Fishing in a “Lobster Tank”: Non-Party Production Order Granted in Proposed Secondary Market Misrepresentation Class Action

Under the Ontario Securities Act, RSO 1990, c S.5 (“OSA”) and equivalent securities legislation in other provinces, there are strict rules regarding the commencement of secondary market misrepresentation claims. For example, plaintiffs must obtain leave from the court to proceed with such claims and are generally not permitted to exercise discovery rights prior to obtaining leave.

However, what if a plaintiff makes targeted production requests to a non-party, former director of an issuer who had publicly accused the issuer’s management of misrepresentations and other serious misconduct, prior to obtaining leave? In Mcdonald v. Guyana Goldfields Inc., 2025 ONSC 2431 (“Guyana Goldfields”), Justice Morgan dealt with this scenario and granted a third-party production order in the context of a proposed class action seeking to advance a secondary market OSA claim.

Background: Discovery and Leave in Secondary-Market OSA Claims

The OSA, as well as equivalent legislation in other provinces, establishes a “carefully calibrated” regime of secondary market misrepresentation liability.[1] Its provisions, which include the requirement that leave be obtained to commence such a claim, strike a “delicate balance” between the “interests of potential plaintiffs and defendants and of affected long-term shareholders”.[2]

To obtain leave, plaintiffs must demonstrate that: (i) the action is being brought in good faith; and (ii) there is a reasonable possibility that the action will be resolved at trial in their favour. A judge hearing a leave motion has an “important gatekeeping role” in preventing “costly strike suits and unmeritorious claims” from proceeding.[3]

A notable aspect of the leave regime is that plaintiffs are severely limited in their ability to exercise discovery rights prior to obtaining leave. As Justice Belobaba explained in Mask v. Silvercorp Metals Inc., 2014 ONSC 5727, at para. 13:

The leave provision was expressly intended to prevent investors from pursuing unsupported actions to the detriment of the shareholders of the target company. Therefore, this court continues to police “discovery-like” requests prior to OSA leave motions “to preclude the putative plaintiff from ‘fishing for facts’ that would support … a speculative lawsuit of the strike-suit type.” The concern is that the plaintiff not engage in a discovery-like “rummage” through the defendant’s corporate files “in the hope of uncovering something helpful to her case.”

The Decision in Guyana Goldfields

In Guyana Goldfields, the plaintiffs brought a proposed class proceeding, including a secondary market misrepresentation claim, against a gold-mining issuer, Guyana Goldfields Inc., as well as its former CEO. The alleged misrepresentations were statements concerning the expansion of an open-pit mine between December 2017 and March 2019.

In late 2018 the company terminated Patrick Sheridan — its founder, executive chairman and a director — from his positions at the company. Over the course of several months in early 2019, Sheridan and several other prominent shareholders conducted a public campaign concerning what they alleged was serious misconduct, mismanagement, misrepresentations, and other governance failures at the company, including in relation to the open-pit mine. Among other steps, Sheridan: (i) created a website that was devoted to informing investors of his findings about the company and his proposals for governance reform; and (ii) sent a letter to the board of the company in April 2019 urging them to commence litigation against the company’s CEO.

However, Sheridan soon reached a settlement with the company and did not publicly disclose any further information that formed the basis for his allegations of misconduct. In the words of Justice Morgan, “the Sheridan Documents on which Sheridan and his supporters based these same allegations, and which were previously either made public or were on the cusp of being made public, are now unavailable to the Plaintiffs and proposed class.”[4]

In support of their pending leave and certification motions, the plaintiffs brought a motion seeking production of specific categories of documents from Sheridan, who was not named as a defendant. Specifically, they sought the following for the period of late 2018 to early 2019: (i) documents created, prepared or exchanged between Sheridan and the other concerned shareholders; and (ii) documents created, prepared, or exchanged between Sheridan and any person other than Guyana Goldfields that supported the letter he sent to the board in April 2019.

Justice Morgan granted the motion. His decision was animated by several core considerations, including the following:

• First, the company had issued press releases in early 2019 which, according to Justice Morgan, showed that “the allegations made by Sheridan establish that a number of Sheridan’s allegations against Guyana and its management were accurate and needed to be addressed by the company.”[5]
• Second, he rejected the idea that the motion was a “fishing expedition”, observing that the plaintiffs “know exactly where to look and are certain that the sought-for documents are there.” He added that Sheridan was “hardly a stranger to the controversy in the action” and that he “is not being burdened with a search for the unknown in as yet unexplored areas of his files”. In Justice Morgan’s words: “If this is fishing, the line is not being cast in murky waters where no light penetrates. This is more like “fishing” in the lobster tank at the front of a seafood restaurant.”[6]
• Third, he concluded that the documents in issue would have been public documents but for confidentiality obligations contained in Sheridan’s settlement with the company. In Justice Morgan’s view, denying the motion would effectively “preserve a potential roadblock” rather than uphold the gatekeeping function of the court on a secondary market misrepresentation leave motion.[7]

Guyana Goldfields is a reminder that, despite their gatekeeping role on secondary market misrepresentation leave motions, courts may grant preliminary production orders where the requests are narrow such that they do not amount to a “fishing expedition”, the documents can be identified with specificity and are known to exist, and the documents are not in the possession of the defendant(s).

It remains to be seen in future cases whether courts will be equally prepared to grant narrow production orders in similar circumstances where they are sought against defendants, rather than just non-parties. Meanwhile, based on the plaintiffs’ success in Guyana Goldfields, it is possible that other plaintiffs could tactically choose not to name a particular person as a defendant, so as to ensure that a production request made against them is as a non-party. In this vein, it bears noting that although Sheridan might have faced personal liability for the alleged misrepresentations — having regard to his positions as director and officer at the time of the misrepresentations[8] — he was not named as a defendant in Guyana Goldfields.

The case is also a reminder to issuers that disputes with dissident shareholders and/or former officers and directors can generate documents that may subsequently be used in support of secondary market misrepresentation claims, even in circumstances where the issuer reaches a settlement that contains strict confidentiality provisions.

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