US Second Circuit rules Issuer’s statements concerning regulatory compliance too generic to constitute material misstatements

On March 5, 2019, the United States Court of Appeal for the Second Circuit affirmed the dismissal of a class action claim alleging securities fraud based on purportedly misleading statements made by an Issuer regarding its regulatory compliance efforts. The Second Circuit concluded that the Issuer’s statements were too generic to cause a reasonable investor to rely on them, and rejected the claim as a “creative attempt to recast corporate mismanagement as securities fraud.” Singh v. Cigna Corp., No. 17-3484-cv, 2019 U.S. App. LEXIS 6637 (2d Cir. Mar. 5, 2019).


In early 2012, Cigna Corporation (Cigna or the Company), a health services organization, acquired a regional Medicare insurer, which subjected the Company to strict Medicare regulatory responsibilities. Between 2014 and 2015, Cigna issued several public statements addressing the regulations, including disclosure that it had “established policies and procedures to comply with applicable requirements” and that the Company “expect[ed] to continue to allocate significant resources” towards compliance. Cigna also published a ‘Code of Ethics and Principles of Conduct’ pamphlet (Code of Ethics) affirming the importance of compliance and integrity to the Company. During this same period, however, Cigna received multiple notices from the Centers for Medicare and Medicaid Services (CMS) for a variety of compliance infractions. On January 21, 2016, CMS informed Cigna it would face sanctions for failing to comply with CMS requirements, causing the Company’s stock to fall substantially. Following this drop, a Cigna investor brought a putative class action suit against the Company, claiming that Cigna’s statements regarding its Medicare compliance were materially misleading, constituting fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5.

The Ruling:

The Second Circuit held that the District Court properly dismissed the claim on the basis that the plaintiffs failed to plausibly allege that there was a material misrepresentation (or omission) under Section 10(b) and Rule 10b-5. An alleged misrepresentation is material only if “there is substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares of stock.” According to the Court, neither Cigna’s Code of Ethics nor its public statements created such reliance.

The Court stated that Cigna’s Code of Ethics was a “textbook example of ‘puffery’,” rendering the statements inactionable. Similarly, Cigna’s generic assertions about its policies and procedures and intention to allocate resources towards compliance would not cause a reasonable investor to view the statements as “alter[ing] the total mix of information made available.” All of the Company’s public statements were also followed by acknowledgments of the complex and evolving nature of the regulatory environment. This lead the Court to conclude that the disclosure actually expressed Cigna’s uncertainty as to its ability to adequately comply with Medicare’s regulatory requirements, rather than suggesting accurate compliance. The Company’s statements, therefore, could not be considered materially misleading.


There has been  an uptick in recent years of securities class actions based on corporations’ more general public statements regarding regulatory compliance, as compared to traditional actions which were solely focussed on allegedly misleading financial and accounting disclosure. However, as Singh demonstrates, at least some courts appear to be discouraging this trend. The decision in Singh should offer comfort that corporations’ generic statements about compliance policies and procedures cannot necessarily be recast as specific misrepresentations. Furthermore, the decision supports the notion that corporate mismanagement should not, by itself, give rise to a securities misrepresentation claim.


The author would like to thank Abigail Court, Student-At-Law, for her contribution to this article. 

Not ready yet: OSC rejects bitcoin fund prospectus

On February 15, 2019, the Ontario Securities Commission issued a decision in which it refused to issue a receipt for a prospectus filing made by 3iQ Corp. (3iQ) in respect of The Bitcoin Fund (the Fund).  The decision highlights the challenges faced by issuers seeking to do business in cryptocurrency markets, which regulators continue to view as highly problematic.


3iQ designed the Fund as a non-redeemable investment fund (NRIF) that would expose investors to bitcoin and daily price movements of bitcoin relative to the US dollar.  3iQ filed a non-offering prospectus on behalf of the Fund in order to resolve the concerns of the OSC in advance of issuing units in the Fund.  It intended to convert and refile its prospectus as an offering prospectus to raise proceeds if and when those issues were resolved.

The prospectus indicated that the Fund would appoint Cidel Trust Company to act as custodian of the assets of the fund. However, as Cidel did not have the capacity to hold bitcoin on behalf of the Fund, it would appoint a sub-custodian.

