market liability action under the Securities Act [2] is permitted to obtain corporate documents from the defendant before the leave motion has been adjudicated.
After reviewing the case law applicable to Requests to Inspect Documents (the “Requests”) pursuant to Rule 30.04(2) and the broader policy concerns regarding leave motions under section 138.8 of the OSA, Justice Belobaba held that the Rule cannot be used as a fishing rod, especially before cross-examinations have been conducted in an OSA leave motion.
Background
The plaintiff, a former shareholder of the defendant mining company, seeks to bring a class action against the company and two senior executives for alleged misrepresentations regarding the mineral resources in the defendants’ mines in China and the accounting treatment of certain third-party dealings.
The motions for leave to commence a secondary market liability action under Part XXIII.1 of the OSA and for certification of the action as a class proceeding under the Class Proceedings Act, 1992 [3] are scheduled to be heard in September 2014.
The defendants filed affidavits opposing the plaintiff’s leave and certification motions. The plaintiff, in turn, served Requests under Rule 30.04(2) of the Rules of Civil Procedure, [4] asking that hundreds of documents mentioned in these affidavits be produced for inspection prior to the cross-examinations. The defendants declined to do so, arguing that the plaintiff’s Requests amounted to a fishing expedition.
Discussion
As a preliminary matter, the Court noted that, at best, it was unclear that a Request to Inspect can be used by a shareholder (who is, at most, a putative plaintiff) to augment a pending OSA leave motion. Unless and until leave is granted, the defendant is not yet a “party” to the OSA action, and a “non-party” cannot be forced to produce documents pursuant to the Rule.
Apart from this preliminary issue, the Court noted that the Requests ran afoul of legal principles with respect to specificity, relevance, proportionality, timeliness, prejudice and privilege. The Court agreed with the defendants that allowing the putative plaintiff to conduct a broad examination before the leave motion “in order to rummage through a large volume of (confidential corporate) documents to find evidence that could support the proposed OSA leave motion would seriously prejudice the defendants”.
The Court further held that it would have dismissed the plaintiff’s motion in any event on the basis of broader policy concerns about the nature of the OSA leave motion. The proper scope of cross-examination on an affidavit is always defined by the context of the proceeding itself. In this case, the underlying policy of the leave motion provides some measure of protection against the potentially coercive nature of secondary market claims by discouraging investors from pursuing unsupported actions to the detriment of the shareholders of the target company.
The Court concluded that the Request to Inspect Documents must be restricted in scope and content to a “manageable dimension” that accords both with first principles of documentary production, as well as the statutory language and underlying policy of the OSA leave provisions.
Comment
In arriving at his conclusion, Justice Belobaba referred to a series of Part XXIII.1 cases where Ontario Courts have consistently restricted the examination rights of moving parties to accord with the policy behind the OSA leave motion. This case, while novel in its application to Requests to Inspect Documents, simply reaffirms an existing trend that, in the context of OSA leave motions, a moving party is restricted from compelling oral and documentary evidence from respondents in an effort to make a case from their evidence.
Recent Update
The Plaintiff sought leave to appeal Justice Belobaba’s decision on August 6, 2014, but leave to appeal was denied (see Mask v. Silvercorp Metals Inc., 2014 ONSC 4647). The Court concluded that the plaintiff did not meet the test for leave to appeal from an interlocutory order of a motions judge. Moreover, Justice Perell found that Justice Belobaba’s decision was an exercise of discretion, and his decision was entitled to significant deference:
The truth of the matter is that Mr. Mask has been hoisted on his own procedural petard. He had the choice of proceeding to cross-examinations in accordance with the agreed schedule, but he chose instead to serve Requests to Inspect Documents with 28 separate requests, demanding thousands of pages of otherwise confidential corporate documents, and he did not file any evidence to explain the relevance of, or the necessity of, reviewing all those documents before the cross-examinations.
Mr. Mask was making a tactical maneuver to obtain an examination for discovery and advance rulings on the production of documents in a case for which leave to proceed had not been granted. It was a trip to the tackle and bait store before a fishing expedition and Justice Belobaba, for a variety of reasons, put a stop it.
[1] 2014 ONSC 4161.
[2] R.S.O. 1990, c. S.5 (“OSA”).
[3] S.O. 1992, c. 6.
[4] R.R.O. 1990, Reg. 194, as amended (the “Rules”).
