On April 17, 2015, the Supreme Court released its decision in Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18: (http://canlii.ca/t/gh76z) addressing two important issues in secondary market disclosure actions. First, how strong a case does the plaintiff have to show to obtain leave to proceed with the action? Second, do concerns or questions posed by a government body amount to a material change that requires timely disclosure?
The action arose when Theratechnologies Inc. (Thera), a pharmaceutical company and reporting issuer based in Montréal, filed a new drug application with the United States Food and Drug Administration (FDA) for a flagship drug to reduce abdominal fat in HIV patients. Thera had carried out a number of clinical trials to test the efficacy and the safety of the drug, including a potential increased risk of diabetes. The results of these clinical trials had been published, and Thera had publicly stated that there were "no major safety concerns" in respect of diabetes.
In the course of its review, the FDA provided Thera with a briefing document that included questions about the drug's potential side effects. When these questions were published, investors became concerned about whether the drug in fact posed an increased risk of diabetes. Thera's stock price dropped by 58 percent in the space of two days. Three days after the publication of these questions, however, the Advisory Committee of the FDA unanimously voted in favour of the drug, which was ultimately approved. Thera's stock price promptly recovered.
The plaintiff, a numbered company that had sold its Thera shares for a loss following the publication of the FDA's briefing document, sought leave to launch a class action against Thera. The plaintiff alleged that Thera had breached its obligation to make timely disclosure of a material change, being the concerns expressed by the FDA.
Under s. 225.4 of the Québec Securities Act, a court will only grant leave for such an action if the court "deems that the action is in good faith and there is a reasonable possibility that it will be resolved in favour of the plaintiff". In that regard, the language of this provision is similar to the language in s. 138.8 of the Ontario Securities Act. As noted by the Supreme Court, s. 225.4 was added as a screening mechanism to discourage frivolous "strike" suits against issuers.
The motions judge, Blanchard J., found that the action had a reasonable possibility of success and granted leave for the action to proceed (2012 QCCS 699, http://canlii.ca/t/fqcbm). Gascon J.A. (as he then was), writing for the Québec Court of Appeal (2013 QCCA 1256, http://canlii.ca/t/ g10fx) found that the "reasonable possibility of success" standard was higher than the usual merits standard required to certify a class action. He found that this higher threshold had been met, and affirmed the decision of the motions judge.
The Supreme Court, however, unanimously allowed the appeal. Reviewing the origin and purpose of s. 225.4, Justice Abella agreed that the provision created a higher standard than the general threshold applicable to class actions. In her view, "a case with a reasonable possibility of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim" (para. 39). This exercise requires the court to review the plaintiff's evidence, but not to engage in a "full analysis of the evidence", which would amount to a "mini-trial".
Applying this approach, Justice Abella noted that the clinical trials giving rise to the the FDA's questions had been disclosed to shareholders as they had become available, as had been the possibility of side effects. She concluded that the publication of the FDA's questions materials did not amount to a material change in Thera's operations, capital or business that required disclosure. Instead, it was an event that was external to the issuer and its business. As a result, the Court found that the plaintiff had failed to point to any evidence of a material change requiring disclosure, and accordingly had not established a reasonable possibility of success.
The Thera decision provides some welcome clarity as to how strong a plaintiff's case must be to proceed with a secondary market disclosure action. In Green v. Canadian Imperial Bank of Commerce, for example, the Ontario Court of Appeal had suggested that the applicable standard was similar to the threshold applicable to class actions, although with the benefit of an evidentiary record (at paras. 81-88). The reporting issuers appealed Green to the Supreme Court and asked for a more robust review of the plaintiff's case in a leave application; the appeal was heard on February 9, 2015 but remains under reserve.
The Thera decision appears to have provided at least some of the higher degree of scrutiny asked for by the Green appellants. Justice Abella suggests that the threshold applicable to leave applications ought to be higher than that applicable to the certification of class actions. The result is arguably a modestly tighter screening mechanism than was previously endorsed by the Court of Appeal, which may make it more difficult for plaintiffs to bring secondary market disclosure actions. The Supreme Court's decision in Green is likely to adopt the approach set out in Thera. However, reporting issuers will no doubt be interested in how the Court actually applies that approach to the facts in Green, which may provide more useful guidance to litigants beyond ensuring that they use the same language in describing the test applicable to leave motions.
With respect to material changes, the Thera decision may come as a welcome development for issuers, as the Court ultimately sided with the issuer in determining that no disclosure was required. Thera's previous disclosure of the results of the clinical trials no doubt assisted it when the FDA raised concerns about those potential side effects. The facts in this case, however, were sympathetic to the issuer, as the FDA ultimately approved its drug application, vindicating Thera's statements about the results of the clinical studies and restoring its share price. The concern noted by the Court of Appeal (at paras. 164-70, 146-150), that there might be a reasonable case that Thera had not sufficiently disclosed the substance of the FDA's concerns when stating the results of the studies, might carry greater weight if an issuer's published studies turn out to be less well-received than the studies were in this case.
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