Position of OSC staff

OSC staff submitted that it was simply too early for bitcoin to be considered an appropriate asset for an investment fund available to the public. Staff expressed concern about the gaps between regulatory regimes in other jurisdictions and the high potential for abuse in a cryptocurrency market that is still very difficult to monitor.  Staff also expressed concern about the fact the Fund had not yet received from any sub-custodian a copy of a customary Service Organizational Control (SOC) audit report and submitted that it would be very unusual to rely on a custodian that could not provide such a report on request.

Notably, staff argued that the Fund had not taken sufficient steps to protect investors against the risk of loss of bitcoin, such as by obtaining insurance. Staff also took the position that the prospectus was not compliant with NI 81-102, which limits a NRIF to investing no more than 20% of its net asset value in illiquid assets.  Staff took the position that bitcoin is an illiquid asset, because it is not traded on market facilities on which public quotations in common use are widely available.

Fund manager responses

Among other things, 3iQ argued that Canadian investors are already able to gain exposure to bitcoin through: (i) the securities of issuers holding cryptoassets that went public via reverse takeovers (ii) unregulated exchanges; and (iii) ATMs. Compared to those alternatives, the Fund would be a safer way to invest in cryptoassets with the benefit of the expertise of a professional portfolio manager.  It also argued that it would be able to perform diligence to establish the source of the bitcoin acquired by the Fund to minimize exposure to fraud or other illicit activities.  3iQ also disputed that bitcoin is illiquid with trading volume evidence.

OSC refuses receipt in the public interest

The OSC founded its decision on a concern about the lack of established regulation for the bitcoin market, which raises investor protection issues. In deciding whether it is contrary to the public interest to issue a receipt for the Fund’s prospectus, the OSC is required to consider whether fund operational risks are adequately managed by measures other than providing disclosure of such risks to investors.  It therefore focused its review on operational concerns.

The OSC expressed concern about accurate valuation due to the fragmented and unregulated bitcoin market. Despite the fact that 3iQ had taken steps to ensure reliable, reputable sources of valuation information, the OSC accepted staff’s submission that trading on less reputable platforms can impact pricing on more reputable platforms.  This exposure differentiates bitcoin assets from conventional investments assets.

While the OSC acknowledged that SOC reports are not normally required by staff for publicly-offered investment funds, it stated that “bitcoin is a novel digital asset that requires novel custodial arrangements”. It found that, without customary SOC reports or insurance to protect against the risk of loss of bitcoin held in cold storage, an investment in the Fund presents a novel risk that is unacceptable for a prospectus qualified fund offering.

The OSC also found that bitcoin is an illiquid asset, and as a result, 3iQ’s prospectus was not compliant with NI 81-102.

Decision expresses regulatory unease about cryptoassets

The OSC’s decision makes clear that cryptoassets are still a long way from being considered trustworthy asset classes.

It also emphasizes the unease created by the recent death of Quadriga’s founder Gerald Cotton and related inaccessibility of nearly USD $150 million in cryptoassets. The OSC’s concerns regarding financial reporting and insurance for coins in cold storage appear to be focused at least in part on making sure that the peculiar circumstances that led to the Quadriga situation are not repeated.


The author would like to thank William Chalmers, Articling Student, for his contribution to this article.

Alberta Securities Commission Declines to Stay Enforcement Proceedings In Face of Parallel Class Actions

In February 2019, the Alberta Securities Commission (ASC) declined to stay the hearing of pending ASC enforcement proceedings on the basis of the existence of parallel, pending class action proceedings.


In June 2018, Staff of the ASC issued a notice of hearing against Alberta divisions of the Lutheran Church-Canada and several of their former officers and directors (the Respondents), alleging that the Respondents had made misrepresentations contrary to s. 92(4.1) of the Alberta Securities Act (material misleading statements) in connection with securities offered to members of the Lutheran Church.

The allegations followed the financial collapse of Church divisions in 2015 and ensuing proceedings filed under the Companies’ Creditors Arrangement Act.  The Respondents and other parties had also been sued in four class action proceedings commenced in British Columbia and Alberta.  The factual allegations supporting the class actions were similar but not identical to those supporting the ASC proceeding.  The causes of action asserted in the class actions (including breach of trust, breach of fiduciary duty, negligence, breach of contract and oppression) were different than the allegation of contravention of s. 92(4.1).

