On April 17, 2015, the Supreme Court of Canada provided Canadian public companies with an important win, holding that the test for leave to start a class action for breach of a company's secondary market disclosure requires the court to evaluate the evidence and conclude that there is a reasonable and realistic chance that the action will succeed. In allowing the appeal of Theratechnologies Inc. and reversing the Québec Court of Appeal's decision granting authorization of a proposed class action under s. 225.4 of the Québec Securities Act (QSA), the Court recognized that since the purpose of the leave mechanism is to screen out unmeritorious lawsuits, the test for leave must have teeth and is not simply a "speed bump" on the way to certification. Although this does not require the court to conduct a "mini-trial" or undertake a full evaluation of the evidence, the plaintiff must nonetheless provide "a plausible analysis of the applicable legislative provisions" and adduce "credible evidence in support of its claim" in order to proceed with its lawsuit. While the Supreme Court's decision was in the context of a proposed class-action under the QSA, the case has implications for public issuers across the country, as the test for leave is the same in the other provinces.
In the spring of 2010, Theratechnologies Inc. (Thera) was awaiting FDA approval of a new drug to reduce excess abdominal fat in HIV patients. As the application proceeded, Thera regularly informed its shareholders of the results of its clinical trials measuring the safety and efficacy of the drug. During the approval process, the FDA referred a number of questions about the drug, including its potential side effects, to an expert Advisory Committee, and made these questions public as part of the package of briefing materials on its website. These questions were then publicized by stock quotation enterprises, leading to a rapid drop in the price of Thera's shares. Thera did not respond publicly because it believed the briefing documents it had already provided to the FDA and the clinical trials it had already made public to its investors (which concluded that the side-effects were minor, transitory and easily managed), offered a comprehensive response to the specific questions that the FDA had posed. The plaintiff, a Thera shareholder, sought authorization to bring a class action for damages, claiming that the FDA's questions amounted to a material change in Thera's business, operations or capital, and that Thera breached its obligation to make timely disclosure of those changes under s. 73 of the QSA.
The motions judge and the Québec Court of Appeal allowed the action to proceed, finding that the claim had a "reasonable possibility of success." Thera appealed to the Supreme Court. At issue was whether the plaintiff could satisfy this second branch of the test for leave.
The Leave Test - Section 225.4 of the QSA
In Quebéc, there are two criteria that must be satisfied before the court will authorize an action for damages for breach of a company's disclosure obligations in the secondary market: (a) the action must be brought in good faith and (b) there must be a "reasonable possibility" that the action will be resolved in favour of the plaintiff. This two-pronged criteria was enacted as s. 225.4 of the QSA, and analogous provisions can be found in the Securities Acts of every province.
As Justice Abella explains in her reasons, the statutory cause of action in s. 225.4 emerged out of Canada-wide efforts to develop a more meaningful and accessible remedy for investors who have suffered a loss as a result of a breach of a company's continuous disclosure obligations.
Prior to the introduction of the statutory liability regime, Québec investors had to resort to the general rules of civil liability to obtain a remedy for a breach of a company's continuous disclosure obligations. Under the Civil Code of Québec, this meant that investors were left with the heavy burden of establishing the fault, the prejudice suffered and the causal link between the fault and the prejudice suffered. In common law jurisdictions such as Ontario, investors had to rely on the tort of negligent misrepresentation, which required that they prove reliance on the misrepresentation. Limited to these traditional causes of action, relief proved largely illusory.
The statutory liability regime reduces the burden on investors, for example, by providing a statutory cause of action without the requirement to prove reliance. At the same time, it contains a screening mechanism to weed out unmeritorious litigation. As the Supreme Court explains, the new regime "reflected an attempt to strike a balance between preventing unmeritorious litigation and strike suits and, at the same time, ensuring that investors have a meaningful remedy when issuers breach disclosure obligations."
Key Findings of the Supreme Court
s. 225.4 of the QSA vs art. 1003 CCP
Under Québec law, the commencement of a class action is governed by art. 1003 of the Code of Civil Procedure. The Supreme Court agreed with the Court of Appeal that the "reasonable possibility" criteria required under s. 225.4 of the QSA departs from the general threshold for the authorization of a class action under art. 1003 CCP. Under the latter, a simple colour of right is required. The Supreme Court reiterated that the low threshold for class actions under art. 1003 CCP reflects the dual objective of "deterrence and compensation that animate the class action system." In s. 225.4 of the QSA, however, the legislature used different language with the objective of creating a more stringent screening mechanism for securities class actions, vesting in the courts an important gatekeeping role.
A Reasonable Possibility of Success
In its judgment, the Supreme Court held that the threshold set out in s. 225.4 of the QSA requires that there be "a reasonable or realistic chance that the action will succeed." According to the Supreme Court, a case with a realistic chance 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. Although the authorization stage under s. 225.4 of the QSA should not proceed as a mini-trial – a full analysis of the evidence is unnecessary at this stage – there must nonetheless be sufficient evidence to persuade the court that there is a realistic chance that the action will be resolved in the claimant's favour.
In this case, the plaintiff alleged that Thera failed to make timely disclosure of a material change to investors. The Act defines a material change as having two components: there must be a change in the business, operations or capital of the issuer and that change must be material (i.e., it must reasonably be expected to have a significant effect on the market price or value of the securities of the issuer). On the facts of the case, the plaintiff was unable to point to any evidence that could qualify as a change in Thera's operations, capital or business as described in the Act. The results of the clinical trials were disclosed to shareholders as they became available, and there was no new information about the side effects of the drugs that required timely disclosure when the FDA mentioned the side effects in the briefing materials. Because the evidence did not credibly point to a material change that could have triggered Thera's disclosure obligations, the Supreme Court held that there was no reasonable possibility that the action could succeed.
Implications of the Decision
The Supreme Court's interpretation of the "reasonable possibility" criterion under s. 225.4 provides important direction from the country's highest court on the applicable test under the leave criterion. Although the decision relates to the QSA, given the virtually identical language in Securities Acts across the country, it has broad-reaching implications and is clearly a "win" for public companies who face the risk of unmeritorious claims and strike suits. Given the Supreme Court's clear confirmation that the leave test is a merits-based test, in appropriate cases it will be beneficial for defendants to put forward a robust defence to leave, including through competing fact and expert evidence and cross-examination of the plaintiff's affiants.
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