Securities Secondary Market Liability in Quebec To Be Discussed by the Supreme Court of Canada
On February 20, 2014, the Supreme Court of Canada granted leave to appeal from the first decision from the Québec Court of Appeal on the statutory secondary market liability regime adopted in 2007, pursuant to a reform of the Quebec Securities Act, R.S.Q. c. V-1.1 (“QSA”).
Under the QSA, Theratechnologies inc. (“Thera”) is a reporting issuer which must comply with continuous disclosure obligations. In 2009, Thera filed an application to the Food and Drug Administration (“FDA”) to commercialize a major drug called Tesamoreline. In the course of the approval process, on May 25, 2010, the FDA published on its website information compiled at that time in the approval process. This lead to some financial analytics companies (Bloomberg, Thomson, etc.) to publicly share their concerns about potential risks based on their reading of the information published by the FDA. The market reacted intensely to the news released; Thera’s stock was heavily traded and lost 58% of its value. Thera’s stock was the object of a cease trading order on May 27. When trading resumed on the following days, and after Thera confirmed that the FDA had approved Tesamoreline as a new drug, the stock regained its value.
The claimant, 121851 Canada Inc. (“121Can”), sold its stock for a total loss of $271,752. 121Can claims that Thera failed to disclose on a timely basis a material change, i.e. the questions raised by the FDA during the drug approval process, and that this failure resulted in damage.
Québec Court of Appeal’s Decision
The Court of Appeal decision is significant in two respects.
First, it held that a judgment authorizing an action under s. 225.4 QSA can be appealed with leave of the Court of Appeal. The court declined to apply article 1010 of the Québec Code of Civil Procedure (“CCP”), which states that a judgment authorizing a class action cannot be appealed. Accordingly, an appeal lies from a judgment authorizing a secondary market claim under the QSA with leave of the Court of Appeal even if the claim arises in the context of a proposed class action.
Second, the Court of Appeal attempted to clarify the test applicable to authorization of a claim under the QSA. The test is set out in section 225.4 of the QSA, which reads as follows:
« 225.4. No action for damages may be brought under this division without the prior authorization of the court.
The request for authorization must state the facts giving rise to the action. It must be filed together with the projected statement of claim and be notified by bailiff to the parties concerned, with a notice of at least 10 days of the date of presentation.
The court grants authorization if it deems that the action is in good faith and there is a reasonable possibility that it will be resolved in favour of the plaintiff. »
The Quebec Court of Appeal specified that a claimant under the QSA must present sufficient evidence to establish a “reasonable possibility of success”, which criteria is more stringent than the “colour of right” filtration mechanism for class actions in general. It stated that the purpose of that “reasonable possibility of success” aims at minimizing the risks of pursuing meritless and opportunistic claims.
However, the Court insisted that a possibility of success is not tantamount to a probability or preponderance of proof. The burden is therefore situated between the simple burden of proving “colour of right” and the balance of probabilities.
Issue to be Debated before the Supreme Court
According to the Supreme Court judgment on leave, the question that is going to be debated in Supreme Court is the following:
“Whether the Court of Appeal erred in stating that mere fact of raising serious arguments about material change in company, without slightest analysis of evidence, was sufficient to establish reasonable chance of success.”
The Supreme Court is likely to use this opportunity to better discuss the application of the authorization test set out in the QSA. It will be interesting to see whether the Supreme Court will better clarify the differences between this test and the one applicable to class actions at the authorization stage.
Perhaps the Supreme Court will use this opportunity to clarify the role of evidence at this stage (e.g. how evidence is submitted and considered), notably where the authorization process under the QSA coincide with that applicable to class actions.
Theratechnologies inc. c. 121851 inc., 2014 CanLII 7157
SCC Court File No : 35550
Leave to Appeal Granted: February 20, 2014
Provisional Hearing Date: December 1, 2014
 Art. 1003(b) CCP (“the facts alleged seem to justify the conclusions sought”)
class action authorization Quebec Court of Appeal reasonable possibiity of success statutory secondary market liability regime Supreme Court of Canada