Applications for a Stay

The allegations of ASC staff were scheduled to be heard on their merits in May 2019.  In October 2018, the Respondents and some of the other defendants in the class actions filed a motion to stay the ASC proceedings pending final resolution of the Alberta class actions.  Subsequently, an additional group of defendants filed an application seeking a stay pending final resolution of all of the class actions.


The first issue to be determined was the standing of the various parties who were not named in the ASC proceeding.

As a matter of procedure, the panel determined it appropriate to hear submissions regarding standing and the merits of the stay application at the same time because no particular efficiencies would have been gained through bifurcation.  This is a matter of discretion.

Regarding standing, the panel considered the factors enumerated under ASC Rule 15-501, s. 6.1[1], which the panel saw as a codification of common law principles applicable to questions of standing.  The panel was also mindful of “flood gates” concerns raised by Staff regarding strangers to a proceeding being permitted to participate.  Ultimately, the panel concluded that certain applicants were not seeking to tender evidence or make submissions that was substantially different than that of the Respondents.[2]  They were denied standing.  On the other hand, standing was granted to one group of applicants who “presented a different perspective and made different submissions”.

Stay Denied

The panel noted that given its public interest mandate, for the panel to exercise its discretion to grant a stay there must be exceptional and extraordinary circumstances involving irreparable harm that outweighs the public interest in seeing the ASC proceeding concluded.  The evidence of irreparable harm must be clear and not speculative, and the harm must be to the applicant.

The panel emphasized that the fact of parallel legal proceedings is not sufficient to establish irreparable harm.  “ASC proceedings are often preceded or followed by criminal prosecutions, civil suits – including class actions – or both.”  Fears of making inconsistent statements, of having one’s statements in one proceeding used in another, or of inconsistent rulings, are speculative and insufficient.  The panel emphasised that “no matter how broadly a notice of hearing is framed, the ASC can only make findings against those who are named respondents, and only for the contraventions specifically alleged and proved by evidence on a balance of probabilities.”  Further, the trial judges in the class actions were capable of addressing evidentiary issues and ensuring fairness in those proceedings.

The panel also rejected the argument that a stay was warranted because the Respondents could only obtain the evidence necessary to defend the allegations made by ASC staff through the discovery process in the class actions.  The argument was speculative and begged the question as to what the Respondents would do if the ASC proceeding was the only outstanding proceeding.

The panel further concluded that the balance of convenience weighed in favour of the public interest in having the ASC proceeding be determined without delay.  The ASC’s public interest mandate to protect investors and foster a fair and efficient capital market “involves the entire market, and extends beyond the interest of a single group  or even several groups – of specific investors”.  Effective enforcement requires timeliness, efficiency and finality.

While not a surprise, this result highlights the challenges facing companies, directors and officers facing concurrent regulatory and class action proceedings arising out of the same matter.  Formerly, the ASC did not permit no-contest settlements of enforcement actions.  Effective May 4, 2018, the ASC decided that it would entertain no-contest settlement agreements in appropriate circumstances.   For more information on this, please go to:


[1] Non-Parties Seeking to Appear before a Panel.

[2] Citing Re Certain Directors, Officers & Insiders of Hollinger Inc., 2005 LNONOSC 858 at para. 48.


Ontario Securities Commission awards whistleblowers $7.5 million in first ever payout

On July 14, 2016, the Ontario Securities Commission (OSC) launched the Whistleblower Program (the Program). Under the Program, individuals that provide information on violations of Ontario’s securities law to the OSC are eligible for awards of between 5% and 15% of total monetary sanctions or voluntary payments. The maximum amount a whistleblower can collect is $1.5 million when sanctions and/or payments are not collected and $5 million when sanctions and/or payments are collected. By June 2018, the Program had generated 200 tips. Tips may be submitted anonymously through counsel and the OSC makes all reasonable efforts to protect the identity of the whistleblowers.

