Canada: The Need For A Legal Ground To Stand On: A Shareholders Class Action Is Dismissed At The Authorization Stage For Failure To Meet Article 1003 B) C.P.C. (Groupe d'action d'investisseurs dans Biosyntech c. Tsang, 2015 QCCS 3265)

In the spring of 2010, BioSyntech, a start-up biotechnology company, developing a cartilage-repair product, BST-Car Gel, filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act. In the subsequent bankruptcy proceedings, the intellectual property relating to the BST-Car Gel was sold. Vincent Blais, a former shareholder of BioSyntech, filed a motion for authorization to bring a class action on behalf of shareholders and security holders against BioSyntech's former directors (the "Defendants") for allegedly causing the company's "avoidable" bankruptcy by failing notably to bring down the company's burn rate and to undertake the necessary measures to secure the financing needed to complete a pivotal clinical trial (the "Motion"). According to the Motion, Defendants breached their duty of care under section 122(1) of the Canadian Business Corporations Act (CBCA), and under articles 322 and 1457 of the Quebec Civil Code. On June 30, 2015, in Groupe d'action d'investisseurs dans Biosyntech c. Tsang, (2015 QCCS 3265), the Honorable Stephen Hamilton of the Quebec Superior Court refused to grant authorization, ruling that the former shareholders of BioSyntech notably lacked the legal standing to bring said class action as the alleged faults of the directors would have been against the company and not the shareholders such that the shareholders would have allegedly suffered indirect damages1. Such damages are not recoverable under Québec civil law.

[153] The shareholders cannot, in law, recover the loss of share value from the directors, even if the directors were negligent. As a result, the class action proposed by the Petitioner cannot succeed. The Petitioner has failed to demonstrate a prima facie right of action against the Respondents pursuant to Article 1003(b) CCP.

Although, the Court acknowledged that the range of parties to whom directors owed a duty of care had arguably been expanded by the Supreme Court of Canada's decisions in Peoples2 and BCE3 to include both creditors and other stakeholders – including shareholders, Justice Hamilton, after reviewing the relevant jurisprudence and doctrine, came to the conclusion that:

[135] With respect to the right of action of the shareholders [under the CBCA] against the directors, the better view appears to be that the shareholders do now have a right of action against the directors.

However, Justice Hamilton emphasized the requirement that the damages claimed by the shareholders in the corporate context must be direct and distinct from those suffered by the company itself.

[140] Damages that are indirect or "par ricochet" are not generally recoverable in extra-contractual liability. As Jean-Louis Baudouin explains:

Comme on le sait, la jurisprudence respecte le critère direct du dommage édicté par le législateur. Le problème de déterminer ce que constitue un dommage « direct » est complexe et, là encore, il serait présomptueux de vouloir généraliser. Toutefois, une tendance se dégage. Les tribunaux ne reconnaissent pas le préjudice qui puise sa source immédiate non dans la faute elle-même, mais dans un autre préjudice déjà causé par la faute. En d'autres termes, est indirect le dommage issu du dommage, le dommage par ricochet, le dommage au « second degré ». (Emphasis added)

As is well known, case law respects the direct injury criteria established by the legislator. The problem of determining what constitutes a "direct" damage is complex and, again , it would be presumptuous to generalize. However, a trend is emerging. The courts do not recognize the prejudice that does not find its source in the fault itself, but rather in another prejudice that has already be caused by the fault. In other words , the damage is indirect when it is resulting from another damage, a damage "par richochet", a "second degree" damage. [Our translation]

[141] The application of this principle in the corporate law context is clear. When the directors cause damage to the corporation, shareholders cannot claim against directors for the resulting loss of share value because this loss is an indirect result of the injury directly caused to the corporation. [...]

In the case of BioSyntech, the shareholders were essentially claiming for a loss in share value, which arose from an alleged "injury" caused to BioSyntech itself. As the Court pointed out: "In those circumstances, the recourse belongs to the corporation and not to the shareholders. If the corporation sues, the shareholders will benefit directly from any recovery. If the corporation fails to pursue its recourse, the shareholders can bring a derivative action in the name of the corporation. If the corporation is bankrupt, the trustee in bankruptcy can bring the action. If the trustee fails to act, the creditors can take the proceedings..."and "If the shareholders are allowed to sue directly for damages of this nature, they effectively jump the queue and recover amounts which should have gone to the creditors."4

In addition to the above, the decision is an important one on two accounts. First, the Superior Court did proceed to a meticulous examination of the allegations of fact and the evidence filed by both parties under the guidance of the Supreme Court of Canada's teachings in Infineon5 and Vivendi6. Therefore, although the test for meeting the "arguable case" test of article 1003 b) C.p.c. is not onerous according to the Supreme Court, bare allegations of facts without supporting evidence will not be sufficient to meet the criteria. Moreover, the Court did distinguish between the 4 allegations of fault brought forth by Petitioner and did proceed to a rigorous analysis of the allegations of facts and the evidence that was filed in support of these allegations of fault. Hence, the filtering mechanism that is the authorization stage does involve a meticulous, rigorous and methodical analysis and appreciation of the allegations of facts and the evidence by the Court.

Second, Justice Hamilton did decide a question of pure law, i.e. the legal standing of the shareholders in light of the allegations of facts and the evidence filed in support of same, by referring to the decisions of the Québec Court of appeal in Trudel c. Banque Toronto-Dominion, 2007 QCCA 413 and Fortier c. Meubles Léon ltée, 2014 QCCA 195. The Superior Court underlined that it had the obligation to decide such legal questions:

"[55] However, the Respondents also advance legal arguments, namely that the directors do not owe the duty under Section 122(1)(b) CBCA to the shareholders, and that the loss claimed by the shareholders is only indirectly caused by the acts of directors and cannot be recovered. The Court will assume that the facts alleged by the Petitioner underlying those legal issues have been proven, and the Court is in just as good a position at the authorization stage as it will be after the trial to deal with those issues. In these circumstances, the Court is required to decide the legal issues."

Therefore, Justice Hamilton follows the guidance of the Quebec Court of appeal and confirms that questions of law must be decided at the authorization stage, and should not be postponed to the merits of the case.

Footnotes

[1] On July 30, 2015, Petitioner has filed an inscription on appeal of the decision of the Honorable Justice Hamilton.

[2] Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 (CanLII), [2004] 3 S.C.R. 461

[3] BCE Inc. v. 1976 Debentureholders, [2008] 3 SCR 560

[4] Groupe d'action d'investisseurs dans Biosyntech c. Tsang, (2015 QCCS 3265), para. 141.

[5] Infineon Technologies AG v. Option Consommateurs, 2013 SCC 59 (CanLII), [2013] 3 S.C.R. 600

[6] Vivendi Canada Inc. v. Dell'Aniello, 2014 SCC 1 (CanLII), [2014] 1 S.C.R. 3

To view original article, please click here.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions