The recent decision of the Supreme Court of Canada in Theratechnologies Inc. v. 121851 Canada Inc. raises interesting questions about disclosure obligations that can be triggered by a regulator’s inquiries, and resulting class action risk if disclosure is inadequate.

The case arose as a proposed class action brought by shareholders of Theratechnologies Inc. (“Thera”) . The plaintiff alleged that Thera failed to adequately disclose and respond to questions that it received from the FDA as part of the regulatory approval process for a new drug. The FDA questions were about side effects of a proposed new drug. When the questions were publicized externally, Thera’s stock dropped by 58% that same day.

The Supreme Court ultimately dismissed the plaintiff’s claim at the leave stage, finding that the company had previously made adequate disclosure regarding the drug’s potential side effects and about the FDA process. The Court found that the FDA’s questions were a routine part of the regulatory process.

However, on different facts the outcome may not have been as happy for the company. For example, if the FDA’s questions had not been routine, would this have resulted in a material change to Thera’s business that Thera would be compelled to disclose? The case does not answer the question, but it reinforces the inherent risk in navigating the regulatory process, as a regulator’s inquiries can often raise larger issues regarding disclosure and potential investor liability.

Factual Background

In the spring of 2010, Thera was awaiting FDA approval of a new drug to reduce excess abdominal fat in HIV patients. As the application proceeded, Thera regularly informed its shareholders of the results of its clinical trials measuring the safety and efficacy of the drug. During the approval process, the FDA referred a number of questions about the drug, including its potential side effects, to an expert Advisory Committee, and made these questions public as part of the package of briefing materials on its website. These questions were then publicized by stock quotation enterprises, leading to a 58% decline in the price of Thera’s shares.

Thera did not respond publicly to the publication because it believed the briefing documents it had already provided to the FDA and the clinical trials it had already made public to its investors offered a comprehensive response to the specific questions that the FDA had posed. Thera shareholders commenced a class action, claiming that the FDA’s questions amounted to a material change in Thera’s business, operations or capital, and that Thera breached its obligation to make timely disclosure of those changes under s. 73 of the Quebec Securities Act.

Finding

The Supreme Court rejected the plaintiff’s claim, finding that the FDA’s questions did not amount to a material change. In particular, the Court focused on the fact that the FDA’s questions, and the package of briefing materials that were made public, were part of the regular and routine process through which the FDA assessed whether a new drug should be approved. The court held there was no new information that required disclosure.

Moreover, the Court recognized that not every fact about a regulatory inquiry, or affecting a business generally, can or should be disclosed to shareholders. The Canadian Supreme Court agreed with this observation from the U.S. Supreme Court: “there are risks of excessive disclosure, which could ‘simply … bury the shareholders in an avalanche of trivial information – a result that is hardly conducive to informed decision making” (TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438 (1976)).”

Implications of the Decision

Public issuers can take comfort from the fact that the Supreme Court recognized that it is not necessary to disclose each and every interaction with a regulator, particularly where these inquiries are routine. As well, the Court acknowledged the dangers of excessive disclosure.

However, where the line can be drawn between routine aspects of a regulatory process and more unusual or atypical aspects will be a judgment call, based on the facts of each case. Whether non-routine queries must be disclosed will be another judgment call – depending upon whether they represent a material change or not. The Thera case highlights that companies navigating a regulatory process must be mindful of the larger risks relating to disclosure and related civil liability.