Standard interpretation of OSA applied: secondary market purchasers have no cause of action for misrepresentation in a prospectus

February 14, 2013

In the recently released decision of Justice Perell in Tucci v. Smart Technologies, secondary market purchasers were excluded from a proposed plaintiff class seeking damages stemming from an alleged misrepresentation in a prospectus under s. 130(1) of the Ontario Securities Act (the “OSA”). This decision confirms the conventional interpretation of s. 130(1), which restricts the statutory cause of action to primary market purchasers.


On July 15, 2010, Smart Technologies, a maker of educational interactive technology products, filed a final Supplemental Prep Prospectus, for its initial public offering (the “IPO”). The IPO closed on July, 20, 2010, and purchasers in the IPO received their Class A shares. However, the Class A shares had also begun trading in the secondary market on July 15, 2010 during the IPO. The proposed plaintiffs argued that the disclosure in the offering materials was materially deficient, and that they suffered damages by acquiring Smart Technologies shares at an inflated price under s. 130 of the OSA (and its provincial equivalents) when a correction regarding disclosure was made on November 9, 2010.

The defendants consented to certification, contesting only the proposed plaintiffs’ attempt to include secondary market purchasers within the defined class.

 Section 130(1) of the OSA provides:

130.  (1)  Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

(b) each underwriter of the securities who is required to sign the certificate required by section 59;

(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;

(d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and

(e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),

or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter.

The plaintiffs argued that “a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public” necessarily included some secondary market purchasers, and attempted to distinguish this case from others where the secondary market purchases occurred after the primary market distribution (Menegon v. Phillips Services Corp. and Kerr v. Danier Leather Inc.). The plaintiffs also argued that, as a matter of public policy, during the initial period of distribution primary and secondary market purchasers are similarly situated and should be treated as such. The plaintiffs relied on the decision in Lawrence v. Atlas Cold Storage Holdings submitting that, in that case, Justice Hoy had not been prepared to find that a proposed plaintiff that had purchased shares on the TSX did not have a claim under s. 130(1).

The Decision

Justice Perell found the plaintiffs’ interpretation of s. 130(1) to be “a strained interpretation”. First, a secondary market purchaser purchases a security offered by a secondary market vendor, and not a security offered by a prospectus. Second, if the plaintiffs’ interpretation were correct, secondary market purchasers would be deprived of a rescissionary remedy since secondary market vendors do not qualify as issuers, selling security holders, or underwriters. Third, no legislative purpose would be served by adding secondary market purchasers to the class because a proposed cause of action was already available to them under Part XXIII.1 of the OSA.

Justice Perell endorsed the B.C. Court of Appeal decision in Pearson v. Boliden Ltd. (2002 BCCA 624), which limited statutory rights for prospectus misrepresentations to investors who purchased securities in the primary market, and held that Menegon and Danier Leather, which the plaintiffs had attempted to distinguish, were clear on this point as well. His Honour rejected the plaintiffs’ attempted use of Justice Hoy’s decision in Lawrence, noting that the reason why it appeared a secondary market purchaser was allowed to advance a claim under s.130(1) was because the secondary market vendor in that case might have been an underwriter making a primary market sale. Justice Perell commented that if the decision in Lawrence did mean that some secondary market purchasers have s. 130(1) claims, he would not follow it and would regard it as wrongly decided on that point.

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