In a decision released on April 17, 2015, the Supreme Court of Canada (SCC) overturned the Québec Court of Appeal's judgment in Theratechnologies Inc. v. 121851 Canada Inc. (See our July 2013 Blakes Bulletin: Statutory Secondary Market Misrepresentation Claims: Quebec Court of Appeal's First Decision for more information.)
For the first time, the SCC considered the standard for granting a plaintiff leave to proceed with a statutory secondary market securities class action. The SCC held that courts must undertake a reasoned consideration of the evidence adduced on the leave motion to ensure that the proposed class action has some merit.
The plaintiff claimed that Theratechnologies Inc. (Thera) failed to comply with continuous disclosure obligations pursuant to the Quebec Securities Act (QSA) in that Thera did not disclose a request for information from the U.S. Food and Drug Administration (FDA) issued in the context of the drug approval process. The plaintiff alleged that it suffered a loss as a result of the decline in Thera's share price following the release of the FDA's request for information.
The plaintiff claimed against Thera, its CEO and the chairman of Thera's board of directors, and 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. The plaintiff sought authorization (certification in the common law provinces) of the class action pursuant to Article 1003 of the Quebec Code of Civil Procedure and leave of the court to pursue a claim for misrepresentation on the secondary market pursuant to Article 225.4 of the QSA.
The motions judge authorized the class action and granted leave to pursue the statutory secondary market misrepresentation claims pursuant to the QSA. The defendants appealed both aspects of the decision.
The Court of Appeal upheld the Superior Court's decision granting leave to the action pursuant to article 225.4 of the QSA, indicating that "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', it is nonetheless less onerous than the balance of probabilities."
The SCC agreed with the Court of Appeal's view on the test for leave, but disagreed with the Court of Appeal's application of the test to the facts of the case.
The SCC emphasized that the applicable test for leave at Article 225.4 of the QSA sets out two criteria: (1) the action must be brought in good faith; and (2) there must be a reasonable possibility that it will be resolved in favour of the plaintiff. In this case, the plaintiff's good faith was not in question.
Regarding the test of the possibility that it will be resolved in favour of the plaintiff, the SCC held that:
. . . the threshold should be more than a "speed bump", and the courts must undertake a reasoned consideration of the evidence to ensure that the action has some merit. In other words, to promote the legislative objective of a robust deterrent screening mechanism so that cases without merit are prevented from proceeding, the threshold requires that there be a reasonable or realistic chance that the action will succeed.
However, the SCC held that this step should not be transformed into a mini-trial but should "ensure that cases with little chance of success—and the time and expense that they impose—are avoided". The SCC held that:
. . . [a] case with a reasonable possibility of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim. [. . .] What is required is sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant's favour.
In this case, the plaintiff alleged that Thera had failed to disclose a material change, namely that the FDA submitted a series of questions to Thera in the context of its drug approval process. The SCC emphasized that the plaintiff had not provided any evidence that would indicate that the questions posed by the FDA strayed from its routine drug approval process. No evidence demonstrated that the questions concerned matters that Thera had not previously disclosed. The SCC held that it was simply a standard step in the drug approval process followed by the FDA. Accordingly, the plaintiff had failed to establish that there had been a "material change" as defined in the QSA. Consequently, the action did not present a reasonable possibility that it would be resolved in favour of the plaintiff.
This decision is noteworthy not only under Quebec law, but under Canadian law in general, since all provinces adopted similar rules governing secondary market civil liability in securities matters. We expect to see courts taking a more rigorous approach when considering the evidence presented by the plaintiff at the leave stage to ensure that there is a reasonable possibility that the action will be resolved in the claimant's favour. In Thera, the SCC held that the plaintiffs failed to meet this standard.
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