On February 27, 2019, the OSC announced the first payout under the Program, making it the first ever award by a Canadian securities regulator. A total of $7.5 million was paid out to three whistleblowers in separate matters for voluntarily providing high-quality, timely, specific and credible information that resulted in monetary payments to the OSC. In order to protect the whistleblowers’ identities and preserve confidentiality, further information regarding the whistleblowers was not released.

The Program initially drew some criticism because of the cap on potential payouts and its impact on the quality of tips that would be received. By comparison, the U.S. Securities and Exchange Commission’s (SEC) Whistleblower Program, which launched in 2011, has no cap on payouts, and awards range between 10% and 30% of the money collected as a result of the information. In 2018, the SEC awarded more than $168 million in awards to 13 whistleblowers. In addition, the SEC made two of its largest whistleblower awards totalling $83 million shared by three whistleblowers and $54 million shared by two whistleblowers.

Nonetheless, the Program is a step in the right direction for the OSC to attract credible tips. The size of the OSC’s first ever payout under the Program not only indicates the significance of the information provided by the whistleblowers, but also emphasizes the crucial role that whistleblowers play in protecting investors from improper and fraudulent practices.

The author would like to thank Sadaf Samim, Articling Student, for her contribution to this article.

Re Meharchand: An affirmation of fundamental securities law principles

On October 19, 2018, the Ontario Securities Commission (OSC) issued reasons for Re Meharchand, a case confirming core concepts in securities law including the definition of an “investment contract”, registration when in the business of selling securities, and the test for fraud.


The respondents, Mr. Meharchand and his company, Valt.X were in the business of cybersecurity. Valt.X purportedly developed, produced and sold cybersecurity hardware and software products. However, over the relevant time, Valt.X had very little sales ($15,000 relative to 1,600,000 contributed by investors). OSC Staff (Staff) brought an enforcement action alleging that Valt.X and Mr. Meharchand had distributed securities without a prospectus, engaged in the business of trading in securities without registering and committed fraud.

The Decision

The hearing panel determined that the respondents breached the Securities Act (Act) in all three respects as alleged by the Staff.

Distribution without Prospectus

The hearing panel found that the respondents raised funds through a program called “CrowdBuy”. Under the CrowdBuy program, the respondents represented that participants could purchase Valt.X software licences at a discount and, through the resale of those licenses, earn lucrative “guaranteed results”. Participants were also offered an option to convert their CrowdBuy subscriptions into Valt.X common shares.

In determining whether the CrowdBuy program was a security by virtue of being an “investment contract”, the panel applied the test as set out in Pacific Coast. In that case, the Supreme Court of Canada held that an investment contract involves an investment of funds with a view to profit, in a common enterprise, where the profit is largely derived from the efforts of the person who controls the enterprise. The panel found that the CrowdBuy program met all the necessary criteria of an investment contract thereby making it a security.

As a result, the hearing panel found that the distribution of these investment contracts without a prospectus or an available exemption was a contravention of the Act.

No Registration

Section 25 of the Act prohibits engaging in the business of trading in securities unless the person is registered under Ontario securities law. The OSC hearing panel found that the respondents maintained a website in which investors could pay for their Valt.X shares, actively encouraged existing investors to refer new investors, and distributed materials promoting exaggerated potential earnings. During the material time virtually all of Valt.X’s business was to trade in securities. Since the respondents were not registered, this amounted to a contravention of the Act.


The hearing panel noted that Mr. Meharchand informed his investors that he would use the funds that he raised for patents, research and development, product manufacturing, and additional staff. However, the panel found these statements misleading as the bank accounts provided little evidence that the funds were being put to any real commercial activity. The panel found Mr. Meharchand had defrauded investors and characterized Mr. Meharchand’s use of the funds as follows: “withdrawals of money for betting on horses, cash transactions for which no record was kept, the satisfaction of alleged debts to Mr. Meharchand, and other payments to him in priority to other Valt.X debt or expenses.”


At the sanctions hearing, the OSC ordered Mr. Meharchand and Valt.X to disgorge approximately $1.6 million to the Commission. In addition, Mr. Meharchand was permanently banned from serving as an officer or director for any issuer or registrant and was required to pay an administrative penalty of $550,000.

This proceeding serves as a reminder that substance prevails over form. Regulators will sniff out investments contracts in disguise and impose significant penalties for market participants trading in securities contrary to securities law.

