Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18 (Securities — Statutory disclosure obligations — Action for damages)

On appeal from the judgment of the Quebec Court of Appeal (2013 QCCA 1256) dated July 17, 2013, affirming a decision of Blanchard J. (2012 QCCS 699)

In the spring of 2010, Theratechnologies inc. (Thera) was awaiting the approval of the United States Food and Drug Administration (FDA) for a new drug to reduce excess abdominal fat among HIV patients. As its application proceeded, Thera regularly updated its shareholders and the Commission des valeurs mobilières du Québec about developments in the FDA process. It also regularly informed its shareholders about the results of its clinical trials measuring the safety and efficacy of the drug, including potential side effects. The trials indicated that the benefits of the drug could be “achieved without significant side effects”.

As is common during the new drug approval process, the FDA referred a number of questions about this drug to an expert Advisory Committee, including questions about its potential side effects. The FDA also made these questions public as part of a package of briefing materials on its website. Thera believed the briefing documents it had already provided to the FDA and the clinical results it had already made public to its investors offered a comprehensive response to the specific questions the FDA had posed. When the questions were publicized by stock quotation enterprises, the price of the company’s shares dropped. 121851 Canada inc., a holding company, sold its shares in Thera during this period. Ultimately, the drug was approved by the FDA and Thera’s share price recovered.

121851 sought authorization under s. 225.4 of the Securities Act to bring a class action for damages against Thera, claiming that the information about the potential side effects of the drug and the FDA’s questions about those side effects amounted to a material change in Thera’s business, operations or capital, triggering timely disclosure obligations under s. 73 of the Securities Act.

Under s. 225.4, the court is a gatekeeper, and grants authorization “if it deems that the action is in good faith and there is a reasonable possibility that it will be resolved in favour of the plaintiff”. The Motions Judge concluded that the authorization mechanism in s. 225.4 of the Securities Actimposed a higher threshold than art. 1003 of the Code of Civil Procedure, which deals with the authorization of class actions generally, but found sufficient evidence to support the conclusion that 121851’s action had a reasonable possibility of success. The Court of Appeal agreed with the Motions Judge that the screening mechanism under s. 225.4 was more stringent than for the authorization of a class action under art. 1003 of the Code of Civil Procedure and required more than a mere possibility of success. It also agreed that the threshold was met in this case.

Held (7:0): The appeal should be allowed.

Section 225.4 of the Securities Act is part of a new regime to address breaches of continuous disclosure obligations in the secondary market, the market in which a company’s shares are traded publicly after they have been issued or distributed by the company. The reforms were inspired by the recommendations of the Allen Committee, suggested after a number of high profile misrepresentations at publicly traded companies. The Committee concluded that the remedies available to investors injured by misleading disclosure in the secondary trading market were so difficult to pursue, that they were largely illusory. As a result, it recommended the creation of a statutory civil liability regime that would help investors sue issuers, directors, and officers who violated statutory disclosure obligations.

Under Quebec’s new regime, when a security is acquired or transferred at the time of a false declaration or omission of information that should have been disclosed, the fluctuation in the value of the security is presumed to be attributable to that fault. Investors are thereby released from the burden of demonstrating that the variation in the market price of the security was linked to the misinformation or omission, and from demonstrating that they personally relied on that misinformation or omission in buying or transferring the security. In order to discourage the kind of strike suits that had become common in the United States under more investor‑friendly regimes, the Quebec scheme established an authorization mechanism — s. 225.4 — to permit only actions in good faith and with a “reasonable possibility” that the claim would be resolved “in favour of the plaintiff”. The regime reflected an attempt to strike a balance between preventing unmeritorious litigation and strike suits and, at the same time, ensuring that investors have a meaningful remedy when issuers breach disclosure obligations.

The “reasonable possibility” that the claim would be resolved in favour of the plaintiff required under s. 225.4 sets out a different and higher standard than the general threshold for the authorization of a class action under art. 1003 of the Code of Civil Procedure. Under art. 1003, the court seeks only to identify whether “the facts alleged seem to justify the conclusions sought”, that is, whether the applicant has established “a good colour of right”. The Quebec legislature used different language in s. 225.4 to create a more meaningful screening mechanism in the securities context so that costly strike suits and unmeritorious claims would be prevented. The threshold requires that there be a reasonable or realistic chance that the action will succeed.

A case with a realistic chance of success requires the claimant to offer some credible evidence in support of the claim. Courts must therefore undertake a reasoned consideration of the evidence to ensure that the action has some merit, but the authorization stage under s. 225.4 should not be treated as a mini‑trial. If the goal of the screening mechanism is to prevent costly strike suits and litigation with little chance of success, it follows that the evidentiary requirements should not be so onerous as to essentially replicate the demands of a trial. A full analysis of the evidence is unnecessary. What is required is sufficient evidence to persuade the court that there is a realistic chance that the action will be resolved in the claimant’s favour.

121851 claims that Thera breached s. 73 of the Securities Act, which requires issuers to provide timely disclosure of material changes to investors. A material change has two components. There must be a change in the business, operations or capital of the issuer and the change must be material, which means it would reasonably be expected to have a significant effect on the market price or value of the securities of the issuer. 121851 argues that when Thera received the FDA briefing materials for the Advisory Committee, it should have issued a responsive press release. But 121851 has not pointed to any evidence that could qualify as a change in Thera’s operations, capital or business as described in s. 5.3 of the Securities Act. The results of the clinical trials, including potential side effects, were disclosed to shareholders as they became available. There was no new information about the side effects of the drug that required timely disclosure when the FDA mentioned those side effects in the briefing materials.

Nor has 121851 pointed to any evidence to suggest that the questions the FDA posed to its advisory committee about these side effects, or the contents of its briefing package more generally, departed in any way from the regular and routine process through which the FDA assesses whether a drug should be approved. Rather, they are a routine step in the FDA’s work to determine whether a drug’s benefits outweigh its risks. It is difficult to characterize these questions as any kind of change to Thera’s business, operations, or capital requiring a reassuring public response from Thera.

Because the evidence does not credibly point to a material change that could have triggered disclosure obligations, there is no reasonable possibility that 121851’s action under s. 73 of the Securities Act could succeed.

Reasons for decision by Abella J.

Neutral Citation: 2015 SCC 18. Docket No. 35550.