Canada: Update on Securities Class Actions in Quebec – Secondary Market Liability

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Class Actions/Securities Regulation, August 2010

On July 26, 2010, a motion was filed seeking authorization to institute a class action against a reporting issuer before the Superior Court of Quebec based on the secondary market liability provisions of the Securities Act (Quebec) (QSA). This is one of the first such class action proceedings in Quebec, following the amendment of the QSA in November 2007 to create secondary market liability for misrepresentations in disclosure documents and for failure to provide timely disclosure of material changes. Please see our November 2007 Blakes Bulletin: New Securities Class Action Exposure in Quebec: Secondary Market Liability Amendments to the Securities Act (Quebec) for a discussion of the QSA secondary market liability provisions.

Theratechnologies Inc. is a Quebec-incorporated company with headquarters in Montréal and shares listed on the Toronto Stock Exchange. The plaintiff, a former shareholder of Theratechnologies, claims that Theratechnologies failed to disclose a "material change" in connection with its lead product, tesamorelin. In particular, the plaintiff alleges that Theratechnologies failed to disclose concerns raised by the United States Food and Drug Administration (FDA) with respect to possible secondary effects associated with the use of the product, for which marketing approval had been sought from the FDA. The material change is alleged to have occurred on May 25, 2010, when the FDA allegedly published on its website the materials necessary for a review meeting to take place between the company and the FDA as part of the new drug approval process. The plaintiff further alleges that there was heavy trading of the company's shares following the publication of the FDA materials and that, judging by the reaction of the market, the information constituted a material change. On May 27, 2010, after the markets closed, the company announced the positive outcome of the review meeting with the FDA, and it is alleged that the market price of the shares recovered on the next trading day.

As permitted by the QSA, the proceeding has been instituted not only against the reporting issuer but against its president and chief executive officer, as well as its chairman.

The class which the plaintiff seeks to represent comprises all individual and all corporate shareholders of Theratechnologies with less than 50 employees who held shares of the company on May 21, 2010 and who disposed of such shares on May 25 and May 26, 2010. Pursuant to the Code of Civil Procedure (Quebec), companies may not be members in a class action unless they employ less than 50 people. This effectively excludes large enterprises from forming part of the plaintiff class, including public companies which are often the target of class actions. Damages sought include: (i) the amount of the loss of the value of the company's shares between May 21, 2010 and May 25 or 26, 2010; (ii) brokerage fees incurred in connection with the sale of the shares; and (iii) loss of profit based on the increase in value of the shares between May 21, 2010 and May 28, 2010.

Like any class action, an action based on secondary market liability under the QSA requires that the prior authorization of the court be obtained – that is, that the class action be certified – before it may proceed.

The 2007 amendments to the QSA relieve aggrieved shareholders from having to demonstrate reliance on the issuer's compliance with its timely disclosure obligations. Likewise, the law puts the burden of proof on the potential defendants to prove that the drop in market price was unrelated to the failure to make a timely disclosure.

Quebec is generally considered to have a low threshold for a class action to be certified. Furthermore, for the purposes of certifying the class in order to allow the action to proceed, the facts alleged in the motion for certification are deemed to be true. There are, nonetheless, other avenues by which the defendants may challenge the plaintiff's motion. It is important to note that none of the facts alleged in the motion have been proven and that no judgment has been rendered in connection with this matter.

Despite a number of important built-in safeguards contained in the QSA and other Canadian provincial securities legislation with respect to secondary market liability – including the need for court authorization for the commencement and settlement of the action, the availability of a due diligence defence, a safe harbour for forward-looking statements as well as caps on liability – class actions are frequently settled before the case is adjudicated or even certified.

This lawsuit comes on the heels of the proposed C$23‑million settlement of a securities class action taken against Gildan Activewear, instituted in 2008, in which misleading statements about earnings guidance were alleged.

Companies will be watching the outcome of the Theratechnologies lawsuit carefully given its possible precedential value regarding disclosure practices and liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.