The Supreme Court of Canada holds that the statutory remedy for a failure to disclose in the secondary market is subject to a "robust deterrent screening mechanism".
Legislative Context
On November 9, 2007, the Act to amend the Securities Act and other legislative provisions (S.Q. 2007, C-15) implemented a statutory civil remedy in Quebec with respect to failure to disclose in the secondary market. The National Assembly took this step in response to a widely acknowledged need for a more accessible remedy for investors in the secondary market. For the benefit of investors, this regime creates a presumption to the effect that where a security is traded subsequent to a failure to disclose, any fluctuation in the value of the security is attributable to this failure. This rebuttable presumption releases the claimant from the burden of having to prove that the fluctuation in value is attributable to the failure to disclose or that the claimant was relying on misinformation when it traded in the security in question. However, to avail itself of this regime, a potential claimant must first obtain judicial authorization. Under section 225.4 of the Securities Act (the "Act"), an applicant for such authorization must demonstrate (i) its own good faith and (ii) the reasonable possibility that the action will be resolved in its favour.
In its April 17, 2015 ruling in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18, the Supreme Court of Canada ruled on this new regime for this first time. In so doing, it was careful to distinguish the authorization required under section 225.4 of the Act from the better known test of the authorization of a class action. This distinction is quite significant in that an action for failure to disclose in the secondary market, if filed as a class action, is therefore subject to two different authorization tests which the claimant must be careful not to confuse. In fact, the Supreme Court notes that the burden of proof incumbent upon the claimant under section 225.4 of the Act is serious enough to constitute a robust deterrent screening mechanism.
Good faith is presumed
The Supreme Court affirms that this first condition by no means negates the principle that good faith is presumed. Consequently, in the absence of clear indications putting the claimant's good faith in doubt or a challenge in this respect by the opposing party, this criterion will generally be easily met.
The reasonable possibility of success: a separate burden
Based on this criterion, a claimant wishing to bring an action for failure to disclose in the secondary market must demonstrate that the theory of its case is solid enough for its action to be authorized. In comparing the authorization required under section 225.4 of the Act to article 1003 of the Code of Civil Procedure ("CCP") for the purposes of authorizing a class action, the Supreme Court affirms that the test regarding the reasonable possibility of success under section 225.4 of the Act requires a more in-depth demonstration than the one provided for by article 1003(b) CCP. The latter requires that the facts alleged seem to justify the conclusions sought; in other words that the claimant has a colour of right. By contrast, section 225.4 of the Act requires a reasonable possibility of success, a standard located mid-way between the "colour of right" and "balance of probability" standards that are familiar in other legal contexts. To meet this burden, a claimant must offer a plausible analysis of the applicable legislative provisions and adduce credible evidence in support of his claim without, however, being subject to a complete analysis of the evidence.
We note that the difference in the outcome between the decisions of the Superior Court and the Court of Appeal (that authorized the secondary market action) and the decision of the Supreme Court (that refused the authorization of the secondary market action) lies in the fact that first two courts were not as thorough in their analyses of the arguments raised in defence by Theratechnologies inc. ("Thera") or in their analyses of the underlying evidence.
Indeed the Court of Appeal was of the opinion that it was up to the trial judge to "fully weigh" Thera's argument to the effect that "the relevant information was available to whomsoever made the effort to read the published studies or certain press releases of the corporation" (para. 170). The Supreme Court concurred with the Court of Appeal insofar as it held that the authorization phase must not turn into a mini-trial and that a complete analysis of the evidence is unnecessary. However, the Supreme Court engaged in a more in-depth analysis of the evidence and of the arguments of the parties than the Court of Appeal and, accepting Thera's arguments, found that the claimant had not adduced any evidence likely to demonstrate a material change in Thera's business, capital or operations within the meaning of the Act and that, as such, the claimant could not reasonably hope to succeed.
The Thera case thus shows that the screening mechanism implemented in section 225.4 of the Act is much more robust and requires a more thorough analysis of the theory of the case and of the evidence put forth by a claimant than the test under article 1003(b) CCP. Furthermore, the Supreme Court affirms its decision in Kerr v. Danier Leather Inc., [2007] 3 S.C.R. 331 according to which an external change influencing the price of a corporation's shares may reflect a material change in its business, operations or capital, but is not itself one. The message is clear: the test set out in section 225.4 of the Act is a screening mechanism with bite that requires the court to conduct a thorough preliminary analysis of the claimant's chances of success on the merits.
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