Surprise ruling makes class-action lawsuits against public companies harder.
The Supreme Court of Canada recently issued a surprise ruling that makes it somewhat more difficult for plaintiffs to bring class-action securities lawsuits against public companies, according to the Financial Post. The court dismissed a lawsuit against a Montreal-based pharmaceutical company and analysts say the decision will have implications for commercial litigation across Canada, including in Alberta. The case sets important guidelines for launching securities class-action lawsuits, an area of law that is still very much in development in much of Canada.
Class-action dismissed
The Montreal-based pharmaceutical company was being sued by investors who argued that the company should have revealed questions that were posed to it by the U.S. Food and Drug Administration about an HIV drug's potential side effects. After those questions became public, the company's stocks fell, but eventually recovered when the FDA ultimately approved the drug, according to the Globe and Mail.
The Supreme Court of Canada dismissed the class-action lawsuit. Investors claimed that the FDA's questions were a "material change" and therefore should have been disclosed to the public by the company. However, previous court decisions had already established that a material change is a change affecting the business, operations, or capital of the entity issuing the shares. The FDA's questions were simply a step in the drug's approval process, according to the court, and did not represent any material change in the business' actual operations.
Threshold raised
The case is significant because it raises the standard for bringing class-action lawsuits against public companies. Plaintiffs in such lawsuits must first prove to a judge that their case has a reasonable chance of succeeding before the judge will allow it to proceed. Commercial defence lawyers have long complained that this screening process had become too easy to pass and was encouraging potentially frivolous lawsuits.
The ruling affects class-action lawsuits related to "secondary market misrepresentation," meaning cases in which a company has been accused of misleading investors. Alberta, along with Quebec and other Canadian jurisdictions, has recently passed amendments to its securities legislation to permit such lawsuits. Although class-action lawsuits of this kind are common in the United States, they are still relatively new in Canada and the recent Supreme Court decision will provide guidance for how such lawsuits can be brought forward in the future.
Legal advice
Sound legal advice is one of the most important considerations for ensuring a business runs smoothly and efficiently. As the above case shows, a commercial dispute has the potential to lead to costly consequences for a business. In order to protect a commercial operation from being exposed to unwanted surprises, an experienced commercial litigation law firm should always be consulted.
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