Canada: No Early Disclosure: Quebec Court Of Appeal Confirms Protection For Public Issuer

Plaintiff-shareholders in Quebec are not entitled to early document disclosure when seeking leave to bring claims against public issuers for secondary market liability. The Quebec Court of Appeal's decision in Amaya1 confirms that the "screening mechanism" under the Quebec Securities Act2 to root out frivolous claims by plaintiff-shareholders is analogous to the statutory remedies available in other provinces and is meant to protect public issuers.

This decision should be read as victory for public issuers faced with such secondary market liability claims in Quebec. Except for seeking disclosure of relevant insurance policies, plaintiff-shareholders in Quebec are not entitled to early document disclosure to assist in their leave applications to the court.

Legislative Context

Like other provinces, Quebec has enacted a legislative remedy for plaintiff-shareholders who allege they have suffered losses in the secondary market for publicly-traded securities due to wrongful conduct by public issuers.3 Under Quebec's Act, plaintiff-shareholders are partially relieved from establishing that the public issuer caused their loss — an element they would be otherwise required to establish under the general civil liability regime of the Civil Code of Quebec.4

This advantage for plaintiff-shareholders, however, is balanced with the requirement that they first secure leave of the court to bring a claim against the public issuer for secondary market liability. This requirement, under s. 225.4 of Quebec's Act, serves as a "screening mechanism" to protect public issuers and their shareholders from frivolous or bad faith actions, sometimes called "strike suits", brought by investors who seek to take advantage of the favourable statutory recourse by bringing meritless actions.5

The plaintiff-shareholders in Amaya sought production of certain Amaya documents, including any insurance policies, to establish that their claims were not meritless. The motions judge held that Quebec's Act was silent on the right to early document disclosure and, in that legislative gap, he applied the Code of Civil Procedure6 to enable an albeit limited document request by the plaintiff-shareholders.

The Appeal Decision

The Court of Appeal held that the motions judge's interpretation of s. 225.4 was incorrect. Kasirer JA, writing for the unanimous panel, held that document disclosure should not be allowed at this early stage of the proceedings because it is incompatible with the legislative policy pursued in the screening mechanism under section 225.4 of the Act.7 While the underlying policy for the statutory remedy is to make available a remedy for aggrieved shareholders, the underlying policy of the screening mechanism requiring leave is to protect public issuers against frivolous lawsuits brought by investors who have no meaningful evidence to show their loss. The screening mechanism, Kasirer JA held, contributes to protect the public confidence in the capital markets and avoids costs and wasted time on meritless litigation.8

As such, the screening mechanism cannot be the opportunity for the plaintiff-shareholder to conduct a fishing expedition of the public issuer. At this early stage, the evidentiary bar is lower and the plaintiff shareholder must only show some credible evidence that the suit is not destined to fail. They are not, at this early stage, entitled to document disclosure to assist them.9 The Court of Appeal cited similar decisions in Ontario courts under its corresponding legislation, aligning the interpretation of Quebec's Act with those in other provinces.10

The Court of Appeal, however, did uphold the motions judge's decision to compel the early disclosure of the insurance policies held by the public issuer.

Takeaways

The nominal differences in wording between the Quebec Act's statutory remedy and those in other provinces do not warrant a departure from the policy common to securities legislation among the provinces: while the statutory remedy has been made available for plaintiff-shareholders to bring claims for secondary market liability, the screening mechanism is in place to prevent its abuse.

To provide plaintiff-shareholders with early document disclosure, apart from any insurance policies, undermines this balance struck in the legislation.

The Amaya decision reinforces the protection for public issuers — and their innocent shareholders — and balances the statutory remedy against its abuse.

Footnotes

1 Amaya inc. c. Derome, 2018 QCCA 120. [Amaya]

2 CQLR c V-1.1. [the Act]

3 An Act to amend the Securities Act and other legislative provisions, S.Q. 2007, c. 15.

4 CQLR c CCQ-1991.

5 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 (CanLII), [2015] 2 S.C.R. 106, para. [39].

6 CQLR c C-25.01.

7 Amaya, para. 103.

8 Amaya, para. 84.

9 Amaya, para. 105

10 See, e.g., Ainslie v. CV Technologies Inc., 2008 CanLII 63217 (Ont. S.C.J., per Lax, J.), section 138.8(1) of the Ontario Securities Act, the screening mechanism analogous to s. 225.4 of the Quebec Act. In the class action context, see, e.g., Mask v. Silvercorp Metals Inc., 2014 ONSC 4161 (Ont. S.C.J., per Belobaba, J.), leave to appeal refused, 2014 ONSC 4647 (Div. Ct., per Perrell, J.).


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