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Nortel Shareholder Has Claim Dismissed
Published in the June 2007 issue of Litigation Notes - View Article
Like a lot of other people, Dr. J.R. Deep lost money on his investment in the shares of Nortel Networks Corporation (“Nortel”). Dr. Deep is described by a Judge of the Ontario Superior Court of Justice as a physician specializing in internal medical and cardiology and also as “…an experienced litigant, having represented himself in a large number of cases before this Court”.
Dr. Deep sued his investment advisor, M.D. Management, alleging that the firm failed to exercise reasonable care and skill in allowing such a significant portion of his portfolio to be invested in the stock of Nortel. He also sued Nortel and its former Chief Executive Officer, John Roth (“the Nortel defendants”) claiming that he had been induced to become a shareholder in Nortel as a result of false and misleading statements that they had made. The Nortel defendants moved to strike out his Statement of Claim and a Judge of the Superior Court of Justice struck out the allegations of breach of fiduciary duty with leave to amend and permitted the balance of the claim to stand. The Nortel defendants appealed to the Divisional Court which allowed the appeal and struck out the balance of the claim as it related to the Nortel defendants, again with leave to amend.
Dr. Deep amended his claim and added a number of new causes of action. The Nortel defendants again moved to dismiss the Statement of Claim, stating that the amended claim did not cure the defects found by the Divisional Court in the original claim and that the additional claims did not disclose reasonable causes of action. The Ontario Superior Court stated that there was a heavy onus on the Nortel defendants on a motion to strike out a cause of action pursuant to Rule 21 of the Rules of Civil Procedure and set out a number of principles which apply to such a motion:
“(1) The power to strike out a claim must be used sparingly, and caution and prudence are to govern the Court’s exercise of its discretion; only in the clearest of cases should a party be deprived of the opportunity of persuading a trial judge that the evidence and the law entitle it to a remedy or a defence;
(2) The Court must accept the facts alleged in the Statement of Claim as proven unless they are patently ridiculous or incapable of proof and must read the Statement of Claim generously with allowance for inadequacies due to drafting deficiencies;
(3) When a defendant moves to strike a claim, it is contending that the claim fails to disclose a wrong that is recognized as a violation of the plaintiff’s rights with the result that a Court would be unable to grant a remedy even if the plaintiff proved all the facts alleged. The only question on such a motion is the substantive adequacy of the plaintiff’s claim, i.e. whether a plaintiff will have established a cause of action entitling it to some form of relief assuming it can prove the allegations pleaded in the claim or, put another way, whether the plaintiff has sought relief for acts proscribed at law;
(4) The Court hearing the motion cannot consider any evidence. Instead the Court must consider whether the material facts pleaded disclose a claim in respect of which relief may be granted;
(5) Where the level of material facts pleaded fails to meet the level required to disclose the cause of action – i.e. if any fact material to the establishment of the cause of action is omitted – the remedy is a motion to strike the pleading, not a motion for particulars.
(6) The novelty of the cause of action or the novelty of the application of a recognized cause of action should not prevent a plaintiff from proceeding with its case. Whether there is a good reason to extend a tort to a new context is the kind of question for a trial Judge to consider in light of the all the evidence. The fact that a pleading reveals an arguable, difficult or important point of law may well make it critical that the action be allowed to proceed; and
(7) The court should not at this stage of the proceedings dispose of the matters of law that are not fully settled in the jurisprudence.”
The Court went on to examine the various causes of action advanced by Dr. Deep. The most significant cause of action was for negligent misrepresentation and the Court found that Dr. Deep had failed to meet the requirements for a valid cause of action, because the statements on which he allegedly relied were forward-looking statements or matters of forecast or opinion which could not found a claim for negligent misrepresentation. Furthermore, Dr. Deep failed to plead that he relied to his detriment on any of the statements set out in his pleading. Although he referred to various statements issued by Mr. Roth at various news conferences, he failed to connect his purchase of shares to any specific statement or misrepresentation.
With respect to the claim in negligence, the Court found that Dr. Deep had not pleaded a cause of action sounding in negligence that was separate from his cause of action for negligent misrepresentation and that pleading therefore suffered the same fate.
He pleaded oppression pursuant to the Ontario Business Corporations Act which failed because it was also based on forward-looking statements and failed to plead detrimental reliance.
A claim based on section 76 of the Ontario Securities Act failed because it was based on alleged insider trading irregularities by senior management of Nortel, who ostensibly sold large amounts of Nortel common shares at inflated prices thereby profiting from materially inaccurate and untrue statements made to the public. Again, Dr. Deep failed to plead any material facts demonstrating a connection between the allegedly selective disclosure by Nortel and any harm that he may have suffered.
With respect to the claim against Mr. Roth personally, the Court considered the principles for separate liability of directors, officers or employees of a corporation as opposed to the liability of the corporation itself and found that in this case no distinct cause of action could be made out against Mr. Roth.
Consequently the Statement of Claim was dismissed without leave to amend. Because the Divisional Court had set out in some detail the matters that Dr. Deep would have to address to rectify his pleading and as he had failed to do so, the Court stated that it saw no reason to afford Dr. Deep a further opportunity to correct his pleadings.