The author would like to thank William Chalmers, Articling Student, for his contribution to this article.

US Tenth Circuit holds SEC can apply antifraud provisions extraterritorially in certain situations

One trend running through recent U.S. Supreme Court decisions is a sense of caution in expanding the scope of U.S. law to extraterritorial activities.  To that end, the Court has instructed that a statute does not apply extraterritorially unless the text clearly shows the U.S. Congress intended such a result.  Notably, the Tenth Circuit recently held that Congress has authorized the SEC to enforce the securities fraud laws extraterritorially in certain circumstances.  Foreign actors should take note of this potential expansion of the SEC’s enforcement powers.

One of the cornerstones — if not the cornerstone — in the Supreme Court’s modern extraterritorial jurisprudence is the 2010 decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), where it held that Section 10(b) of the Securities Exchange Act (and Rule 10b-5 promulgated thereunder) did not apply extraterritorially.  See 561 U.S. 247 (2010).  However, in SEC v. Scoville, No. 17-4059 (10th Cir. Jan. 24, 2019), the Tenth Circuit held that with respect to SEC enforcement actions, the antifraud provisions of the securities laws apply extraterritorially “when either significant steps are taken in the United States to further a violation of those anti-fraud provisions or conduct outside the United States has a foreseeable substantial effect within the United Sates.”  Here we harmonize these two significant decisions.

The U.S. Supreme Court’s Morrison Decision

Section 10(b) is used to challenge material misstatements and omissions made in connection with the purchase or sale of securities.  In Morrison — a private securities fraud action — the Court first held that the statutory text of these antifraud provisions do not apply extraterritorially.  The Court next examined whether the activity at issue — the purchase of securities of a foreign issuer by foreign persons on a foreign exchange—fell within the “focus” of Section 10(b).  Plaintiffs argued that because the misstatements at issue arose from the activities of the defendant issuer’s Florida subsidiary and public statements made in Florida, they were seeking a domestic application of the statute that fell within the statute’s focus.  The Court disagreed and held that “the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.”  Accordingly, Section 10(b) would only apply to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.”  As the late Justice Scalia stated for the Court: “For it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States.  But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”

The Tenth Circuit’s Decision in Scoville

In Scoville, the United States Court of Appeals for the Tenth Circuit had the opportunity to examine the extraterritorial application of Section 10(b) (and Sections 17(a)(1) and (a)(3) of the Securities Act of 1933) in a SEC enforcement action.  The Tenth Circuit held that the 2010 Dodd-Frank Act Amendments to the jurisdictional sections of the antifraud provisions makes clear in that context “that the antifraud provisions apply when either significant steps are taken in the United States to further a violation of those antifraud provisions or conduct outside the United States has a foreseeable substantial effect within the United States.”  The court based its conclusion on the text of the 2010 Dodd-Frank Act, where Congress amended the 1933 and 1934 securities acts to state the following:

The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of section 77q(a) of this title [Section 17(a) of the 1933 Securities Act] involving—

(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or

(2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.

15 U.S.C. § 77v(c) (bracketed material added); see also id. § 78aa(b) (amended 1934 Securities Exchange Act providing federal district courts with “jurisdiction of an action or proceeding brought or instituted by the [SEC] or the United States alleging a violation of the antifraud provisions of this chapter involving–(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States”).

In so deciding, the Tenth Circuit addressed why the Dodd-Frank Amendments addressed extraterritoriality in the jurisdictional provision of the securities fraud statutes, and not in the substantive/merits section.  It first noted that “Morrison . . . , contrary to forty years of circuit-level law, held that the question of the extraterritorial reach of § 10(b) did not implicate a court’s subject-matter jurisdiction; instead, other provisions of the securities acts gave district courts subject-matter jurisdiction to hear SEC enforcement actions generally.”  Nevertheless, the Tenth Circuit held that “it is clear to us that Congress undoubtedly intended that the substantive anti-fraud provisions should apply extraterritorially when the statutory conduct-and-effects test is satisfied” because, among other items, the Supreme Court issued the Morrison opinion on the final day that a joint congressional committee considered the proposed Dodd-Frank Act, that committee published the final version of the bill several days later, it was enacted into law less than a month after Morrison, and Congress titled this section of the Dodd-Frank Act “STRENGTHENING ENFORCEMENT BY THE COMMISSION.”

