Ontario not a universal jurisdiction for statutory secondary market securities lawsuits

In the recent case of Yip v. HSBC Holdings PLC, the Ontario Court of Appeal declined to allow the proposed securities class action to proceed on the basis that the defendant did not have a “real and substantial connection” to Ontario. HSBC’s shares are listed on the London and Hong Kong Stock Exchanges, with secondary listings on the Bermuda Stock Exchange and the Paris Euronext Stock Exchange. The plaintiff bought shares of HSBC on the Hong Kong Stock Exchange using funds contained in a Hong Kong bank account. The purchase was executed on the plaintiff’s computer located in Markham, Ontario. Disclosure documents were also accessed via HSBC’s website from the plaintiff’s computer in Ontario.

Mr. Yip filed a statutory secondary market claim for misrepresentation under Part XXIII.1 of the Ontario Securities Act (the Act), alleging that various misleading representations were present in HSBC’s continuous disclosure documents and public statements. These misrepresentations misled investors, causing HSBC securities to be purchased at inflated prices and eventually leading the proposed class to incur approximately USD $7 billion in losses.

The lawsuit hinged on whether HSBC was a “responsible issuer” as set out in s.138.1 of the Act. The second prong of the definition to qualify as such refers to “any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded”. HSBC argued that it did not have a “real and substantial connection” to Ontario, and was therefore not a “responsible issuer” and thus the court lacked jurisdiction over the claim.

In upholding the trial court’s decision, the Court of Appeal applied the existing common law “real and substantial connection” test and found that HSBC “could not be said to be carrying on business in Ontario simply because [the plaintiff] could access a non-reporting issuer’s disclosure information using his home computer in Ontario”. The court endorsed the trial judge’s conclusion that downloading HSBC’s material from a website was an “extremely weak connection” and that “HSBC…had no reason to believe that it was obliged” to comply with or would be subject to securities regulation in Ontario. In the result, the court upheld the lower court decision in dismissing the statutory claim and staying the related common law claim on the basis that Ontario does not have jurisdiction, and, even if it did, Ontario is not the appropriate forum to hear the complaint.

In an era of international securities trading, this decision brings a measure of clarity to the extent of Ontario’s jurisdiction in statutory secondary market cases. However, the decision in this case was heavily dependent on the facts – it is not impossible to imagine a scenario in which a “responsible issuer” may be found to have a “real and substantial connection” to Ontario despite its securities not being traded on a local exchange. Even though HSBC was ultimately successful, substantial defence costs were likely incurred. A directors’ and officers’ (D&O) liability insurance policy can provide coverage for defence costs, settlement and judgement amounts for a public company, and its board and management, when faced with a securities lawsuit.