On November 17, 2023, the Supreme Court of Canada released its decision in Sharp v. Autorité des marchés financiers, 2023 SCC 29, on the jurisdiction of Québec’s securities regulatory tribunal, the Financial Markets Administrative Tribunal (FMAT), to prosecute the out-of-province appellants. By a 7–1 majority, the Court found that (i) special jurisdictional rules under Québec’s securities regulatory scheme gave the FMAT broad jurisdiction and (ii) Québec’s securities legislation constitutionally applied to the appellants under the Unifund test because there was a “real and substantial” connection to Québec.
The decision is the first time the Supreme Court of Canada has directly addressed the question of whether provincial administrative tribunals have the power to sanction out-of-province conduct. In doing so, the Court provides important guidance on the proper approach to determining the constitutional applicability of provincial legislation to out-of-province parties (with a particular focus on Québec). The Court also signals its intention to approach jurisdictional issues in the securities context with flexibility, having regard for the transnational nature of modern securities manipulation and fraud.
Background: the ‘pump-and-dump’ scheme
The respondent Autorité des Marchés Financiers (AMF), Québec’s provincial securities regulatory agency, brought an action before the FMAT alleging that the appellants, residents in British Columbia, participated in a transnational “pump-and-dump” scheme to manipulate the market for shares of Solo International, Inc. (Solo) in contravention of the Québec Securities Act.
The appellants, acting through their offshore entities, allegedly acted in concert to acquire shares of Solo, give it a legitimate “face” and promote its business for the purpose of fraudulently increasing the value of its shares and then selling them for a profit.
The AMF alleged several links between Solo and Québec, including that (i) Solo was a reporting issuer in Québec with obligations under the Québec Securities Act; (ii) Solo had Québec subsidiaries; (iii) Solo had mining interests located in Québec which it promoted through the alleged scheme; and (iv) Solo was alleged to have had a place of business in Montréal.
The appellants initially moved to challenge the FMAT’s jurisdiction over them as out-of-province defendants. The FMAT denied their motion and confirmed its jurisdiction to hear the AMF’s action. The Québec Superior Court dismissed the application for judicial review, and the Québec Court of Appeal dismissed the appeal (which we previously commented on).
The Supreme Court’s decision: applying the Unifund ‘real and substantial connection’ test
The majority, per Wagner C.J. and Jamal J., began its analysis of the proper territorial application of Québec’s scheme with Title Three of Book Ten of the Civil Code of Québec (CCQ), which governs the international jurisdiction of Québec authorities. Finding that no provision in the CCQ grounded the FMAT’s jurisdiction over parties not domiciled in Québec (including no special provision in Title Three of Book Ten), but that the CCQ does not preclude the application of other jurisdictional rules set out in special statutes, the majority examined Québec’s special securities regulatory statutes: the Act respecting the Autorité des marchés financiers and the Securities Act. The majority determined that the scheme empowers the FMAT to act and decide matters in a broad range of circumstances, and grants the FMAT a large measure of discretion when exercising its jurisdiction “in the public interest”.
Because neither statute expressly addresses its extra-territorial application, the majority used the test set out in Unifund as a principle of statutory interpretation to read down the territorial reach of the otherwise broadly framed provincial legislation, consistent with the territorial restrictions in the constitution.
In Unifund, the Court held that a provincial legislative scheme can constitutionally apply to an out-of-province defendant provided that there is a “real and substantial connection” or “sufficient connection” — terms that the Court uses interchangeably — between the legislative scheme and the out-of-province defendant. The test is organized around four propositions:
- The first and second require a “sufficient” connection between the jurisdiction and the individual or entity sought to be regulated, having regard to the subject matter of the legislation.
- The third and fourth require consideration of order and fairness, having regard to the subject matter of the legislation.
The Court also confirmed that the Unifund test is part of a family of distinct “real and substantial connection” tests. Each version has been developed for a specific context — for instance, the common law test developed in Van Breda for courts’ jurisdiction over tort claims with foreign aspects, and the test developed in Morguard for the recognition of court judgements interprovincially.
Applying the first and second Unifund propositions, the majority found a sufficient connection between Québec and the appellants in the circumstances of this case. Notably, the appellants allegedly used Québec as the “face” of their alleged pump-and-dump scheme by promoting Solo’s business in Québec and partly targeting Québec residents. Further, the shell company at the centre of the scheme (Solo) was a reporting issuer in Québec and its director was a Québec resident. The majority found that “[it] would defeat the purpose of the cross‑border nature of modern securities regulation to allow the defendants to escape the reach of Québec’s regulatory oversight.”
Applying the third and fourth Unifund propositions, the majority found that applying Québec’s securities regulatory scheme to the appellants was both fair — seeing as the appellants’ entrance into Québec’s market was not accidental or irrelevant, but rather was an integral part of their securities manipulation operation — and did not offend order or interprovincial comity. The majority emphasized the need for a flexible and purposive approach to order and fairness in the securities context given that contemporary securities manipulation and fraud are often transnational and extend across provincial and national borders.
The majority therefore concluded that there was a sufficient connection between Québec and the appellants to justify applying Québec’s securities regulatory scheme to them. As a result, the FMAT correctly concluded that it has jurisdiction over the appellants, since the FMAT’s adjudicatory jurisdiction flows from the province’s prescriptive legislation jurisdiction through the Act respecting the Autorité des marchés financiers and the Securities Act.
This decision is instructive on the constitutional principles and the proper test to be applied in considering the application of provincial regulatory authorities over out-of-province respondents. Although the constitutional principles considered will be instructive outside Québec, the application of the Unifund test as a principle of statutory interpretation will depend on both the facts of individual respondents and on the provincial statutory scheme sought to be applied extra-territorially. In other words, this decision should not be read as an outright expansion to the territorial jurisdiction of provincial securities regulatory authorities and administrative tribunals generally, but rather as clarification on the proper analytical framework to determine the jurisdiction of these provincial authorities on a case-by-case — and party-by-party — basis.