In the spring of 2010, BioSyntech, a start-up biotechnology company, developing a cartilage-repair product, BST-Car Gel, filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act. In the subsequent bankruptcy proceedings, the intellectual property relating to the BST-Car Gel was sold. Vincent Blais, a former shareholder of BioSyntech, filed a motion for authorization to bring a class action on behalf of shareholders and security holders against BioSyntech’s former directors (the “Defendants”) for allegedly causing the company’s “avoidable” bankruptcy by failing notably to bring down the company’s burn rate and to undertake the necessary measures to secure the financing needed to complete a pivotal clinical trial (the “Motion”). According to the Motion, Defendants breached their duty of care under section 122(1) of the Canadian Business Corporations Act (CBCA), and under articles 322 and 1457 of the Quebec Civil Code.   On June 30, 2015, in Groupe d’action d’investisseurs dans Biosyntech c. Tsang, (2015 QCCS 3265), the Honorable Stephen Hamilton of the Quebec Superior Court refused to grant authorization, ruling that the former shareholders of BioSyntech notably lacked the legal standing to bring said class action as the alleged faults of the directors would have been against the company and not the shareholders such that the shareholders would have allegedly suffered indirect damages[1]. Such damages are not recoverable under Québec civil law.

 [153] The shareholders cannot, in law, recover the loss of share value from the directors, even if the directors were negligent. As a result, the class action proposed by the Petitioner cannot succeed. The Petitioner has failed to demonstrate a prima facie right of action against the Respondents pursuant to Article 1003(b) CCP.

Although, the Court acknowledged that the range of parties to whom directors owed a duty of care had arguably been expanded by the Supreme Court of Canada’s decisions in Peoples[2] and BCE[3] to include both creditors and other stakeholders – including shareholders, Justice Hamilton, after reviewing the relevant jurisprudence and doctrine, came to the conclusion that:

[135] With respect to the right of action of the shareholders [under the CBCA] against the directors, the better view appears to be that the shareholders do now have a right of action against the directors.

However, Justice Hamilton emphasized the requirement that the damages claimed by the shareholders in the corporate context must be direct and distinct from those suffered by the company itself.

[140]     Damages that are indirect or “par ricochet” are not generally recoverable in extra-contractual liability. As Jean-Louis Baudouin explains:

Comme on le sait, la jurisprudence respecte le critère direct du dommage édicté par le législateur. Le problème de déterminer ce que constitue un dommage « direct » est complexe et, là encore, il serait présomptueux de vouloir généraliser. Toutefois, une tendance se dégage. Les tribunaux ne reconnaissent pas le préjudice qui puise sa source immédiate non dans la faute elle-même, mais dans un autre préjudice déjà causé par la faute. En d’autres termes, est indirect le dommage issu du dommage, le dommage par ricochet, le dommage au « second degré ». (Emphasis added)

As is well known, case law respects the direct injury criteria established by the legislator. The problem of determining what constitutes a “direct” damage is complex and, again , it would be presumptuous to generalize. However, a trend is emerging. The courts do not recognize the prejudice that does not find its source in the fault itself, but rather in another prejudice that has already be caused by the fault. In other words , the damage is indirect when it is resulting from another damage, a damage “par richochet”, a “second degree” damage. [Our translation]

[141]     The application of this principle in the corporate law context is clear. When the directors cause damage to the corporation, shareholders cannot claim against directors for the resulting loss of share value because this loss is an indirect result of the injury directly caused to the corporation. […]

In the case of BioSyntech, the shareholders were essentially claiming for a loss in share value, which arose from an alleged “injury” caused to BioSyntech itself. As the Court pointed out: “In those circumstances, the recourse belongs to the corporation and not to the shareholders. If the corporation sues, the shareholders will benefit directly from any recovery. If the corporation fails to pursue its recourse, the shareholders can bring a derivative action in the name of the corporation. If the corporation is bankrupt, the trustee in bankruptcy can bring the action. If the trustee fails to act, the creditors can take the proceedings…”and “If the shareholders are allowed to sue directly for damages of this nature, they effectively jump the queue and recover amounts which should have gone to the creditors.” [4]

In addition to the above, the decision is an important one on two accounts. First, the Superior Court did proceed to a meticulous examination of the allegations of fact and the evidence filed by both parties under the guidance of the Supreme Court of Canada’s teachings in Infineon[5] and Vivendi[6]. Therefore, although the test for meeting the “arguable case” test of article 1003 b) C.p.c. is not onerous according to the Supreme Court, bare allegations of facts without supporting evidence will not be sufficient to meet the criteria. Moreover, the Court did distinguish between the 4 allegations of fault brought forth by Petitioner and did proceed to a rigorous analysis of the allegations of facts and the evidence that was filed in support of these allegations of fault. Hence, the filtering mechanism that is the authorization stage does involve a meticulous, rigorous and methodical analysis and appreciation of the allegations of facts and the evidence by the Court.

Second, Justice Hamilton did decide a question of pure law, i.e. the legal standing of the shareholders in light of the allegations of facts and the evidence filed in support of same, by referring to the decisions of the Québec Court of appeal in Trudel c. Banque Toronto-Dominion, 2007 QCCA 413 and Fortier c. Meubles Léon ltée, 2014 QCCA 195. The Superior Court underlined that it had the obligation to decide such legal questions:

“[55] However, the Respondents also advance legal arguments, namely that the directors do not owe the duty under Section 122(1)(b) CBCA to the shareholders, and that the loss claimed by the shareholders is only indirectly caused by the acts of directors and cannot be recovered. The Court will assume that the facts alleged by the Petitioner underlying those legal issues have been proven, and the Court is in just as good a position at the authorization stage as it will be after the trial to deal with those issues. In these circumstances, the Court is required to decide the legal issues.”

Therefore, Justice Hamilton follows the guidance of the Quebec Court of appeal and confirms that questions of law must be decided at the authorization stage, and should not be postponed to the merits of the case.