TORONTO, March 6 (Reuters) - 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 control.
“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 & Graydon LLP.
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.
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 timely disclosures.
“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 said.
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 suits.
“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.
Plaintiffs’ lawyers say their suits will encourage better disclosure, and that they often get results more quickly than regulators.
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 United States.
Lascaris said civil suits are no substitute for hard prison time.
“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.”