When Ontario passed legislation in 2005 giving ordinary investors the right to sue companies for misleading them, many people wondered if the new rules would have any real teeth. Now, two Ontario judgments seem to suggest that they do.

As a result of decisions dealing with a $165-million claim against Winnipeg-based Arctic Glacier Income Fund and a $600-million claim against Toronto-based Imax Corp., it appears that class actions by disgruntled inves-tors in the secondary markets will be much easier to launch.

There is also a possibility that financial advisors could find themselves included as defendants in such class actions — as “experts” who have misled investors — under Section 138 of the Ontario Securities Act, although that possibility is viewed as unlikely.

“The overall message,” says Jeffrey Leon, partner with law firm Bennett Jones LLP in Toronto and counsel for an officer of Arctic Glacier, “is that the courts thus far in Ontario have set a relatively low bar in terms of the evidence required to get leave [to certify a class action].”

That “low bar” reflects rising public impatience with inaccurate statements made by public firms. “A lower threshold for certifying class actions,” says Karim Jamal, chairman of the University of Alberta’s department of accounting operations, “means the courts are taking disclosure seriously.”

In the Arctic Glacier case, decided early last month, inves-tors had argued that the mutual fund trust, which owns a packaged-ice business, misrepresented itself as a law-abiding corporate citizen. In 2009, the parent company had pleaded guilty to participating in an anti-competitive conspiracy in the U.S. and agreed to pay a fine of US$9 million. Prior to this settlement, the price of the company’s stock dropped significantly over a seven-month period.

In Imax, that company’s shares plummeted by 40% after it announced that the U.S. Securities and Exchange Commission was asking questions about when Imax had recorded certain revenue and costs. Imax subsequently restated its financial results and admitted it had made a mistake.

According to Dimitri Lascaris, partner with Siskinds LLP in London, Ont., who had represented the plaintiffs in the Arctic Glacier case, these recent court decisions are likely to have an important impact on issuers going forward: “Until now, there has been no real palpable threat to the business community, [which] is [now] being significantly more prudent about its disclosure practices.”

Individual companies and their directors are also likely to have more sleepless nights. “The easier it is to approve class proceedings,” notes Nigel Campbell, partner with Blake Cassels & Graydon LLP in Toronto, “the more vulnerable an issuer becomes.”

The 2005 legislation does include a “cap” on damages, limiting them to 5% of an issuer’s market capitalization, although some legal experts think that limit may now be in doubt.

Financial advisors, Campbell adds, may want to keep abreast of similar cases as they move through the legal system — and keep their clients aware of developments that may affect them.

Advisors could also find themselves in the middle of similar cases if they are considered “experts” under the definition in Sec. 138. Says Miguel Mendes, lawyer with Ogilvy Renault LLP in Toronto: “When you look at Section 138 closely, it leaves open a possibility that [financial advisors] might somehow be liable one day.”

These court decisions also allow claims not specified in Sec. 138. These common-law claims — the basis for individual claims before Sec. 138 — have been extended to class actions. Now, some lawyers believe, the courts have become too permissive.

Leon, for one, says the pendulum has swung too far in favour of plaintiff-investors: “The legislature levelled the playing field. [But] if you permit all claims to go through, it might be argued this has not been achieved.” IE