Class Actions and the Securities Act

The Québec Court of Appeal has confirmed the right to appeal from a decision authorizing the institution of an action in damages under the Securities Act in the context of a proposed class action.

On July 17, 2013, the Québec Court of Appeal rendered a long-awaited decision in the matter of Theratechnologies Inc. v. 121851 Canada Inc., 2013 QCCA 1256. This case raised for the first time the issue of a respondent’s right to appeal from a decision on a motion for authorization to institute a class action based on the Securities Act’s1 new civil liability regime.

The Court of Appeal laid down novel principles regarding the respondents’ right to appeal at the authorization stage, as well as in relation to the interplay between the criteria for the authorization of a class action set out in Article 1003 of the Code of Civil Procedure (“CCP”), and those for the required prior authorization of the Court to institute an action in damages against an issuer in the secondary market under section 225.4 of the Securities Act.

Facts

Theratechnologies inc. (“Thera”) is a public corporation listed on the Toronto Stock Exchange that develops and markets therapeutic products. During a new drug approval process, various communications were exchanged between Thera and the Food and Drug Administration in the United States. On the basis of one of those communications, credit rating corporations expressed concern that the new drug would increase the risk of diabetes, which led to a temporary drop in Thera’s stock price. 121851 Canada Inc. (the “Shareholder”) then decided to sell its Thera shares and incurred a significant loss.

Alleging that Thera, as a reporting issuer under the Securities Act, had failed to disclose a “material event”, the Shareholder instituted a class action against Thera, claiming that it had breached its continuing disclosure obligations.

Thera’s new drug was eventually approved by the relevant authorities and marketed.

The debate before the Superior Court

Initially, the Shareholder sought only the authorization to institute a class action pursuant to Articles 1002 and following of the CCP. Thera then presented a motion to dismiss, claiming that the Shareholder had not sought or been granted prior authorization pursuant to s. 225.4 of the Securities Act, which is an essential condition for instituting an action in damages under that statute.

The motion for authorization to institute a class action was then amended to request such authorization. Consequently, the Shareholder sought in first instance both authorization to institute an action in damages under the Securities Act and authorization to institute a class action under the CCP.

In one judgment, Justice Marc-André Blanchard decided the two requests and authorized both the action in damages under the Securities Act and the class action2. Justice Blanchard concluded that there was a “reasonable possibility that [the action in damages] will be resolved in favour of the plaintiff” pursuant to s. 225.4 of the Securities Act, and that the four criteria for authorization to institute a class action pursuant to Article 1003 CCP had been met.

Leave to appeal

In March 2012, Thera sought leave to appeal the judgment of the Superior Court. Thera specified that it was seeking leave to appeal solely with respect to the first aspect of Justice Blanchard’s decision, i.e. the authorization to institute an action in damages pursuant to s. 225.4 of the Securities Act.

Justice Morissette of the Court of Appeal, presiding as Motions Judge, noted the interesting and novel issues raised by the proposed appeal and referred the motion for leave to a panel of the Court of Appeal.3

The Court of Appeal thus had to decide upon both the existence of the right to appeal and the grounds for the motion for leave to appeal, as well as upon the grounds for appeal.

Decision of the Court of Appeal

The decision of the Court of Appeal, rendered by Justice Clément Gascon, is structured around two distinct themes: the existence of the right to appeal and the grounds for the appeal.

The existence of the right to appeal

Thera acknowledged that, in virtue of Article 1010 CCP, it did not have the right to appeal the decision authorizing the institution of the class action.[4] Thera’s submissions were thus limited to the decision authorizing the action in damages pursuant to the Securities Act.

After analyzing the new regime created by s. 225 and following of the Securities Act, the Court noted that the mechanisms for authorization to institute a class action and for authorization to institute an action in damages under the Securities Act are distinct and have different purposes. The first seeks to eliminate opportunistic claims not made in good faith and where there is no reasonable evidence of the alleged failure to perform an obligation, whereas the second aims to ensure the quality of the proposed legal syllogism by way of a burden of “demonstration” rather than a burden of “proof”.

[OUR TRANSLATION]

It follows that, in terms of its purpose, the authorization mechanism provided for in s. 225.4 of the Securities Act is different from that for a class action under the Code of Civil Procedure.

