Reliance must be specifically pleaded to assert a civil liability claim in securities class action: Québec Court of Appeal

The Québec Court of Appeal authorized¹ in part the institution of a secondary market misrepresentation class action against Barrick Gold Corporation based on the Québec Securities Act (QSA), finding that the plaintiff proved a reasonable possibility of success regarding one of the three types of alleged misrepresentations pleaded. However, it dismissed authorization regarding the civil liability claim under the Civil Code of Québec (CCQ) on the basis that the plaintiff failed to plead reliance. It also dismissed authorization regarding the statutory primary market misrepresentation claim.

This decision confirms that the legal framework applicable to the QSA’s secondary market leave test is higher than and different from the Code of Civil Procedure (CCP) class action authorization test, and that defendants do not need the Court’s authorization to adduce evidence to contest the Securities Act’s leave test. It also reiterates that the legal principles applicable to misrepresentation claims under the QSA are different from those governing civil liability claims under the CCQ.

What you need to know

• Under the QSA leave test, both parties can adduce evidence without the Court’s prior authorization. However, the Court should not conduct a full analysis of the evidence, as this stage must not be treated as a mini-trial.
• The QSA screening mechanism has two steps. First, the judge must determine whether the plaintiff offers a plausible analysis of the legislative provisions and sufficient evidence to support their claims. In the affirmative, the judge must then consider whether the defendant’s analysis and evidence counters the plaintiff’s submissions.
• It is the plaintiff who has the burden to meet the QSA reasonable possibility of success threshold. The defendant is not required to adduce evidence to demonstrate that the plaintiff’s claim has no reasonable possibility of success.
• Reliance is an essential element of securities misrepresentations claims based on the CCQ and must be specifically pleaded.

Background

The class plaintiff alleged that Barrick made three types of material misrepresentations concerning compliance with environmental requirements of the Pascua-Lama mining project, namely regarding its (i) water management system, (ii) glacier protection measures, and (iii) water quality monitoring system. The plaintiff further alleges that those misrepresentations were subsequently publicly corrected, causing a significant decrease in Barrick’s share price. After a six-day hearing, Justice Davis of the Superior Court dismissed the authorizations sought entirely, ruling that the plaintiff failed to show a reasonable chance of demonstrating that Barrick made material misrepresentations.

Decision

The Court of Appeal concluded that the authorizations judge correctly summarized the applicable legal frameworks but erred in their application to the case before him “by treating the authorization stage as a mini-trial” and by failing to consider evidence filed by the plaintiff which conflicted with evidence filed by Barrick. Therefore, the appellate court examined the case de novo to determine whether the authorizations sought should be granted.

Secondary market misrepresentation claims—QSA screening mechanism

The Court of Appeal confirmed that in proposed securities class actions in Québec, it is preferable to start with the leave test established at section 225.4 of the QSA. The good faith component of this test was not disputed. The reasonable possibility of success threshold, which is more demanding than the appearance of right criterion established at article 575(2) CCP for class action authorization, was contested. The Court of Appeal stated that both parties (the plaintiff but also the defendant) can adduce evidence in the context of the QSA screening mechanism without the Court’s prior authorization, adding that the judge must consider the evidence adduced by both sides, but does not have to conduct a full analysis of such evidence.

Plaintiff’s burden of demonstration—QSA misrepresentation claims

A plaintiff seeking authorization to bring an action for misrepresentation based on the QSA secondary market provisions must show, with respect to each alleged misrepresentation, that there is a reasonable possibility of success regarding the following elements: (i) the defendant made a misrepresentation within the meaning of the QSA, which means that the misrepresentation must be material; (ii) such misrepresentation was subsequently publicly corrected; (iii) the plaintiff acquired shares between the time the misrepresentation was made and the time it was publicly corrected; (iv) where the misrepresentation is not in a core document, the defendant knew or should have known that the representation was misleading.

The Court of Appeal found that the plaintiff met this burden, but only regarding the alleged misrepresentations concerning the project’s water quality monitoring system. For the two other alleged types of misrepresentations (glacier protection measures and water quality monitoring system), the Court of Appeal found that the plaintiff’s analysis and evidence failed on the issue of materiality, which is an essential component of misrepresentation claims under the QSA. The Court of Appeal made clear that it is the plaintiff who has the burden to demonstrate having a reasonable possibility of success, including regarding materiality. The defendant is not required to present evidence tending to show that the plaintiff has no reasonable chance of success.

Class action authorization screening mechanism

Secondary market claims

Having concluded that the plaintiff met the QSA leave test in relation to the water quality monitoring system misrepresentations, the Court of Appeal unsurprisingly found that the appearance of right criterion of article 575(2) CCP, which is a lower threshold, was also met.

Primary market claims

Regarding the primary market claim, which is not subject to a QSA screening mechanism leave requirement, the appellate court found that the prospectus on which the plaintiff relied was issued before the alleged water quality monitoring system misrepresentations took place, such that it could not have been a valid claim in that regard. For the two other types of misrepresentations, the Court of Appeal found that the allegations regarding materiality were “vague, general and imprecise”. Consequently, the appearance of right criterion was not met for the primary market claims.

CCQ misrepresentation claims

The plaintiff attempted to rely on the Supreme Court of Canada (SCC) decision in Asselin² to argue that it did not have to plead that the plaintiff relied upon the alleged misrepresentations to meet the appearance of right criterion under the CCQ. The Court of Appeal dismissed this argument entirely, pointing out that the Asselin case was not about disclosure obligations under the QSA, that reliance was pleaded in Asselin, and that nothing in Asselin counters the SCC decision in Theratechnologies³ where the SCC ruled that reliance is an essential element of securities misrepresentations claims based on the CCQ.