SCC Rules on Threshold to Commence an Action Based on the Secondary Market Liability Regime

On April 17, 2015, the Supreme Court of Canada (SCC) released its decision in Theratechnologies Inc. v. 121851 Canada inc., confirming that the "reasonable possibility" test provided for under section 225.4 of the Québec Securities Act (QSA) for authorization to commence an action under the new Québec statutory secondary market liability regime and the leave test in similar regimes across Canada requires some credible evidence that there is a realistic chance that the plaintiff will succeed at trial.^{1 2}

The SCC unanimously granted the appeal of Theratechnologies Inc. (Thera). While the SCC agreed with the Quebec Court of Appeal (QCA) on the authorization threshold set out in section 225.4 QSA, which requires more than a mere possibility of success, it did not share the QCA’s conclusion that the threshold was met in this case. The SCC held that there was insufficient evidence credibly pointing to a material change that could have triggered Thera’s timely disclosure obligations under section 73 QSA and, consequently, the authorization threshold was not met.

Background

In the course of considering an application for approval of Thera’s new drug, tesamoralin, the U.S. Food and Drug Administration (FDA) raised questions concerning risks of side effects. Bloomberg, Dow Jones and Thomson Reuters published information concerning the FDA’s questions, but Thera itself did not make any disclosure about the FDA’s questions. The same day the reports were published, and on the basis of this information, the plaintiff sold its shares of Thera for a loss. Thera’s share price also fell that day by 58%. Two days later, a public hearing was held by the FDA advisory committee, at which the committee unanimously voted to approve tesamoralin. Thera issued a press release announcing this development, and its share price recovered.

The plaintiff filed a motion seeking the authorization of an action pursuant to section 225.4 QSA, and authorization of a class action. The plaintiff alleged that, in breach of section 73 QSA, Thera failed to disclose a material change, namely the questions raised by the FDA before it approved tesamoralin. The judge in first instance granted leave to the plaintiff to bring an action pursuant to section 225.4 QSA and authorized the class action. Thera sought leave to appeal the authorization of the judgment pursuant to section 225.4 QSA and the QCA upheld the Superior Court judgment authorizing the plaintiff to institute a class action against Thera pursuant to section 225.4 QSA.

The "Reasonable Possibility" Test

Section 224.5 QSA sets out two criteria for the authorization of an action for damages under the QSA’s new statutory secondary market liability regime: the plaintiff must show it is acting in good faith and that the action has a reasonable possibility of success. The SCC considered that there was no dispute that the plaintiff’s action was brought in good faith, and that the case turned on the interpretation of "a reasonable possibility" that the plaintiff’s action be resolved in its favour.

The SCC reviewed the history and objectives of the authorization mechanism set by section 225.4 QSA and concluded that this provision emerged out of the efforts to develop a more meaningful and accessible form of recourse for investors throughout Canada. Prior to the adoption of the statutory secondary market liability regimes, investors in Québec faced the heavy burden of the general civil liability regime of the Québec Civil Code, which requires to prove a fault, a prejudice and a causal link between the two. The causality element proved particularly difficult to demonstrate in the securities context. In common law provinces, proof of reliance on an alleged misrepresentation in an issuer’s continuous disclosure was required, making secondary market claims unsuitable for certification as class actions. The new statutory regimes deem reliance on a misrepresentation. However, in order to strike a balance between ensuring the rights of investors to a meaningful remedy and preventing costly unmeritorious litigation, the "reasonable possibility" test was adopted in Québec and across Canada.

The SCC agreed with the QCA’s conclusion that demonstrating a reasonable possibility of success under section 225.4 QSA is a different and higher burden than the general burden for the authorization of a class action, but is a lower burden than proof on a balance of probabilities. The SCC held that the threshold is more than a "speed bump" and that the courts must undertake a reasoned consideration of the evidence to ensure that the proposed action has a realistic chance of success. This requires the plaintiff to offer a plausible legal theory as well as some credible evidence in support of the proposed action.

In the present case, the SCC found that the plaintiff failed to present sufficient evidence supporting that there was a reasonable possibility that the action be resolved in its favour. Section 5.3 QSA provides that a material change has two components: there must be a change in the business, operations or capital of the issuer and the change must be material in that it is reasonably likely to have a significant effect on the market price or value of the issuer’s securities. The SCC concluded that the plaintiff did not point to any evidence of a material change. Consequently, the plaintiff’s action under section 73 QSA had no reasonable or realistic chance of success.

Conclusion

The SCC’s decision on the interpretation of the higher burden to meet under section 225.4 QSA compared to the general burden under article 1003 CCP is not surprising considering the different language used in the QSA. However, this judgment is significant in that for the first time the SCC has interpreted the "reasonable possibility" test that is found in securities legislation across Canada and concluded that the test is intended to be a meaningful screening device for securities class actions.

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¹ 2015 SCC 18.

¹ RSQ, c V-1.1.