On April 17, 2015, the Supreme Court released its unanimous decision in Theratechnologies Inc. v 121851 Canada Inc., 2015 SCC 18. The decision deals with class action authorization under the Québec Securities Act, RSQ, c V-1.1 (the "Act"), and has important implications for publicly traded companies across Canada. The judgment overturns the Québec Court of Appeal, which upheld the lower court authorization of this class action.
Theratechnologies Inc. ("Thera") was in the process of obtaining United States Food and Drug Administration ("FDA") approval to market a new drug designed to reduce abdominal fat in HIV patients. During the approval process, the FDA published all materials assembled for the new drug application in accordance with its usual practice. The published documents included questions that the FDA had regarding a potential increased risks of diabetes. These questions attracted the attention of stock option quotation services such as Dow Jones, which issued press releases citing the FDA's concern. The result of this publicity was a drop in the share price, during which some investors sold their shares at a loss. The share price subsequently recovered and the FDA eventually approved the new drug application.
121851 Canada Inc. ("121851") sought judicial authorization under s. 225.4 of the Act to launch a class action suit. 121851, a corporate shareholder, claimed that the FDA's questions amounted to a material change in Thera's business, operations or capital, triggering disclosure obligations under the Act.
Reasonable Possibility of Success
Section 225.4 of the Act addresses breaches of continuous statutory disclosure obligations in the secondary market and attributes fluctuation in the value of the security to the misrepresentation or omission in question. The regime established under s. 225.4 along with similar provisions across the country, reflect an attempt to strike a balance between preventing unmeritorious litigation and ensuring that investors have a meaningful remedy when issuers breach disclosure obligations. Under s. 225.4, a court will grant authorization only if it deems the action to be in good faith with a reasonable possibility that it will be resolved in favour of the plaintiff. At the heart of this case was the question of what burden the plaintiff had to overcome in order to satisfy this requirement; in other words, what constitutes a "reasonable possibility of success" within the meaning of this provision.
The Supreme Court undertook a straight forward statutory interpretation exercise, agreeing with the Court of Appeal and Motions Judge that a reasonable possibility of success set out a different and higher standard than the general threshold for the authorization of class actions under art. 1003 of the Civil Code of Québec which require only "a good colour of right". The Supreme Court held that a reasonable possibility of success required the claimant to offer both a plausible analysis of the applicable legislative provisions and (most importantly) some credible evidence in support of the claim such that there is a realistic chance the plaintiff will win. The Supreme Court found that the evidentiary requirements at this stage should not be so onerous as to replicate the demands of a trial. Speaking for a unanimous bench, Abella J stated that the threshold should be more than a "speed bump" and required courts to undertake a reasoned consideration of the evidence to ensure the action has some merit.
Ultimately, the Supreme Court found that 121851 had not pointed to any evidence that could qualify as a material change in Thera's business, operations or capital, triggering disclosure obligations.
A Fine Balance
The decision may not appear particularly ground-breaking but it does provide much needed guidance to lower courts in a number of provinces that have been trying to find the appropriate balance between preventing unmeritorious claims and shareholder "strike suits" while allowing legitimate claims to proceed.
Critics may argue that the decision inevitably places a greater evidentiary burden on plaintiffs at an earlier stage in the proceedings. However, given the Court's insistence that a full analysis of the evidence is not necessary at this stage, this decision is not likely to have a chilling effect on future meritorious claims.
The Supreme Court evidently intends to establish some degree of uniformity across the country, given the similarity in securities related authorization or certification regimes in place throughout.
Notably though, the Court was directed to the Canadian Securities Administrators' "National Policy 51-201 Disclosure Standards" which lists potentially "material" information and declined to adopt this list as dispositive of whether there was a change in the business, operations or capital of a reporting issuer. The Court said to do so would "collapse the distinction between material facts and material changes, significantly expanding timely disclosure obligations beyond what is required by statute. This would, in effect, allow the Canadian Securities Administrators' policy to amend Québec's securities legislation, contrary to this Court's ruling in Pezim".
Securities Regulation and Class Actions
The Supreme Court has had considerable output in securities regulation and class actions cases in the past 5 years. Both of these types of cases share the problem of being rooted in provincial legislation but often national in scope.
The Court's opinion in the Reference re Securities Act, 2011 SCC 66 advised that Parliament's power over the regulation of trade and commerce under s. 91(2) permits federal legislation on matters of genuine national importance and scope but cannot be used to deny provincial legislatures the power to regulate local matters and industries with their boundaries. The Court found the proposed federal legislation to be principally directed at day-to-day regulation of all aspects of securities and therefore overreached genuine national concerns.
In McLean v British Columbia (Securities Commission), 2013 SCC 67, the Court upheld the BC regulator's interpretation of the limitation period in the BC Securities Act thus allowing secondary jurisdictions to wait until the conclusion of the primary proceeding by another province's securities commission before commencing what might otherwise be parallel or duplicative proceedings that waste regulator resources or overburden targets of such proceedings.
In both cases, it appears the Court was alive to the goal of improving interjurisdictional cooperation if not cooperative federalism.
On the class actions front, there have been a number of recent Supreme Court decisions addressing various aspects of class action proceedings (for example, the Pro-Sys Consultants/Infineon Technologies/Sun-Rype Products trilogy in 2013 re indirect purchasers and the Bank of Montreal/Amex Bank of Canada/Marcotte trilogy in 2014 re credit card conversion charges, as well as Vivendi in 2014 re private health insurance benefits). We now await the Court's decisions in the IMAX (35811), CIBC (35807) and Celestica (35813) appeals which were heard in February 2015 and will address the representative plaintiffs' claims for damages under Part XXIII.1 of the Ontario Securities Act for misrepresentations alleged to have been made in respect of shares trading in the secondary market.
We should learn by about August 2015, whether the Court's reasons in Theratechnologies Inc. in the Québec context foretell the result in these Ontario-based appeals.
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