After adopting the conduct-and-effects test, the Court had no qualms affirming the district court’s decision that the SEC could enforce the anti-fraud provisions in this instance.  Scoville involved sales of revenue interests called AdPacks in a business called Traffic Monsoon that would ostensibly boost web traffic in order to rank websites higher on search engine results, but which allegedly operated as a Ponzi scheme.  Even though some sales of, and offers to sell, the AdPacks were made to persons outside the United States, the defendant conceived and created Traffic Monsoon in the United States, he created and promoted the Adpack instruments over the internet while residing in Utah, and the servers housing the Traffic Monsoon website were physically located in the United States.


As Judge Briscoe noted in her concurring opinion, the court could just as easily have decided that this case involved the offer and sale of securities in the United States without addressing extraterritoriality issues.  Traffic Monsoon was based in the United States, operated in the United States, and sold the AdPacks through computer servers based solely in the United States.  However, in cases where foreign/domestic issues are a closer call, the SEC can be expected to rely heavily on the statutory conduct-and-effects test to flex its enforcement power.  In the meantime, Morrison will continue to apply to private securities fraud actions.

SEC Takes Aim at Digital Tokens and Smart Contracts

In his Blockchain Law column, Robert A. Schwinger discusses a wave of new enforcement actions brought by the SEC targeting blockchain-based digital token ventures under a variety of provisions in the securities laws. These proceedings show the breadth of the approaches the SEC is taking toward enforcement in this area, perhaps most notably in one case where it appears a “smart contract” blockchain application may have proved to be a bit too smart for its own good.

On the heels of the first-ever judicial holding this past summer that a cryptocurrency could qualify as a “security” under federal securities laws, the Securities and Exchange Commission has brought a wave of new enforcement actions targeting blockchain-based digital token ventures under a variety of provisions in the securities laws. These proceedings show the breadth of the approaches the SEC is taking toward enforcement in this area, perhaps most notably in one case where it appears a “smart contract” blockchain application may have proved to be a bit too smart for its own good.

Read the full article.

The Quebec Court of Appeal qualifies litigation funding agreement as a plan of arrangement


In Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.), the Quebec Court of Appeal characterized a litigation funding agreement in the context of CCAA proceedings as a plan of arrangement, ordering a creditor vote for its approval.


Bluberi Gaming Technologies Inc. (together with Bluberi Group inc. as Bluberi) operated a gaming company based in Drummondville, Quebec. In November 2012, Callidus Capital Corporation (Callidus), the publicly traded arm of Catalyst Capital Group Inc., provided Bluberi a $24 million loan. Despite missed projections, Callidus continued to extend credit to Bluberi.

In November 11, 2015, Bluberi filed for CCAA protection. In its filing, Bluberi’s management complained that Callidus had deliberately employed predatory lending tactics and consumed the equity value of Bluberi with a view of taking over the business.

In early 2016, Bluberi sought a sale solicitation process and received four offers, with Callidus submitting the winning offer. Following months of negotiations, the parties agreed on an asset purchase agreement by which Callidus purchased all of Bluberi’s assets. Except for an undischarged claim of $3 million, Callidus’ secured claims were extinguished. However, Bluberi retained a right to pursue Callidus.

On September 11, 2017, Bluberi filed an application seeking approval of a $20 million interim lender priority charge to finance its litigation against Callidus (the Callidus Litigation). The funders were comprised of a venture company involving Bluberi’s former President Gerald Duhamel and Bentham IMF (Bentham) (collectively, the Funders). Prior to Bentham’s financing, there was no proposed plan of arrangement.

A week later, Callidus filed a CCAA plan of arrangement proposing a $2,630,000 payment to Bluberi creditors. In response, Bluberi filed a plan of arrangement which foresaw half the proceeds of the Callidus Litigation, after payment of expenses, would be distributed to the creditors if the net proceeds exceed $20 million.

Bluberi’s largest creditor voted against Callidus’ plan (as amended), barring two thirds majority approval. Bluberi withdrew its plan prior to the creditor meeting and vote.

