On March 19, 2013, Justice van Rensburg of the Ontario Superior Court of Justice issued an important decision relating to overlapping class action proceedings against IMAX Corporation (“IMAX”) that are currently pending in the United States and Ontario, Canada.  In the opinion, the Ontario Court recognized a U.S. class action settlement with IMAX, which has already been approved by a U.S. Court and amended its previous decision certifying a “global” class of investors that acquired IMAX shares on both the NASDAQ and TSX stock exchanges.  See Silver v. IMAX Corporation, 2013 ONSC 1667 (March 19, 2009, Sup. Ct. J.).  A copy of the Order can be found here. The Canadian decision is significant for practitioners involved in parallel securities class actions in the United States and Canada.

Background to the IMAX Parallel U.S. and Canadian Proceedings

In August 2006, IMAX announced that it was in the process of responding to an informal inquiry from the Securities and Exchange Commission concerning the timing of revenue recognition, and specifically, its application of multiple element arrangement accounting to revenue derived from theater system sales and leases. This disclosure severely impacted the value of IMAX’s stock which dropped by approximately 40% following the announcement.  At that time, IMAX was incorporated under the laws of Canada, duly headquartered in Canada and New York and held a dual-listing on the NASDAQ and TSX stock exchanges.

Following the announcement of the SEC’s investigation, class action lawsuits were commenced in the United States District Court for the Southern District of New York (“U.S. Court”) alleging that IMAX and other defendants made material misrepresentations and omissions regarding revenue recognition for theater systems in violation of the federal securities laws.  The U.S. actions were not the only proceedings triggered by the disclosure of IMAX’s revenue recognition issues.  On September 20, 2006, following the filings of the U.S. class actions, a parallel class action lawsuit captioned Silver v. IMAX Corporation, Court File No. CV-06-3257-00, was filed in the Ontario Superior Court of Justice, Canada (the “Canadian Action”) against IMAX and other defendants alleging, based on substantially identical facts to those alleged in the U.S. actions, that IMAX made material misrepresentations and omissions regarding revenue recognition for theater systems.

After the U.S. actions were consolidated, an amended complaint was filed against the defendants by the lead plaintiff in the U.S. Court. After briefing by the parties, on September 15, 2008, the defendants’ motions to dismiss were denied by the U.S. Court.  See In re IMAX Sec. Litig., 587 F. Supp. 2d 471 (S.D.N.Y. 2008).  Shortly after discovery commenced in the U.S. Action, the lead plaintiff moved for class certification (seeking a global class of investors).  However as a result of the Second Circuit’s decision in W.R. Huff Asset Management Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008), several procedural issues surfaced that complicated and derailed the progress in the U.S. Action. In the intervening time period, the Canadian Action started progressing more rapidly and the parties completed class certification discovery and submitted briefing on plaintiffs’ motion for certification of a global class.

On December 14, 2009, the Canadian Court certified the Canadian Action on behalf of  investors worldwide who acquired IMAX’s common stock on the NASDAQ or Toronto Stock Exchange. See Silver v. IMAX Corporation, [2009] O.J. No. 5585, 2009 ON.C. LEXIS 4847 (Dec. 14, 2009, Sup. Ct. J.).  The certified class in the Ontario proceedings was defined as: “All persons, other than the Excluded Persons, who acquired securities of IMAX during the Class Period on the TSX and on the NASDAQ on or after February 17, 2006 and held some or all of those securities at the close of trading on August 9, 2006.” At the time, the Canadian order certifying a “global class” of IMAX investors was unprecedented in Canadian class action procedure.

The U.S. class action was able to get back on track and by November 2011, the parties in the U.S. Action commenced settlement negotiations and reached a final settlement agreement in March 2012. In light of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), the settlement class included only those who “purchased or otherwise acquired IMAX shares on the NASDAQ from February 27, 2003 through July 20, 2007” and excluded those who purchased IMAX stock on the Toronto Stock Exchange.  In order to address the overlap between the U.S. class and Canadian class (overlapping class members are those who purchased or acquired their IMAX shares on the NASDAQ between February 17, 2006 and August 9, 2006) the settlement agreement was conditioned on the entry of an order in the Canadian Action that excluded from the Canadian class any investor who did not opt out of the U.S. class (the “Canadian Order”).  If the Canadian Order was not granted, the settlement would not proceed and the parties to the U.S. Action would revert back to their previous litigation positions.

After the U.S. Court preliminarily approved the settlement on March 28, 2012, the IMAX defendants made a motion to the Canadian Court to amend the “global” class definition to exclude from the certified Canadian class all persons who would be bound by a final judgment in the U.S. settlement.

On April 27, 2012, notice was published in the U.S. Action.  The U.S. notice described the parallel U.S. and Canadian class actions, noted the differences in the proceedings and advised all class members (i.e. those who purchased or otherwise acquired IMAX shares on the NASDAQ between February 27, 2003 and July 20, 2007) of their right to remain in the class in the U.S. Action and be eligible to claim their settlement compensation, or to opt-out, and pursue their own individual action, or opt-out and elect to remain instead in the class in the Canadian Action (i.e. those who purchased IMAX securities on the NASDAQ on or after February 17, 2006 and held some or all of those securities on August 9, 2006).  Presumably overlapping class members would opt-out of the U.S. settlement and choose to remain in the Ontario class if they thought that they would receive a better recovery in the Canadian Action.  If an overlapping class member did not opt out of the U.S. Action, they would automatically be bound and deemed to be a member of the class in the U.S. Action and excluded from the Canadian Action.

