Quebec courts have reaffirmed how challenging it can be for underwriters, issuers and other defendants to resist securities class actions for statutory primary market liability at the authorization or “certification” stage.
In 2017, the Superior Court of Québec and the Québec Court of Appeal gave the green light for a class action lawsuit involving Valeant Pharmaceuticals International Inc. (Valeant), a dual-listed company on the TSX and NYSE, to go to trial for statutory primary market liability and other causes of action because of the “low standard” of “appearance of right” at the authorization stage, thus illustrating how challenging it can be for defendants to obtain the early dismissal of such cases.
The claims at issue relate to the restatement by Valeant of certain of its audited and unaudited financial statements in 2016 and allegations of misrepresentation premised on investor losses. Class actions were commenced in multiple jurisdictions, but the parties agreed to stay actions in other Canadian provinces to allow the Quebec action to proceed to an authorization hearing (Valeant is headquartered in Quebec). Authorization in Quebec is the process by which the court determines whether the claims of the various plaintiffs within the proposed class may proceed on a collective basis. It is similar to a certification hearing in Canadian common law provinces, although the test varies in some significant ways. Valeant, certain individuals who were officers and directors of the company at the time, the company’s auditors, and various underwriters of offerings made by Valeant during the class period were all named as defendants in the action.
The Quebec action is asserted on behalf of an international class of plaintiffs, and advances Division I (statutory primary market liability) and Division II (statutory secondary market liability) claims under the Securities Act (Quebec) (QSA), as well as civil claims for misrepresentation under article 1457 of the Civil Code of Québec.
The securities offerings at issue were comprised of: (i) four offerings of debt securities that were sold exclusively to accredited investors in Canada pursuant to a prospectus exemption under National Instrument 45-106 – Prospectus Exemptions (NI 45-106); and (ii) two offerings of common shares that were sold exclusively outside Canada under a U.S. registration statement. (Quebec regulates a distribution of securities from Quebec to persons established outside Quebec.) In each case, no prospectus was filed in Canada. Offering memoranda were provided voluntarily to accredited investors in the case of each of the debt offerings.
The defendants argued that statutory primary market liability could not attach to the offerings in question because section 221 of the QSA only creates a cause of action against, among others, the underwriters where an offering memorandum is “prescribed by regulation”. In the case of the debt offerings by Valeant, the purchasers received copies of the offering memorandum voluntarily, therefore, the defendants argued, Division I liability could not apply in this case.
On August 29, 2017, the Superior Court of Québec authorized the commencement of the class action. In her decision, Justice Chatelain held that applying the “low standard” of “appearance of right”, Division I claims should be allowed to proceed to trial. She accepted that “prescribed by regulation” could mean something other than “required by regulation” and that, at the preliminary stage of authorization, the facts alleged were sufficient to sustain a cause of action for misrepresentation.
With respect to the debt offerings, she explained:
“Whether the Defendants are right to submit that section 221 QSA shows a clear intent to exclude offering memorand[a] provided voluntarily is a matter better left to the merits of the action…”
“Considering the low standard applicable at this stage, the Court is satisfied that there is at a minimum ‘some evidence’ to establish an appearance of right with respect to the [o]ffering memoranda.”
With respect to the March 2015 common share offering made exclusively outside Canada using a U.S registration statement, Justice Chatelain stated that “the question remains as to whether the prospectus which was in fact used in relation to the [common share offering] is a prospectus within the meaning of the QSA which can give rise to [a] cause of action…” She emphasized:
“The Defendants may be right in the final outcome, but, again, considering the low standard applicable at this stage, the Court is satisfied that there is at a minimum ‘some evidence’ to establish an appearance of right…”
The underwriters sought leave to appeal. On November 30, 2017, the Québec Court of Appeal released its decision denying leave to appeal. Applications by the other defendants requesting leave to appeal were denied in concurrent decisions.
Justice Mainville found that the plaintiffs had made out a “prima facie case” that the debt offerings were subject to a Division I claim. He denied the application on the basis that if accepted, offerings made under a prospectus exemption would escape statutory liability for misrepresentation under the QSA:
“Consequently, an ‘accredited investor’ who acquires securities in the primary market would be left without any statutory recourse for misrepresentations made directly to him by the issuer, while that same ‘accredited investor’ would have the full range of Division II recourses if the securities are purchased by him in the secondary market without any direct misrepresentations to him. These are curious results. A full evidentiary record with full argument[s] [is] necessary to sort out these issues.”
The underwriters had also submitted that an amendment to section 221 of the QSA that would impose liability for offering memoranda provided voluntarily is not yet in force, meaning that the current regime does not impose offering memorandum liability in such circumstances. Justice Mainville again emphasized the need for “a hearing on the merits of all the claims allowing for a complete evidentiary record and full arguments”, but questioned whether the delay in passing the amendment might be because “the amendment is deemed no longer necessary at this time to allow ‘accredited investors’ to pursue Division I claims in the primary market”.
Ultimately, Justice Mainville concluded that the defendants had not “met the demanding test for authorizing an appeal of the Judge’s decision” and stated that “although the arguments of the Defendants are appealing, at the authorization stage, the Court must refrain from making a decision on the merits of the case, even more so when the argument is based in evidence.”
IMPLICATIONS FOR QUEBEC FINANCINGS
Potential for Quebec Prospectus Liability for Distributions Outside Canada
The Quebec courts’ refusal to deny authorization of the prospectus claims under section 217 of the QSA raises uncertainty as to whether a Quebec issuer making a prospectus distribution exclusively in a country outside Canada, or its underwriters, might still face prospectus liability in Quebec.
Scope of Offering Memorandum Liability
The Valeant cases also illustrate some striking inconsistencies in the way primary market (new issue) liability for private placements is dealt with in the various Canadian provinces.
Most provinces already impose statutory liability for misrepresentation when offering memoranda are provided voluntarily, although British Columbia and Quebec do not. In some cases, issuers in those latter jurisdictions may choose to offer equivalent contractual provisions in order to “level the field” when marketing across provinces.
The scope of statutory offering memoranda liability is typically narrower than for a prospectus. In Ontario, for example, only the issuer and selling securityholders face statutory liability for misrepresentations in an offering memorandum. The scope of statutory offering memoranda liability in Saskatchewan, New Brunswick and Prince Edward Island extends to the issuer and selling securityholders as well as directors and signatories. In contrast, selling securityholders do not face statutory offering memoranda liability in other jurisdictions such as Manitoba and Nova Scotia, where liability is only imposed on the issuer, directors and signatories. In Quebec, statutory offering memorandum liability extends to the underwriters where the offering memorandum is prescribed by legislation. As a result of the Valeant decisions, a question now arises as to whether this liability on the part of the underwriters can extend to offering memoranda that are voluntarily provided. Clarification of this point, as well as the prospectus liability point raised above, will now await a trial on the merits in the Valeant trial or legislative reform.
Quebec May Become a Lead Jurisdiction for Securities Class Actions
As the Valeant decisions illustrate, the combination of a low threshold for authorization with a high threshold for appeals may make Quebec increasingly attractive to plaintiffs as a jurisdiction to commence securities class actions.
Provincial Jurisdiction Contests
While the jurisdiction of the Quebec courts over an international class of purchaser claimants was not contested in the Valeant cases, in the future, we can expect defendants to challenge the jurisdiction of Quebec courts over non-Quebec purchasers to limit the ruling’s impact.