On February 6, 2018, Bluberi sought approval of third-party financing by way of a Litigation Funding Agreement, as between Bluberi and the Funders. The terms of the litigation funding agreement (LFA) included that:

  • The proceeds of the Callidus Litigation will be used to reimburse the Funders for sums expended to finance the litigation. The expended amounts are otherwise not reimbursable and carry no interest;
  • A success fee based on a percentage of the litigation proceeds payable to the Funders; and
  • $20,000,000 super priority charge in favour of the Funders over the Callidus Litigation to secure reimbursement of the Funders’ expended amounts and success fee.

In response, Callidus filed a new plan of arrangement, increasing its contribution by $250,000, and requested the CCAA Court to allow it to exercise its voting rights for the unsecured portion of its proof of claim. With permission to vote on its own plan, Callidus would likely achieve the two thirds majority vote required to sanction its plan of arrangement.

QCCS Decision

As discussed in an earlier post, Michaud J. approved Bluberi’s funding arrangement and kept certain clauses of the LFA as confidential. He also prohibited Callidus from voting on its own plan.

Michaud J. noted that Callidus’ behaviour had been contrary to the “requirements of appropriateness, good faith, and due diligence [that] are baseline considerations that a court should always bear in mind when exercising CCAA authority.He noted that Callidus:

  • Initially contested the appropriateness of the CCAA proceedings to prevent Bluberi from pursuing its claim in damages against it,
  • allowed the Monitor and Debtors to work on a valuation of the business, then appointing a chief restructuring officer, only to adopt a different position before the Court to exhaust Mr. Duhamel financially, and
  • filing a plan of arrangement at 3 p.m., the day before a scheduled hearing for an application to allow debtors to pursue their claim against Callidus, which provided releases from the claims against it. Callidus was “buying releases from creditors who have no interests in the awarding of such release.”

QCCA Decision

In a unanimous decision, Schrager J. reversed Michaud’s J. ruling, providing that:

  • Being a plan sponsor does not preclude the creditor from voting on its plan.
  • There was no factual or legal justification to prohibit Callidus from voting on its plan, warranting the QCCA to substitute its discretion for that of the court below.
  • Litigation financing cannot be authorized to pursue a litigious claim of the debtor company, in the absence of an approved CCAA plan, where creditor rights are affected and where there are viable alternatives for creditor recovery.
  • Litigation funding forming the basis of a plan of arrangement must be disclosed in full to creditors in the context of CCAA proceedings, subject only to litigation privilege.

We understand that Bluberi is working to seek leave to appeal to the Supreme Court of Canada.

The Quebec Court of Appeal rules that dissident rights do not apply to trust unitholders

On January 21, 2019, the Quebec Court of Appeal ruled  in O’Leary Funds Management c. Boralex Inc., 2019 QCCA 84, that dissident rights under business corporations acts do not apply to trusts. Unitholders of a trust must therefore ensure that their rights are recognized under the trust agreement or the Civil Code of Quebec. The Court was very clear that unitholders may not invoke the rights and protections of shareholders, even by analogy.


In the fall of 2010, Boralex Inc. (Boralex) decided to acquire its income trust fund, the Boralex Power Income Fund (Power Fund), in view of privatization. Boralex offered $5.00 per unit. The Board of Trustees convened an independent committee to consider the offer. The independent committee valued the fair market value of the units between $4.50 and $5.05 and, as a result, the Board of Trustees advised the unitholders to accept Boralex’s offer.

O’Leary Funds Management Ltd. (O’Leary) refused to tender its units, arguing that Boralex’s offer did not reflect fair market value or support the best interests of unitholders. Further, O’Leary contended that Boralex could not proceed with a compulsory acquisition because the trust agreement stipulated that Boralex required approval of at least 90% of the Power Fund units.

Owning only 73% of the units, Boralex decided to acquire the Power Fund through a business combination between the Power Fund and a shell company. In effect, the business combination allowed Boralex to force unitholders to exchange their units for shares of another Boralex shell company. To do so, Boralex took the following steps:

  • convened a special meeting of unitholders;
  • passed a resolution to exchange units in the Power Fund for redeemable shares in the shell company; and
  • forced redemption of the shares at $5 each.

At the special meeting, 85.87% of unitholders approved the forced acquisition; O’Leary did not. Nevertheless, Boralex forced all minority unitholders to tender their units and, on November 2, 2010, O’Leary received payment for its units under protest.

