Ontario Appellant Court will examine an Underwriters’ Duty of Care to Investors

(April 8, 2019).  In LBP Holdings Ltd. v. Hycroft Mining Corp., 2017 ONSC 6342, the Ontario Superior Court of Justice (Justice Perell) declined to certify a negligence misrepresentation class action claim against the underwriters of Hycroft Mining Corp.’s (“Hycroft”) secondary offering.

The Plaintiff alleged that the prospectus associated with Hycroft’s secondary offering contained misrepresentations (by omitting material adverse facts about Hycroft’s operations) despite the underwriters providing a certification that the prospectus made full, true and plain disclosures.  In conjunction with the claim against Hycroft, the Plaintiff is seeking to hold the underwriters accountable for their losses that were proximately caused by those misrepresentations, e.g., several weeks after the offering the truth emerged, conflicting with the statements in the prospectus, and the price of Hycroft Mining Corp.’s securities dropped in value.

In denying the certification of the claim against the underwriters (the claim against Hycroft continues), the court primary focused on the possibility of individualized issues of reliance of each member of the putative class (i.e., did each member rely upon the underwriters’ certification in making a decision to purchase shares from them) and the individual damages of the putative class members was too large (i.e., average of USD$200,000 each) to warrant the necessity of a class proceeding, e.g., it would be preferable for each of the 254 putative class members to issue individual claims.  The Plaintiff appealed the decision.

The Ontario Divisional Court (Justices Sachs, Thorburn, and Bale) has allowed the Plaintiff to appeal the decision of the Superior Court of Justice denying the certification of a negligent misrepresentation claim against Hycroft’s underwriters.  The arguments will now advance to the Ontario Appellant Court (Justices Corbett, Backhouse and Myers).

This is an important issue; having the lower court’s decision stand will result in investment banks being immune from civil liability for negligence or outright failure to conduct due diligence when underwriting public offerings.  Further, the decision will be used by investment banks to seek to repeal the law requiring them to provide certifications of truthfulness on all prospectuses.