The recent decision of the Supreme Court of Canada inTheratechnologies Inc. v. 121851 Canada
Inc. raises interesting questions about disclosure
obligations that can be triggered by a regulator's inquiries,
and resulting class action risk if disclosure is inadequate.
The case arose as a proposed class action brought by
shareholders of Theratechnologies Inc. ("Thera") . The
plaintiff alleged that Thera failed to adequately disclose and
respond to questions that it received from the FDA as part of the
regulatory approval process for a new drug. The FDA questions were
about side effects of a proposed new drug. When the questions were
publicized externally, Thera's stock dropped by 58% that same
The Supreme Court ultimately dismissed the plaintiff's claim
at the leave stage, finding that the company had previously made
adequate disclosure regarding the drug's potential side effects
and about the FDA process. The Court found that the FDA's
questions were a routine part of the regulatory process.
However, on different facts the outcome may not have been as
happy for the company. For example, if the FDA's questions had
not been routine, would this have resulted in a material change to
Thera's business that Thera would be compelled to disclose? The
case does not answer the question, but it reinforces the inherent
risk in navigating the regulatory process, as a regulator's
inquiries can often raise larger issues regarding disclosure and
potential investor liability.
In the spring of 2010, 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 58% decline in the price of Thera's
Thera did not respond publicly to the publication 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
offered a comprehensive response to the specific questions that the
FDA had posed. Thera shareholders commenced a class action,
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 Quebec Securities Act.
The Supreme Court rejected the plaintiff's claim, finding
that the FDA's questions did not amount to a material change.
In particular, the Court focused on the fact that the FDA's
questions, and the package of briefing materials that were made
public, were part of the regular and routine process through which
the FDA assessed whether a new drug should be approved. The court
held there was no new information that required disclosure.
Moreover, the Court recognized that not every fact about a
regulatory inquiry, or affecting a business generally, can or
should be disclosed to shareholders. The Canadian Supreme Court
agreed with this observation from the U.S. Supreme Court:
"there are risks of excessive disclosure, which could
'simply ... bury the shareholders in an avalanche of trivial
information – a result that is hardly conducive to informed
decision making" (TSC Industries, Inc. v. Northway, Inc. 426
U.S. 438 (1976))."
Implications of the Decision
Public issuers can take comfort from the fact that the Supreme
Court recognized that it is not necessary to disclose each and
every interaction with a regulator, particularly where these
inquiries are routine. As well, the Court acknowledged the dangers
of excessive disclosure.
However, where the line can be drawn between routine aspects of
a regulatory process and more unusual or atypical aspects will be a
judgment call, based on the facts of each case. Whether non-routine
queries must be disclosed will be another judgment call –
depending upon whether they represent a material change or not. The
Thera case highlights that companies navigating a regulatory
process must be mindful of the larger risks relating to disclosure
and related civil liability.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).