Canada: The Québec Court Of Appeal Confirms The Dismissal At The Authorization Stage Of A Shareholder Class Action Against The Directors And Officers Of A Public Company

In Groupe d'action d'investisseurs dans Biosyntech c. Tsang, 2016 QCCA 1923, the Québec Court of Appeal (Justices Schrager, Dutil and Parent) recently confirmed the decision of the Québec Superior Court to dismiss at the authorization stage a shareholder class action against the directors and officers of a public company.

Background

The Petitioner sought leave to institute a class action on behalf of the shareholders of BioSyntech, a medical device public company that filed for bankruptcy in 2010, against its eight directors and officers. BioSyntech was a biotech start-up and its success rested on its ability to access capital to develop and market a promising medical device, BST CarGel. In the aftermath of the financial crisis of 2008, BioSyntech was not able to access sufficient capital to conclude its pivotal trial and reach the European and Canadian markets with its product, which ultimately led to its bankruptcy in 2010. The Petitioner alleged that BioSyntech's bankruptcy was avoidable and resulted from a pattern of faults of the directors and officers, who failed to properly address the company's financial condition. The Petitioner argued that, as a result of the faults of the directors and officers, the shareholders were deprived of the possibility to share in the potential profits of BioSyntech and were therefore entitled to compensatory damages.

Before the Québec Superior Court ("QCSC"), the Respondents argued, inter alia, that the shareholders of BioSyntech did not have the necessary standing to institute a class action against its directors and officers since the alleged faults, should they ever be proven, would have been committed against the company and only indirectly against its shareholders and the alleged damages (i.e. the loss in value of BioSyntech's shares) would have been suffered by the company and only indirectly by its shareholders. The QCSC accepted the damages argument and dismissed the Motion to Institute a Class Action on that basis.

On appeal, the Petitioner argued that the QCSC interpreted the Supreme Court's leading cases of Peoples v. Wise and BCE Inc. v. 1976 Debentureholders too restrictively. The Petitioner argued that the Supreme Court opened the door to a direct action by shareholders against the directors and officers based on the violation of their duty of care under section 122 b) of the Canada Business Corporations Act.

The Decision of the Québec Court of Appeal

The Québec Court of Appeal ("QCCA") first noted that "the facts of the matters before the Supreme Court did not strictly require consideration of whether shareholders are included in "stakeholders" to whom the directors owed their duty of care under Section 122 b) C.B.C.A." and that "the debate is ongoing as to whether a direct right of action is open to shareholders against directors" (para. 21). Yet, for the purposes of the appeal, the QCCA, much like the QCSC, was prepared to adopt the Appellant's view that shareholders had such a direct right of action against the directors and officers of a company post-Peoples and BCE Inc.

The QCCA agreed with the Respondents that irrespective of the question of the duty of care owed by the directors and officers to the shareholders, the proposed class action in the case at hand had no chance of success because the damages alleged by the Petitioner were indirect. The QCCA referred to other decisions rendered by the Courts of Appeal in British Columbia (Roback v. Gardner) and Newfoundland (Npv Management Limited v. Anthony). The QCCA also referred to the common law rule in Foss v. Harbottle, whereby shareholders cannot sue a wrongdoer where a company already has a right of action against the same wrongdoer for the same damages:

"[23] Indirect damage is not that caused by the act of the wrongdoer, but rather is caused by the damage which the wrongdoer caused. In this case, the damages claimed for the loss of share value were not caused directly by the directors alleged breach of their duty of care by not obtaining, for example, adequate financing for BioSyntech. That alleged fault might (arguably) have caused (in whole or in part) the insolvency and inability of BioSyntech to pursue its business. It is the insolvency which caused the shares to lose their value so that such damage would be caused indirectly to the shareholders by the directors.

[24] Such distinction, at least in the corporate context, is hardly exclusive to Quebec civil law. The principle is known in Common Law jurisdictions as the rule in Foss v. Harbottle. It is certainly recognized in Quebec and was explained by Laforest, J. speaking for a unanimous bench of the Supreme Court in Hercules Managements Ltd. v. Ernst & Young : [...]

[...]

[26] Peoples and BCE did not change the rule in Foss v. Harbottle – they did not (and it was not necessary to) address the rule. Again, and at best, the only assistance to Appellants in Peoples and BCE is the recognition of the possibility that the Section 122 b) C.B.C.A. duty of care is owed by directors directly to shareholders. However, there is really nothing in either of the Supreme Court cases to suggest that a breach of the duty of care entitles shareholders to recover compensation from directors for indirect injury."

Our Comments

Importantly, the QCCA confirmed that it is still possible for a class action in Québec to be dismissed at the authorization stage, despite recent Supreme Court and QCCA rulings. The QCCA refers to its recent decision in Charles v. Boiron Canada inc., where Justice Bich questions the utility of the authorization process in Québec, but still decides to maintain the dismissal of the Motion for Authorization.

According to the QCCA, the QCSC's analysis in the case at hand had not gone beyond the filtering mechanism applicable at the authorization stage and the authorization judge was correct in denying authorization based "purely on a meticulous analysis of the legal argument under-pinning the factual allegations" (para. 33). Accordingly, it was legitimate for the QCSC to dismiss the proposed class action at the authorization stage.

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