In the absence of any provision in the Securities Act specifying that a decision authorizing an action in damages is final and without appeal, and contrary to the applicable regime under Article 1010 CCP prohibiting any appeal from a judgment on a motion for authorization to institute a class action, the Court stated that an appeal from a decision rendered pursuant to the Securities Act is subject to the rules applicable to appeals from interlocutory judgments under Articles 29 and 511 CCP. The Court also stated that such an approach is consistent with the law in effect in the other Canadian provinces.

Consequently, the decision authorizing an action in damages pursuant to the Securities Act, even if it is coupled with a decision authorizing the institution of a class action, is appealable provided that the criteria of Articles 29 and 511 CCP are met. In light of the regime created by the Securities Act, the Court’s previous decisions regarding the absence of a right to appeal in class action matters do not apply, nor do those regarding interlocutory judgments rendered before the judgment authorizing a class action.

[OUR TRANSLATION]

[E]ven though the judgment is not appealable insofar as the authorization of the class action is concerned, solutions exist. … [I] n its specific context, the judgment authorizing an action in damages under s. 225.4 of the Securities Act is an interlocutory judgment that orders the doing of something that could not remedied by the final judgment.

In the circumstances of this case, the Court of Appeal concluded that the question raised by the appeal was novel and that the legal system would benefit from knowing the Court’s answer to it. The Court also decided that the Superior Court judgment ordered the doing of something that could not be remedied by the final judgment.

Consequently, Thera’s application for leave to appeal was granted. The Court of Appeal specified however that any application for leave to appeal a judgment rendered pursuant to s. 225.4 of the Securities Act will not necessarily satisfy the applicable test, each case having to be decided on its own facts.

The grounds for appeal

Regarding the grounds for appeal, Thera raised errors in the judge’s assessment of the evidentiary burden applicable to the authorization of an action in damages pursuant to s. 225.4 of the Securities Act, and in his assessment of whether the criteria under that provision had been met.

In regards to the applicable burden, the Court of Appeal stated that there is no connection between the criteria of Article 1003 CCP and those of s. 225.4 of the Securities Act, as the latter’s framework is more rigorous than the one relative to the authorization of a class action.

[OUR TRANSLATION]

This filtering mechanism is therefore not intended to exclude only seemingly frivolous or unfounded cases. It also seeks to exclude proposed cases that ultimately have no reasonable chance of success.

Nevertheless, the mechanism for the authorization of an action in damages pursuant to the Securities Act does not require an analysis as extensive as that to be made by the judge deciding on the merits of the action. The Petitioner must demonstrate being of good faith and must establish a “reasonable possibility” that the litigation will be resolved in its favour, following a summary assessment of the claimed right of action. In order to succeed, a Petitioner must adduce at least a modicum of evidence, which will vary depending on the circumstances of the case. Furthermore, this burden will not be affected should the action under the Securities Act be instituted as a proposed class action.

Regarding the application of these criteria, the Court of Appeal concluded that the Superior Court did not commit any error and correctly applied the statutory conditions. The Court also stated that the judge of first instance did not have to immediately and definitely decide the matters under dispute.

The Court of Appeal thus concluded that the Superior Court did not err in granting authorization to institute the action. Therefore, even though leave to appeal was granted, Thera’s appeal was dismissed.

Conclusion

In addition to the conclusions it reaches regarding the application of the authorization regime under the Securities Act, this decision of the Court of Appeal is also highly relevant with respect to the outcome of motions for leave to appeal a decision that is incidental or parallel to that on a motion for authorization to institute a class action.

The Theratechnologies case is consistent with the developing case law of the Court of Appeal to the effect that decisions rendered outside of the procedural framework of a class action and which do not decide the Petitioner’s right to institute such an action may, depending on the circumstances, not be subject to Article 1010 CCP and be appealable in accordance with the usual rules.


1 R.S.Q. c. V-1.1.
2 2012 QCCS 699.
3 According to article 509 C.C.P., 2012 QCCA 1489.
4 For a more extensive analysis of the right to appeal in class action cases, see: Chantal Chatelain and Vincent de l’Étoile, Recours collectif: Géométrie du droit d’appel, Colloque national sur les recours collectifs, Développements récents au Québec, au Canada et aux États-Unis, Service de la formation continue, Barreau du Québec, Volume 362, 2013, p. 109.