On November 9, 2007 amendments to Quebec’s Securities Act1 (the “QSA”) came into force creating a civil liability regime allowing investors on the secondary market to sue issuers for breaches of continuous disclosure requirements. This past April, the Supreme Court of Canada rendered its decision in Theratechnologies inc. v. 121851 Canada inc.2, which involved the burden of proof applicable to investors seeking authorization to bring a class action for damages pursuant to section 225.4 of the QSA.

The facts of the case

Theratechnologies (“Thera”) is a pharmaceutical company listed on the Toronto Stock Exchange. In 2010, Thera was awaiting the approval of a new drug by the United States Food and Drug Administration (the “FDA”). During the approval process, Thera regularly informed its shareholders and Quebec’s financial markets regulator, the Autorité des marchés financiers, of the results of its clinical trials, including the fact that the trials indicated that the side effects of the drug were not significant.

As it commonly does, the FDA referred a number of questions about the drug to an expert advisory committee. Those questions were also published on the FDA’s website.

Stock quotation companies then published press releases mentioning that the drug could increase the risk of diabetes. Thera did not publicly comment on the press releases, believing that the briefing documents it had provided to the FDA and the clinical results it had disclosed adequately responded to the questions posed by the FDA. In the absence of any public statement by Thera, its share price fell by 58% over the course of a few days.

121851 Canada inc. (the “Corporation”), which had suffered a loss on its sale of Thera shares, requested authorization from the Superior Court of Québec, pursuant to section 225.4 of the QSA, to bring a class action for damages against Thera, alleging that it had breached its obligation to inform investors of a material change. According to the Corporation, the information that diabetes was a possible side effect of the new drug, together with the questions posed by the FDA, amounted to a material change in Thera’s business, operations or capital. The Corporation maintained that Thera should have issued a press release to reassure investors and stabilize its share price.

The Supreme Court of Canada’s decision

In a unanimous decision, the Supreme Court overturned the decisions of the courts below, on the basis that the authorization criteria for a class action under section 225.4 of the QSA are stricter than those under section 1003 of Quebec’s Code of Civil Procedure.

The Court first of all pointed out that section 225.4 of the QSA prescribes two fundamental conditions for obtaining authorization to institute a class action under the QSA: (i) the action must be brought in good faith, and (ii) there must be a reasonable possibility that the plaintiff will prevail. In this instance, no one disputed that the Corporation was in good faith. The Court therefore focussed its attention on the interpretation of the second condition, namely the reasonable possibility that the action would succeed.

The Court concluded that the criterion of a “reasonable possibility” that the plaintiff would prevail, set out in section 225.4 of the QSA, was a more onerous one than the “mere possibility” of success, one of the class-action authorization criteria under article 1003 of the Code of Civil Procedure. In the case of a proposed action under the QSA, a court must not limit itself to determining whether the facts alleged seem to justify the conclusions sought, as is the case under article 1003 CCP, but go on to perform a preliminary assessment of the evidence in order to determine whether the “reasonable possibility of success” burden has been met.

The Court then proceeded to analyze the evidence offered by the Corporation in support of its request for authorization and concluded that it had not established that there had been a material change requiring public disclosure by Thera. The Court noted that the timely disclosure obligation on which the proposed class action was based is triggered by two factors, namely (i) a change in the issuer’s business, operations or capital, and (ii) the need for the change to be material, meaning that “it would reasonably be expected to have a significant effect on the market price or value of the issuer’s shares”. Information regarding the side effects of the drug had already been disclosed to shareholders, and was so before the FDA published its questions. There was thus no new information about side effects that required disclosure by Thera. Moreover, the Corporation offered no evidence suggesting that the FDA’s questions or the content of its briefing materials departed in any way from the normal course followed by the FDA in its approval process. Furthermore, the Corporation’s evidence in no way tended to show that the FDA’s questions pertained to new information or data concerning the drug that had not already been disclosed by Thera. Thus, the fact that the FDA was following its usual process did not constitute a material change for Thera. It therefore had no obligation to issue a reassuring public response. Consequently, the request for authorization to institute the class action was denied.

The Court noted in passing that excessive disclosure of information is not without risks, particularly that of burying shareholders in “an avalanche of trivial information – a result that is hardly conducive to informed decision-making”3. Be that as it may, it remains important to identify what constitutes a material change or fact, and to then disclose the necessary information.

The other Canadian jurisdictions

Since 2005, provisions similar to section 225.4 of the QSA have been adopted in all Canadian provinces and territories, following the recommendations of the Canadian Security Administrators that a civil liability regime more accessible to secondary-market investors be created for breaches by public companies of their timely or continuous disclosure obligations. These provisions ease the burden of proof formerly applicable in actions of this kind, while at the same time creating a screening mechanism to filter out frivolous or ill-founded lawsuits.