| TORONTO, March 6
TORONTO, March 6 Mining companies facing the
harsh financial realities of the post-boom market are also up
against a new legal threat in Canada - a big increase in the
number of shareholder class-action lawsuits.
Plaintiffs' lawyers say the suits are good for investors
because they deter fraud. Opponents say companies can be forced
to settle or pay for costly litigation even when they have done
nothing wrong; when they are accused of misleading investors
when they were the victims of market forces beyond their
"Increasingly, what we're saying to clients when they've had
to deliver bad news to the markets is, you know, chances are you
will be sued," said Andrea Laing, a partner at Blake, Cassels &
The litigation-happy environment reflects changes to the
Ontario Securities Act that came into effect in late 2005 and
gave shareholders an explicit right to sue issuers that mislead
investors or do not share news quickly enough.
The law targets all companies with a "real and substantial"
connection to Ontario, so investors can sue companies and their
officers and directors even if firms are not headquartered in
Canada or listed on a Canadian exchange.
Investors can also sue outside experts such as geologists
and auditors hired by public companies.
Several years passed before the new regime faced any
real-world tests, but by 2008 securities class actions, once
rare in Canada, were on the rise. By the end of 2012 there were
51 active lawsuits in Canada, up from 16 in 2004, according to
NERA Economic Consulting, which tracks securities litigation.
Two-thirds of the cases filed in 2012 were against companies
in mining or oil and gas. Defense lawyers say that reflects the
sector's inherent uncertainty, but their opponents see something
different at work.
"Since the days of Bre-X, it's been obvious that natural
resources companies have been particularly susceptible to fraud
or potential fraud," said Michael Spencer, who represents
plaintiffs in Canada and the United States. Bre-X refers to a
1997 scandal in which Canadian miner Bre-X salted rock samples
with gold to create the impression of a massive gold strike.
"I doubt that the lawsuits over-represent whatever
misconduct is occurring in the market."
Spencer, a partner at Milberg LLP in New York, took the
Ontario bar and joined Toronto firm Kim Orr Barristers part-time
in 2011 because he believes the new rules bring big
opportunities in Canada.
WRITEDOWNS GO TO COURT
There may be more cases against mining companies to come. In
the United States securities class actions tend to follow sharp
stock declines. Damages are based on how much investors have
lost, and big losses mean potential damages are high enough to
justify the cost of bringing a suit.
Several years of rising resource prices may have sheltered
some miners as a first wave of cases targeted issuers in other
sectors. But more recently, there has been no shortage of big
share price moves in the mining industry.
As metals prices stagnate and costs spiral upward, many
companies have pulled back rosy forecasts or taken big
writedowns on assets they bought in better times, just the sort
of move that can prompt allegations that a company did not make
"Any issuer has a problem when they have to go to the market
and say listen, we're going to have to take this big writedown,
because they're always vulnerable to an argument that whatever
they've now disclosed they should have disclosed sooner," Laing
Last March Koskie Minsky LLP, one of a handful of Canadian
firms that represent investors in class actions, filed against
Kinross Gold Corp over a $2.94 billion charge the company
took on assets related to its acquisition of Red Back Mining.
The suit, which is still ongoing, claims $4 billion in damages.
"IN THE CROSSHAIRS"
Corporate lawyers making presentations at this week's
Prospectors and Developers Association of Canada conference in
Toronto warned mining executives to be careful about what they
promise their shareholders.
That's no small thing in a sector famous for loose talk,
where hundreds of small, cash-strapped companies compete for
financing to develop resources that could turn out to be smaller
than expected, or vulnerable to a drop in metals prices.
The new law caps damages unless the court finds that there
was fraud, and not just an error. But damages are not the only
risk associated with the lawsuits, said Chris Hubbard, a partner
at McCarthy Tetrault.
"You also have, obviously, legal defense costs, you have the
time and investment of the internal company personnel," he said
in an interview. "Also, and importantly, you have significant
brand issues for the company."
Mark Gelowitz, a partner at Osler, said mining companies
seem to be "in the crosshairs" of lawyers who bring class action
"The operating assumption of the plaintiffs' bar is that
every time there's a disclosure that changes something ... the
earlier disclosure was a misrepresentation, when it fact it
could be nothing more than the evolution of the business
environment around that project," he said.
CIVIL SUITS NOT ENOUGH?
Plaintiffs' lawyers say their suits will encourage better
disclosure, and that they often get results more quickly than
The Ontario Securities Commission's case against Sino-Forest
Corp, accused of massively inflating its forestry assets in
China, is still in its early stages. But auditor Ernst & Young
has already agreed to a C$117 million ($114 million) settlement
with Sino-Forest investors.
Even so, Dimitri Lascaris, a partner at Siskinds LLP and
co-lead counsel for the Sino-Forest class action, said civil
suits are not enough to clean up corporate Canada.
Bre-X sparked changes in Canada's regulatory regime, but
there were no convictions in connection with the case, and
securities fraud convictions remain rarer in Canada than in the
Lascaris said civil suits are no substitute for hard prison
"I think it's helping, but I'm not going to pretend that it
is a complete solution to the problem," he said. "The problem we
have in this country is that we do not have enough convictions
which result in prison sentences for white collar crime."