Canada: Statutory Secondary Market Misrepresentation Claims: Quebec Court Of Appeal’s First Decision

In its recent decision in Theratechnologies Inc. v. 121851 Canada Inc., the Quebec Court of Appeal considered, for the first time, whether a right of appeal from a Superior Court decision granting leave to pursue secondary market misrepresentation claims pursuant to article 225.4 of the Quebec Securities Act (QSA) exists in the context of a class proceeding. In addition, the Court of Appeal elaborated on the criteria for leave set out in the QSA.

Background to the Decision

The plaintiff, 121851 Canada Inc. (121), claimed that the defendants, Theratechnologies Inc. (Thera) had failed to comply with continuous disclosure obligations pursuant to the QSA. 121 alleged to have suffered a loss of C$271,000 as a result of Thera's deficient public disclosures.

The plaintiff sought certification of a class proceeding against Thera and also the CEO and chairman of the board of directors of the corporation, which included a claim pursuant to the provisions of the QSA that impose civil liability for misrepresentations or omissions affecting the price of securities on secondary markets.

Accordingly, two aspects of the action pursued by 121 required authorization from the court. The plaintiff sought certification of the action pursuant to Article 1003 of the Quebec Code of Civil Procedure and also required leave of the court to pursue a claim for misrepresentation on the secondary market pursuant to Article 225.4 of the QSA. The leave test set out in Article 225.4 requires a plaintiff to demonstrate that the action is brought in good faith and that there is a reasonable possibility that it will be resolved in favour of the plaintiff.

The motions judge granted certification and leave to pursue the statutory secondary market misrepresentation claims pursuant to the QSA. The defendants appealed both aspects of the decision.

Appealing from the Leave Decision – More than a Mere Matter of Procedure

In Quebec, an order granting certification of a class proceeding is not subject to appeal. However, there is no express prohibition in the QSA on an appeal from a decision granting leave to commence an action under Article 225.4.

The Court of Appeal made a clear distinction and concluded that the decision of the motions judge regarding leave to pursue secondary market misrepresentation claims pursuant to Article 225.4 of the QSA could be appealed (subject to leave). There was no basis not to follow the general rules governing appeals as set out in the Code of Civil Procedure.

After considering the policy objectives underlying Article 225.4, the Court of Appeal concluded that the leave requirement, in the context of a statutory secondary market claim, differs in significant ways from a motion for certification. While Article 225.4 of the QSA aims to promote access to justice for shareholders who allege to have been harmed by the failure of a public issuer or other defendants to comply with disclosure obligations, the legislative intent of the leave requirement is to screen out frivolous or opportunistic cases (often referred to as "strike suits") at a preliminary stage to avoid subjecting defendants to the costs and expenses of unmeritorious litigation. In keeping with this legislative objective and the interests of justice, the Court of Appeal concluded that an appeal of the leave decision should be available.

Thus, in the context of a proposed class proceeding brought in conjunction with an application for leave to pursue claims pursuant to Article 225.4 of the QSA, defendants may be able to appeal the leave decision, but not certification.

The Court of Appeal went on to grant leave to appeal to the defendants and to consider the merits of the appeal.

The Test for Granting Leave Pursuant to Article 225.4

In articulating the criteria for granting leave to pursue a statutory secondary market claim, the Court of Appeal reviewed jurisprudence from Ontario and British Columbia that considered the leave test. The court concluded that [translation]: "if the requirement to show the reasonable possibility of resolution in favour of the plaintiff is more onerous than the simple requirement to demonstrate 'colour of right' [as would be the onus for establishing certification in Quebec], it is nonetheless less onerous than the balance of probabilities." Accordingly, while the leave test is not a determination of the merits, there must be real and sufficient evidence to demonstrate the reasonable possibility of the plaintiff's success.

Conclusions

Notably, like the Court of Appeal for British Columbia's recent decision in Round v. MacDonald Dettwiler and Associates Ltd., (Round), the Quebec Court of Appeal emphasized that the level of scrutiny that a court should bring to an analysis of the plaintiff's motion for leave to commence an action under the statutory secondary market liability regimes is higher than that applied to a motion for certification. This raises questions as to whether courts in these provinces may apply a higher standard of review than the "low bar" being employed by courts in Ontario. Like the Round decision, it also raises the possibility that the courts in different provinces will come to interpret practically identical secondary market liability provisions in divergent ways in light of the distinct procedural and substantive legal contexts of each jurisdiction.

Further, the determination that a decision granting leave to pursue statutory secondary market claims may be appealed in the context of a class proceeding is an important development in Quebec class action law.

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.