Canada: Court of Appeal Specifies Criteria that Apply to Authorizations to Institute Actions for Secondary Market Liability (s. 225.4 of the Securities Act)

Last Updated: July 23 2013
Article by Philippe Charest-Beaudry and Pierre Y. Lefebvre

On February 24, 2012, the Superior Court rendered Québec's first decision on the application of the new provisions of the Securities Act (the "Act") regarding secondary market liability (êt_C.A_THERA.pdf (PDF available in French only)). The decision authorized the plaintiff to bring an action for damages pursuant to section 225.4 of the Act by means of a class action.

In this case, the petitioner accused the respondent, Theratechnologies, of having failed to disclose what it considered to be a material change in its activities, operations or capital, namely the fact that the FDA had raised questions about the side effects of Theratechnologies' leading drug, tesamorelin, in the course of the approval process.

Theratechnologies petitioned the Court of Appeal for leave to appeal this decision on the grounds that the Superior Court, despite having acknowledged that the authorization mechanism provided for in the Act differs from that governing class actions, failed to apply it correctly. Indeed, section 225.4 of the Act provides that an authorization mechanism must be applied before an action may be brought under the secondary market liability regime set out in sections 224.2 et seq. of the Act. In order to obtain such a court authorization, the plaintiff must demonstrate that "[TRANSLATION] the action is in good faith and there is a reasonable possibility that it will be resolved in favour of the plaintiff."

On July 17, 2013, the Court of Appeal ruled both on the leave to appeal a judgment rendered under section 225.4 of the Act and on the merits of the appeal of the judgement at trial (êt_C.A_THERA.pdf (PDF available in French only)).

Leave to Appeal

The Court of Appeal first acknowledged that there is a right to appeal with leave under articles 29 and 511 of the Québec Code of Civil Procedure (the "C.C.P.") against a judgment rendered under section 225.4 of the Act, and therefore granted such a leave in this case.

Since a judgment authorizing the institution of a class action is without appeal (art. 1010 par. 2 C.C.P.), the judgment authorizing both an action under section 225.4 of the Act and a class action may therefore be appealed with leave, but only in respect of the action under section 225.4 of the Act.

The court thus recognized that such an authorization has the effect of ordering that "[TRANSLATION] an irremediable thing be done that the final judgment cannot remedy," seeing as, first, "[TRANSLATION] one of the admitted goals is to shield vulnerable markets from the undue pressures of the high costs of strike suits" and, second, by granting such an authorization to institute an action for secondary market liability, the trial judgment triggered the application of specific measures regarding the burden of proof and quantification of damages.

Appeal on the Merits

In the appeal on the merits, the court specified that criteria must govern the analysis of whether there is a "[TRANSLATION] reasonable possibility of succeeding on appeal" under section 225.4 of the Act. More specifically, it emphasized the following elements:

  • The criterion set forth in section 225.4 of the Act "[TRANSLATION] is more stringent than that of colour of right [...] under article 1003 (b) C.C.P." that applies to authorizations to institute a class action;
  • This more stringent criterion results from the lawmakers' intent to implement a "[TRANSLATION] reliable filtering mechanism";
  • The goal of this filtering mechanism is to "[TRANSLATION] protect reporting issuers against strike suits, those opportunistic actions that are brought solely for the purpose of obtaining a quick settlement based on conjecture rather than on a right that is grounded in real and tangible evidence"; and
  • While the plaintiff's burden of proof is greater than the simple burden of demonstration currently required in class actions, judges apprised of a motion for authorization must not conduct an in-depth analysis of the evidence presented, but must limit themselves to "[TRANSLATION] a summary appreciation of the right of action invoked";

In the end, the Court of Appeal claimed it was satisfied that the criteria of section 225.4 of the Act had been met and refused, at this preliminary stage, to rule on the issue of whether or not the questions raised by the FDA regarding the side effects of tesamorelin constitute a material change in the activities, operations or capital of Theratechnologies. The court therefore referred this question to the trial judge.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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