A fairness hearing to consider the final approval of the U.S. settlement was held in the U.S. Court on June 14, 2012, resulting in an Order dated June 20, 2012 (the “U.S. Fairness Decision”) determining that the U.S. settlement was fair, reasonable and adequate and in the best interests of the U.S. class.  In re IMAX Sec. Litig., No. 06-6128 (S.D.N.Y. June 20, 2012). Although the U.S. settlement was approved, finality of the settlement is contingent on the Canadian Court amending the class definition and the Canadian Order becoming final and unappealable.

The Canadian Court’s March 19, 2013 Order

Approximately a year after the defendants made their motion to the Ontario Court to amend the global class definition, on March 19, 2013, Justice van Rensburg issued a detailed opinion granting the motion.  In granting the defendants’ motion, Justice van Rensburg first determined that under Sections 5(1)(d), 8(3) and 10(1) of the Ontario Class Proceedings Act, 1992, S.O. 1992, c. 6, the Ontario Court had authority to amend its previous order certifying a “global” class.  Justice van Rensburg noted in the opinion that her original decision to certify a global class “contemplated [   ] that this issue could be revisited depending on what occurred in the parallel U.S. proceedings.”  Silver, 2013 ONC 1667, para. 67.

As part of her consideration to amend the certified global class, Justice van Rensburg determined that the Court needed to recognize the U.S. Fairness Decision and consider whether the Canadian Action remained the “preferable procedure” for resolving the claims of overlapping class members who did not opt out of the U.S. Settlement.  Silver, 2013 ONC 1667, para. 83-85.  When determining the issue of recognition, the Court applied the factors from the Canadian Court of Appeal’s decision in Currie v. McDonald’s Restaurants of Canada Ltd., (2005), 74 O.R. (3d) 321 (C.A.).

After applying the Currie analysis, Justice van Rensburg concluded that the test had been satisfied to formally recognize the U.S. Fairness decision because (i) there was a “real and substantial connection” with the claims of the overlapping class members and the U.S. Court; (ii) overlapping class  members were accorded procedural fairness (including adequate notice) by the U.S. Court; and (iii) the overlapping class members’ rights were adequately represented by an appropriate lead plaintiff representative and U.S. class counsel. Silver, 2013 ONC 1667, para. 105-133.  In granting defendant’s motion to amend the class definition, Justice van Rensburg stated:

I have applied the factors from the Court of Appeal’s decision in Currie with respect to when a decision of a foreign court purporting to settle claims of class members that are the subject of parallel proceedings in Ontario, will be given preclusive effect. Having determined that the U.S. Court has a “real and substantial connection” with the claims of the overlapping class members, I have considered whether there was procedural fairness in the treatment of such claims (including the adequacy of notice and representation in the proceedings). Having found that the U.S. Settlement should be recognized, I have considered all of the circumstances, including the current status of these proceedings, before concluding that the Ontario Action is no longer the ‘preferable procedure’ for the determination of the claims of class members whose claims are covered by, and who have not opted out of, the U.S. Settlement. The class definition in these proceedings is amended accordingly.

Silver, 2013 ONC 1667, para. 18.

In opposition to the defendants’ motion, Canadian plaintiffs’ counsel had argued that the U.S. settlement was insufficient, unfair and that granting defendants’ motion would “rip the guts out” of the pending Canadian Action. Silver, 2013 ONC 1667, para. 7. In response to that argument, Justice van Rensburg appropriately observed that:

It is not the function of this court to seek to jealously guard its own jurisdiction over a class proceeding that has been certified here. Such an approach is inconsistent with the principles of comity. It is also not the function of the court to favour or protect the interests of class counsel within this jurisdiction, knowing that they have invested time and resources into the litigation, and that their compensation will depend on the size of the judgment or settlement they are able to achieve. As I have already noted, class action counsel assume significant risks, including the potential that the court may certify a smaller class than that requested. In pursuing an action when there are existing parallel proceedings in another jurisdiction, class counsel are aware that the other action might move more quickly or reach a determination before their own case is decided or resolved.

Id. at para. 179.

As a result of the Canadian Court’s decision, the Canadian class will now be comprised almost entirely of only those who purchased IMAX stock on the TSX.  The certification order dated December 14, 2009 was amended to define the new Canadian certified class as:

All persons, other than Excluded Persons, who acquired securities of Imax during the Class Period on the TSX and on NASDAQ, and held some or all of those securities at the close of trading on August 9, 2006 (the “Class Members”).

“Excluded Persons” means Imax’s subsidiaries, affiliates, officers, directors, senior employees, legal representatives, heirs, predecessors, successors and assigns, and any member of the defendants’ families and any entity in which any of them has or had during the Class Period a legal or de facto controlling interest and all NASDAQ purchasers during the Class Period who did not deliver an opt out notice in the U.S. class action In re IMAX Securities Litigation, Civil Action No. 1:06-cv-06128 (S.D.N.Y.).

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.  As lead counsel in the IMAX U.S. class action, we are extremely pleased with the decision from the Ontario Court.  The plaintiffs in the Canadian Action are currently in the process of appealing Justice van Rensburg’s March 2013 Order.  The decision to grant the defendant’s motion to amend the class will permit the U.S. settlement to be concluded and payments to eligible claimants will proceed once the Canadian Order becomes final and unappealable.