Canada: Supreme Court Of Canada Renders Its First Decision On The Secondary Market Liability Provisions Of The Quebec Securities Act

In a landmark judgment rendered on April 17, 2015, the Supreme Court of Canada reversed the decisions of the Quebec Court of Appeal and Quebec Superior Court that had authorized a shareholder of TSX-listed Theratechnologies Inc. to institute an action for damages by way of a class action under Section 225.4 of the Securities Act.¹ This decision is the Supreme Court's first ruling on Quebec's secondary market liability regime and on the "reasonable possibility of success" test used to authorize such actions.

Background

In 2010, a shareholder of Theratechnologies Inc. filed a motion for authorization to institute, by way of a class action, an action for damages against Theratechnologies Inc. based on the secondary market liability provisions of the Quebec Securities Act. The shareholder claimed, among other things, that Theratechnologies Inc. had failed to disclose a material change as a reporting issuer and that the failure had resulted in damage.

In 2012, the Superior Court granted the motion. It held that the test for authorization to institute a class action was different from the test for authorization to bring an action under the secondary market liability provisions of the Securities Act. It found that, in this particular case, both tests were met, and thus authorized the action against Theratechnologies Inc.² The Quebec Court of Appeal dismissed an appeal from this judgment in 2013.³

The Supreme Court's decision⁴

Unlike a suit governed by the Civil Code of Québec or the common law tort of negligent misrepresentation, under the statutory secondary market liability regimes adopted in Quebec and in other provinces, investors are not required to prove personal reliance on misinformation or an omission to inform. Nonetheless, to prevent costly strike suits and unmeritorious litigation from proceeding, Quebec's Securities Act includes a meaningful screening mechanism and gives the courts an important gatekeeping role. The courts are thus required to conduct a preliminary examination of the proceedings to assess whether they are brought "in good faith" and whether there is a "reasonable possibility" that the claim will be resolved in the plaintiff's favour.

In unanimous reasons written by Justice Abella, the Supreme Court of Canada agreed with the courts below that the reasonable possibility of success test was more stringent than the ordinary "good colour of right" standard used to authorize class proceedings in Quebec law. The test constitutes a robust deterrent screening mechanism and requires that the courts undertake a reasoned consideration of the evidence to ensure the proposed action has some merit. While the authorization stage for a secondary market liability suit ought not to be treated as a mini-trial, the claimant must offer a plausible analysis of the applicable legislative regime and sufficient credible evidence to persuade the court that there is a reasonable possibility of the case being resolved in his or her favour.

Applying this test, the Supreme Court of Canada held that the claimant had failed to identify any material change in Theratechnologies' operations, capital or business that had not been disclosed in accordance with its timely disclosure obligations under the Securities Act. As the claim had no reasonable possibility of success, the court reversed the judgments below and denied authorization under s. 225.4 of the Securities Act.

Conclusion

In view of the similarity between Quebec's secondary liability regime and those existing in other provinces, the Supreme Court's judgment on the reasonable possibility of success test will provide significant guidance for courts throughout Canada when dealing with such claims.

Footnotes

1. RSQ, c V-1.1.

2. 2012 QCCS 699.

3. 2013 QCCA 1256.

4. 2015 SCC 18.

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