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Supreme Court of Canada establishes test for leave to commence action for breach of secondary market disclosure obligations under securities legislation

4 minute read

The Supreme Court of Canada decision in Theratechnologies Inc. v 121851 Canada Inc., 2015 SCC 18, considers the leave requirement that a plaintiff shareholder must meet in order to advance a statutory cause of action for damages against a reporting issuer for breaches of the continuous disclosure obligations in the secondary market. The case was decided under the Quebec Securities Act, but has implications across Canada, including in Ontario, where a similar legislative regime exists. Important policy considerations drove the result.

In 2009, the defendant Theratechnologies Inc. (“Thera”) filed an new drug application with the Food & Drug Administration ("FDA"). In accordance with its regular procedures, the FDA convened a meeting of an expert Advisory Committee to evaluate the safety and efficacy of the new drug. In 2010, the FDA published the information it had compiled about the drug, which included questions the FDA had put to the Advisory Committee. As a result of those questions, Dow Jones issued a press release and article which expressed concerns about the risks associated with the drug, but which the court found did not disclose that Thera's clinical trial results had concluded that those risks were minor, transitory, and easily managed.

After Dow Jones press release, the value of Thera shares dropped. The plaintiff sold its shares and suffered a loss. A few days later, Thera issued a press release advising that the Advisory Committee had unanimously recommended that the FDA approve the new drug. The share price recovered. A few months later, the FDA approved the drug.

The plaintiff sought leave under section 225.4 of the Quebec Securities Act, for approval to commence a class action for damages, arguing that the information on the potential side effects of the drug amounted to a material change in Thera's business, operations, or capital, triggering timely disclosure obligations under section 23 of the Securities Act. Section 224.5 of the Securities Act requires that: (1) an action must be brought in good faith; and (2) there must be a reasonable possibility that it will be resolved in favour of the plaintiff. These provisions essentially mirror those in the sections 75 and 13.8 of the Ontario Securities Act.

There was no issue that the plaintiff was acting in good faith. The court considered the policy objectives behind the second requirement – to strike a balance between unmeritorious strike suits that waste time and expense and to ensure that investors have a meaningful remedy when issuers breach disclosure obligations – and determined that the court must undertake a reasoned consideration of the evidence to ensure that the action has some merit. This threshold requires that there be a reasonable or realistic chance that the action will succeed. This requires the plaintiff to offer both a plausible analysis of the legislation and some credible evidence in support of the claim. In other words, there is some preliminary merits assessment, but there is not to be a mini-trial.

In this case, the court concluded that there was no reasonable chance that the plaintiff could succeed. Thera regularly updated its shareholders about developments in its FDA application and clinical trials, but was not, “required to reassure its investors at every stage of the FDA approval process”. It held that a reasonable investor who had read Thera's news releases would have known of the potential risks and that the clinical trials had found that they were not clinically significant. Thera met its statutory duty of disclosure. The court warned of the, “risks of excessive disclosure, which could, ‘simply bury the shareholders in an avalanche of trivial information – a result that is hardly conducive to informed decision making'”.

The content contained in these blogs is intended to provide information about the subject matter and is not intended as legal advice. If you would like further information or advice on any of the subjects discussed in a blog post, please contact the author.

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Lisa C. Munro, FCIArb, Q.Arb

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