16 Sep 2013

Disgruntled Buyers of Facebook Shares Better Think Twice Before Attempting to Institute a Class Action in Québec

By
Sarah D. Pinsonnault
Revenu
Québec

Facebook’s initial public offering (IPO) on May
18th 2012, was the largest tech offering in history, and the third-largest
IPO in US history. Shortly thereafter, a series of lawsuits were filed due to, inter alia, alleged misrepresentations
by Facebook and talks of insider trading. In Mouaikel c. Facebook
(2013 QCCS 4176), the Petitioner sought to institute a class action before the
Québec Superior Court on behalf of all Québecers who purchased Facebook stocks
following its IPO.

 

The respondents, which included Mark Zuckerberg
and several Facebook directors, US banks and brokerage firms, responded with a
motion seeking the dismissal of the petitioner’s motion. They contended that
the Québec Superior Court lacked jurisdiction in accordance with sections 163
and 164 of the Code of Civil Procedure. Alternatively, should the
Superior Court find that it has jurisdiction, they argued that it should
nevertheless decline to hear the case on the basis of forum non conveniens. In fact, they purported that the matter
should be referred to the New York District Court because a number of lawsuits
against Facebook have already been centralized and are currently proceeding in
that State.

As a result, the petitioner had the burden of
proving the connecting factors that would attribute jurisdiction to Québec.
Ultimately, the only connecting factor the petitioner was able to raise was
that the damages suffered by the proposed group occurred in Québec, pursuant to
s. 3148(3) of the Québec Civil Code (CCQ).

The presiding judge of the case at bar, Justice
David R. Collier, proceeded with an analysis of s. 3148(3)’s “damage (…) suffered
in Québec”. In citing several Québec Court of Appeal cases, he noted the
distinction between cases where the party suffered damages in Québec solely due
to the fact that his/her patrimony is located here, versus cases where the
actual causal events took place in Québec. Justice Collier then went on to
conclude as follows:

“[20] Although the TD Waterhouse
statement records the petitioner’s purchase and sale of shares, it does not
indicate where the transactions occurred or where she paid for her shares.  Nothing in the record indicates that the
sales transactions occurred in Québec, and, in the absence of such proof, the
law presumes that they occurred in the United States.  In this regard, article 1734 CCQ stipulates
that a buyer is bound to take delivery of the property sold, and to pay the
price, at the time and place of delivery. 
In our case, the Facebook shares would have been notionally delivered
either at the NASDAQ exchange in New York or at Facebook’s head office in
California, the deemed situs of the
shares.[18]  According to article 1734
CCQ, the petitioner’s payment would therefore have been owed at one of these
two US locations.

[21] It follows that the
petitioner’s alleged overpayment and loss would have occurred in the United States where
the purchase and sale transactions were concluded.  Nothing happened in Québec other than the
recording of the petitioner’s loss in her brokerage account.  Based on the legal principles cited above, it
cannot be said that the petitioner suffered damage in Québec within the meaning
of article 3148(3) CCQ.

[22] In the absence of proof that
the petitioner suffered damage in Québec as a result of a material event that
occurred here, there is no basis to conclude that a real and substantial
connection exists between the alleged facts of her motion and this Court, which
consequently has no jurisdiction to hear the present matter.”

In light of the absence of any connection
between Québec and the petitioner’s motion in question, the Court was not
required to rule on the forum non
conveniens
considerations pursuant to article 3135 CCQ. Nevertheless, Justice
Collier remarked that the consolidated actions before the New York District
Court would ultimately include the petitioner given that the lead plaintiff in
these actions is seeking to include “all persons and entities who purchased or
otherwise acquired the Class A common stock of Facebook in or traceable to
Facebook’s IPO, and were damaged thereby.”:

“[24] Given the allegations of
misrepresentation and insider trading in the United States, and considering
that Facebook issued its prospectus under the rules of the US Securities and
Exchange Commission and traded its shares on the NASDAQ exchange in New York,
there is little question that New York law will apply to the actions against
the respondents.  The petitioner’s
contention that its action in Québec would proceed solely according to Civil
Code rules of liability is far from convincing. 
Moreover, the majority of the underwriter defendants are domiciled in New York and it appears
certain that much of the relevant discovery will be conducted there.  A final judgment would have to be executed in
the United States.  The New York District Court appears to be the
natural forum to hear the actions against the respondents, and Québec
shareholders appear to have no advantage in proceeding by way of a duplicative
and costly action in this province. 
There is no reason to believe that their interests would be less well
protected in the New York
litigation than they would be here.”

The Respondents’ motion for declinatory
exception was thus granted and, consequently, the petitioner’s attempted class
action suit was dismissed.

To read this decision in its entirety, click here.

 

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