On April 17, 2015, the Supreme Court of Canada allowed the appeal of Theratechnologies Inc. and reversed the Quebec Court of Appeal’s decision, granting prior authorization of a secondary market proposed class action under s. 225.4 of the Quebec Securities Act (QSA).

Under s. 225.4 of the QSA, the criteria for prior authorization to institute an action in damages are two-fold: the action must be filed in good faith and there must be “a reasonable possibility that it will be resolved in favour of the plaintiff”.

While the Supreme Court agreed with the Quebec Court of Appeal that the “reasonable possibility” criterion sets out a higher standard than the general threshold for the authorization of a class action under art. 1003 of the Code of Civil Procedure, the Supreme Court held that the threshold had not been met in this case.

The Secondary Market Proposed Class Action

In 2010, Respondent sought authorization to bring a class action for damages against Theratechnologies Inc. claiming that it had breached its disclosure obligations regarding the potential side effects of a drug awaiting FDA approval. Theratechnologies Inc. regularly informed its shareholders, including respondent, of the results of its clinical trials measuring the safety and efficacy of the drug. When questions issued by the FDA regarding the drug were publicized by stock quotation enterprises, the price of Theratechnologies’ shares dropped. Respondent claimed that the FDA’s questions amounted to a material change in Theratechnologies’ business, operations or capital, triggering timely disclosure obligations under s. 73 QSA.

A “Realistic Chance” that the Action Will Succeed

In Theratechnologies Inc. v. 121851 Canada Inc., the Supreme Court held that the threshold set out in s. 225.4 QSA requires that there be “a reasonable or realistic chance that the action will succeed”. According to the Supreme Court, a case with a realistic chance of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim. The authorization stage under s. 225.4 QSA must not proceed as a mini-trial – a full analysis of the evidence is unnecessary at this stage. However, there must be sufficient evidence to persuade the court that there is a realistic chance that the action will be resolved in the claimant’s favour.

In this case, the respondent was unable to point to any evidence that could qualify as a change in appellant’s operations, capital or business as described in s. 5.3 QSA. Because the evidence did not credibly point to a material change that could have triggered appellant’s disclosure obligations, the Supreme Court held that there was no reasonable possibility that respondent’s action could succeed.

As the application of s. 225.4 QSA is still novel, it remains to be seen how courts will apply the Supreme Court’s interpretation of the “reasonable possibility” criterion. However, we expect that the courts will continue to strike a balance between allowing investors to pursue claims under s. 225.4 in appropriate cases and preventing unmeritorious litigation.