In Theratechnologies inc v. 121851 Canada
inc.,1 the Supreme Court of Canada ruled for the
first time on a case involving the new secondary securities market
liability regimes. These regimes, which have been adopted in most
Canadian provinces, facilitate actions by investors when reporting
issuers breach their disclosure obligations, including when they
fail to report a material change.
Theratechnologies, a pharmaceutical company whose common shares
are listed on the Toronto Stock Exchange, applied to the U.S. Food
and Drug Administration (FDA) for a new drug. As part of its
approval process, the FDA referred questions about the drug,
including its possible side effects, to an expert advisory
committee. The FDA also published the questions in documents posted
on its website. When some analysts then published reports
addressing the issues raised by the FDA, including the possible
side effects, the share price of Theratechnologies dropped by more
than 50%. Theratechnologies did not react publicly to these
statements. Two days later, the advisory committee unanimously
voted in favour of approving the new drug application. The share
price recovered soon thereafter.
A class action was then brought under the Québec
Securities Act. The plaintiffs principally claimed that
the possible side effects of the medication and the FDA's
questions regarding those effects constituted a material change in
the business, operations or capital of Theratechnologies and that
it had failed to disclose that change.
Article 225.4 of the Securities Act provides that such
recourse is subject to prior approval of the court, which it must
give "if it deems ... there is a reasonable possibility that
it will be resolved in favour of the plaintiff". The Supreme
Court concluded that this test is more demanding than the general
authorization criteria applicable to class actions in
Québec, in which the court only examines whether "the
facts alleged seem to justify the conclusions sought".
The Supreme Court also held that the gatekeeping role of the
courts under article 225.4 requires that the courts "undertake
a reasoned consideration of the evidence to ensure that the action
has some merit". In addition, it "requires the claimant
to offer both a plausible analysis of the applicable legislative
provisions, and some credible evidence in support of the
claim" so as to establish a reasonable possibility of success.
While the authorization required by the Québec
Securities Act should not be treated as a mini-trial,
sufficient evidence is nevertheless required to convince the court
that there is a reasonable possibility that the action will be
resolved in the plaintiff's favour.
In this case, the Supreme Court concluded that the plaintiffs
had not satisfied the test. Citing its decision in the
Kerr2 case, the Court reiterated that the
obligation of timely disclosure is limited to "material
changes"‒ that is, a material change in the operations,
business or capital of the issuer. In Theratechnologies,
the Supreme Court found that the plaintiffs had not demonstrated
that the FDA's questions related to new information that had
not been disclosed. The Court further concluded that it was
difficult to characterize the questions as any kind of change to
the business, operations or capital of Theratechnologies requiring
any reassuring public response. This was particularly the case
because Theratechnologies would have been put in a very difficult
position had it tried to reassure investors while the FDA's
decision was still pending.
The Court therefore concluded that the plaintiffs' action
had no reasonable chance of success and refused to authorize the
The Ontario Securities Act also provides for a
screening method requiring that for an action in the secondary
market to be authorized, there must be "a reasonable
possibility that the action will be resolved at trial in favour of
the plaintiff", a test very similar to that found in the
Québec Securities Act. The finding in
Theratechnologies is therefore likely to have an impact
beyond the borders of Québec.
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