Danier – Revisited

On October 12, 2007, the Supreme Court of Canada (“SCC”) released judgment in the case of Kerr v Danier Leather Inc, [2007] 3 SCR 331. This securities law case has been discussed by Yu-Sung Soh in a post on October 18, 2007. His post primarily deals with statutory interpretation within the context of potential prospectus misrepresentation, including the difference between material facts and material changes; but I will briefly comment on the case with respect to the Business Judgment Rule, as well as costs in class action suits.

Business Judgment Rule

Yu-Sung has provided a detailed description of the facts in this case, so I will proceed directly into a discussion of this Rule. The Business Judgment Rule is traditionally called upon when people, in hindsight, criticize the decision of a board of directors when they have a choice between various corporate options. A shareholder may be unhappy with a business decision of the board and seeks redress from the courts. The Business Judgment Rule states that courts should not “second-guess” the decisions made by directors and managers, provided that the decisions are reasonable, as the courts recognize that they do not have the expertise, knowledge, and experience of these decision makers. Even if the decision, with the benefit of hindsight, is “wrong,” as long as it is within a range of reasonableness, the courts will not find these decision-makers liable, as managers and directors of companies should be encouraged to use their expertise to make decisions that they believe are in the best interests of the shareholders.

Although the Court of Appeal in this case did not find that the prospectus had an implied representation that the earnings forecast was objectively reasonable, they explained that even if there were such a representation, the trial judge should have deferred to Danier management’s “business judgment” when considering if the earnings forecast was within the reasonable range.

The SCC, however, concluded that the Business Judgment Rule will not apply here, in deciding if Danier, the issuer, had fulfilled its disclosure obligations as defined in Securities Act, RSO 1990, c S 5. In this case, Danier either fulfilled its disclosure obligations, or failed to do so, leaving no room for the court to defer to the management’s business judgment. Therefore, investor protection under the Securities Act is enhanced, as issuers and management are not protected by the Business Judgment Rule when the issue in question is whether the disclosure obligations under the Securities Act have been met.

Costs

Section 31(1) of the Class Proceedings Act, 1992, SO 1992, c 6, explains that:

In exercising its discretion with respect to costs under subsection 131 (1) of the Courts of Justice Act, the court may consider whether the class proceeding was a test case, raised a novel point of law or involved a matter of public interest.

Clearly, therefore, if the class proceeding involved a novel point of law, or matter of public interest, this section allows the court to refuse to award costs against the unsuccessful plaintiff, as class proceedings strengthen access to justice by allowing people, who may otherwise be unable to litigate their issues individually, to bring a case together as a class. The SCC, in this case, ordered the representative plaintiff to pay the defendant’s costs, refusing to exercise its discretion under s. 31(1) of the Class Proceedings Act. Speaking for a unanimous SCC, Binnie J. explained at paragraph 68:

We are certainly not dealing with people on either side who are historically disadvantaged. Nor, as the Court of Appeal noted, ‘is it a contest characterized by significant power imbalance’ ([2006] O.J. No. 3770 (QL), at para. 6). Though many Canadians are investors and the resolution of the present dispute will affect future actions for prospectus misrepresentation, the Court of Appeal rightly concluded that this is, in essence, ‘a commercial dispute between sophisticated commercial actors who are well resourced’ (Ibid.). If anything, converting an ordinary piece of commercial litigation into a class proceeding may be seen by some observers simply as an in terrorem strategy to try to force a settlement. Be that as it may, Mr. Durst was well aware that as a representative plaintiff he ran the risk of being held solely responsible for the defendants’ costs if the action failed. He gambled on his interpretation of s. 130(1) and lost.

Further, at paragraph 63:

However, protracted litigation has become the sport of kings in the sense that only kings or equivalent can afford it. Those who inflict it on others in the hope of significant personal gain and fail can generally expect adverse cost consequences.

This refusal to rescind the order of costs against the representative plaintiff may result in fewer class proceedings in the future. When faced with potentially steep cost awards, representative plaintiffs of class proceedings place themselves in positions of significant risk, as being unsuccessful may cause them to experience significant loss that outweighs any potential gain.