O’Leary subsequently sued Boralex for damages caused by the allegedly unlawful acquisition of the Power Fund. A few months after Paquette J. of the Quebec Superior Court ruled against the plaintiff in O’Leary Funds Management c. Boralex inc., 2018 QCCS 842, the Quebec Court of Appeal affirmed that under both the trust agreement and the defendant’s other legal obligations, Boralex’s acquisition of the Power Fund was lawful.


  • The QCCA reaffirmed that the governing law on trusts remains conceptually and practically different from corporate law:

The Fund is a trust created pursuant to articles 1260 to 1298 of the Civil Code of Quebec and, consequently, the laws governing corporations are not applicable. Yet, all the appellants arguments are intended to invoke rights and protections reserved for dissenting shareholders in corporate law. However, these laws do not apply here, even by analogy. The only rights of unitholders are those provided for in the trust arrangement. [Unofficial translation]

  • Where claimants are unitholders of a trust, and not shareholders of a corporation, they may not claim rights and protections afforded to shareholders in corporate statute. The QCCA explained that unitholders cannot use corporate law to “distort the text of the trust deed and try to make it say what it does not say.”
  • The only rights and protections afforded to unitholders are those found in trust agreements and the Civil Code of Quebec.


The author would like to thank Sophie Doyle, student-at-law, for her contribution to this article.

Motion Judge Erred in Law by Approving Class Counsel’s Fees

The Court of Appeal for Ontario recently set aside a decision approving the legal fees of class counsel on the condition that counsel would donate 40% of the approved fees to charity.

The appeal provides useful guidance for practitioners on fee approval motions in class actions.

The Settlement Agreement

Welsh v. Ontario, 2019 ONCA 41 involved a class action commenced in August 2015 under the Class Proceedings Act, 1992, S.O. 1992, c. 6 alleging that the province of Ontario had, for decades, negligently operated schools for the deaf and had breached its fiduciary duty and duty of care to students.

The action was certified on consent in August 2016. Through mediation, the parties achieved a settlement in November 2017.

Under the settlement agreement, Ontario was to establish a $15 million settlement fund. It was agreed that class counsel’s fees could be up to 25% of the settlement funds in an amount to be approved by the Court.  The settlement agreement expressly provided that if any amounts remained after payment for all fees, claims, and costs, they were to revert to Ontario.

The Motion Judge’s Decision

At the motion to approve the settlement, class counsel requested that the motion judge approve fees of $3.75 million, which represented 25% of the $15 million settlement fund.

The motion judge found that a counsel fee of $3.75 million was not fair and reasonable to all the class members because “the results achieved for the whole of the Class [were] disappointing” in that only about 10% of the class would benefit from the settlement.  As a result, the motion judge approved class counsel’s fees of $3.75 million on the condition that counsel would donate $1.5 million of its fees to a charity for the deaf.

The motion judge also determined that the $2.25 million balance of class counsel’s fees would be subject to a proportionate reduction depending on the reversion to Ontario of the settlement funds not taken up by the class claimants.

Error to Impose a Charitable Donation

On appeal, a panel of Justices Sharpe, Juriansz, and Roberts, unanimously held in reasons by ‘the Court’ that the motion judge had erred.

It was an error of law to impose a charitable donation condition, particularly in the absence of submissions from the parties. By requiring class counsel, without the parties’ input or consent, to donate part of its fees to a designated charity, the motion judge inserted into the settlement agreement a material condition not agreed to by the parties.


The Court of Appeal noted that the appropriate way to address the Court’s concerns with class counsel’s fees is to allow the parties to make submissions with respect to those concerns and, if the parties wish, to agree to change the terms of the settlement. The Court is not permitted to unilaterally modify the terms of a negotiated settlement – including provisions on legal fees – without the consent of the parties.

The Court of Appeal declined to determine and approve class counsel’s fees, and remitted the matter to be heard afresh by a different judge on the class action list of the Superior Court of Justice.

The decision clarifies the limits of first instance decision-makers on fee approval motions and is a useful precedent for class counsel.


The author would like to thank Elana Friedman, Articling Student, for her contribution to this article.