Ontario Court conditionally approves litigation funding agreement in securities class action

March 24, 2011

In Dugal v. Manulife Financial Corporation the Ontario Superior Court of Justice recently granted conditional approval of a funding agreement under which a third party will indemnify the plaintiffs in a proposed class proceeding against their exposure to the defendants’ costs in return for a share of the proceeds of any recovery in the litigation.

BACKGROUND

In this proposed class proceeding, the plaintiffs claim that Manulife Financial Corporation (Manulife) made misrepresentations concerning its risk management practices in its public disclosure documents that had the effect of artificially inflating the value of its stock. 

The plaintiffs brought a motion seeking approval by the Court of a funding agreement with Claims Funding International PLC (CFI), an Irish corporation, on the following material terms: (i) CFI is entitled to a commission of 7% of any settlement or judgment, after deduction of class counsel's fees and disbursements and administration expenses; (ii) the commission is subject to a "cap" of $5 million if the resolution occurs prior to the filing of the plaintiffs' pre-trial conference brief and $10 million if the resolution occurs thereafter; (iii) CFI will pay $50,000 towards the plaintiffs' disbursements; (iv) class counsel are required to advise CFI of any significant issue in the proceeding, including prospects of success, strategy and quantum, and class counsel are required to respond to any reasonable request by CFI for information about the proceeding; (v) CFI acknowledges that the representative plaintiffs are to instruct counsel and that counsel's duties are to the plaintiffs and not to CFI; (vi) the plaintiffs must conduct the proceeding in a manner that avoids unnecessary costs and delay and must provide full and honest instructions to class counsel; (vii) CFI is not required to provide funding for any appeal unless it independently decides to do so; (viii) CFI is only entitled to terminate the agreement if the plaintiffs breach their obligations referred to above or appoint different lawyers to replace class counsel; (ix) the agreement is governed by the laws of Ontario and Canada and is subject to the exclusive jurisdiction of the Ontario courts; and (x) the agreement does not come into effect unless approved by the Court.

Prior to the motion class counsel provided notice of the proposed funding agreement to the 25 independent investment funds or pension funds that held the largest number of Manulife shares during the class period.  In addition, notice was given to 68 class members, who have contacted class counsel to advise that they purchased Manulife shares during the class period.  There was no opposition from any of the persons notified.

The Defendants’ Concerns

The defendants raised a number of concerns.  They argued that the funding agreement: is, or may be, champertous and therefore unlawful under the An Act Respecting Champerty; fails to provide any assurance that costs would actually be paid if the plaintiffs are unsuccessful; and does not provide adequate protection for confidential information obtained by plaintiffs’ counsel. 

THE DECISION

Justice Strathy examined both the agreement and the defendants’ concerns and approved the funding agreement, subject to amendments.  His Honour was satisfied that the Court had jurisdiction to approve the agreement as part of its inherent jurisdiction to control its own process.  Additionally, His Honour stated that jurisdiction pursuant to s. 12 of the Class Proceedings Act, 1992 was not dependent upon the action having been certified.  In exercising the Court’s supervisory jurisdiction, Justice Strathy noted that he was entitled to put himself in the shoes of prospective class members and ask whether the proposed agreement was fair and reasonable.  The fact that the agreement was acceptable to a reasonably representative and informed group of prospective class members was not determinative but was an important factor considered.

Justice Strathy stated that he would approve the funding agreement subject to receiving further evidence, and if the parties were unable to agree, further submissions on two areas of concern that had been raised by the defendants.  First, CFI had no assets in Canada and provided no evidence concerning its capacity to satisfy a costs award.  In these circumstances, His Honour stated that the Court would not approve the agreement without the provision of adequate security and that he would also consider whether the defendants should be given a direct right against the security.  Second, His Honour stated that there should be some reasonable controls on the provision of information to CFI and that appropriate guidelines needed to be established to recognize the interests of both CFI and the defendants. 

Subject to satisfactory amendments to the funding agreement to address the above noted concerns, His Honour decided to approve the funding agreement because:

  1. It would help to promote an important goal of the CPA, providing access to justice;
  2. There was no evidence that CFI stirred up, incited or provoked this litigation, within the meaning of "moved" in s. 1 of An Act respecting Champerty;
  3. The indemnification agreement left control of the litigation in the hands of the representative plaintiff.  It did not permit officious intermeddling by CFI in the conduct of the litigation but allowed CFI to receive appropriate information about the progress of the litigation, consistent with its need to manage its own financial affairs;
  4. The 7% commission was, in general, reasonable and consistent with the 10% commission that would be payable to the only other available source, the Class Proceedings Fund;
  5. The commission cap was reasonable and was a fair reflection of the potential downside risk facing CFI ($10 million in costs);
  6. The commission was acceptable to the representative plaintiffs, both of whom are sophisticated investors, and to a large and reasonably representative cross-section of class members;
  7. The possibility of a "windfall" recovery to CFI, when balanced against the probability of protracted litigation and a somewhat speculative result, was a factor that a commercial risk-taker must take into account in determining the amount of its compensation;
  8. The existing state of affairs, in which the defendants profess every intention of mounting an aggressive and expensive defence, the financial terms of the indemnification agreement were a fair reflection of risk and reward;
  9. The plaintiffs are represented by experienced and highly reputable counsel who can be expected to discharge their duties to the plaintiffs, the class and the Court without being influenced by CFI; and
  10. There will be court supervision of the parties to the agreement.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

Stay in Touch with Knowledge Hub