The Court of Appeal Limits the Disclosure of Documents Prior to the Authorization of a Class Action Instituted Under the Securities Act
On January 29th, in the course of interlocutory proceedings in connection with a class action filed against Amaya for making false or misleading statements on the secondary market, contrary to Quebec’s Securities Act (the “Act”)1, the Court of Appeal ruled on a request for disclosure of documents prior to the authorization (certification) of the class action2.
The Court of Appeal granted Amaya’s motion for leave to appeal and upheld the Superior Court’s decision, but solely as regards the order therein to disclose insurance policies, and it dismissed the applicant’s requests for disclosure of all other documents.
Recap of the Superior Court’s decision3
In February 2017, the Superior Court granted the applicants’ motion seeking disclosure of certain documents before the hearing on authorization of the class action, including Amaya’s “Disclosure, Confidentiality and Trading Policy” and its directors’ and officers’ liability insurance policies.
In its reasons for judgment, the Superior Court set out a three-step test for the disclosure of evidence at the pre-authorization stage. The purpose of the test was to create a framework for pre-authorization disclosure in order to avoid “fishing expeditions” and limit the scope of disclosure to what was truly necessary. After applying the test, the Court found that the applicants’ motion respected not only the requirements of cooperation and openness under Article 20 of the Code of Civil Procedure (the “CCP”) but also the considerations of practicality and fairness that are essential for the proper, efficient and cost-effective administration of justice.
This decision of the Superior Court changed the well-established rule in the case law regarding disclosure of evidence prior to the authorization of a class action. Hitherto, there had been no disclosure whatsoever at that stage of the proceedings. It was therefore up to those seeking authorization to conduct an investigation in order to gather sufficient facts and information to meet the authorization criteria.
Following this decision, the applicants in a class action were provided with additional procedural means at their disposal to bolster their file with information and documents that they could now obtain from the respondent through a disclosure order.
The Court of Appeal’s decision: a return to the established rule
On August 29th, 2017 Amaya moved for leave to appeal the Superior Court’s judgment ordering disclosure of documents prior to the authorization of the class action instituted against it. On January 29th, 2018, the Court of Appeal rendered its decision, in which it essentially disposed of three issues:
1) the application for leave to appeal;
2) the request for disclosure of documents prior to authorization of the class action, and
3) the request for disclosure of Amaya’s directors’ and officers’ liability insurance policies.
First of all, regarding the motion for leave to appeal the Superior Court judgment, it is interesting to note that the judgment is covered by the second paragraph of Article 31 CCP as it “determines part of the dispute or causes irremediable injury to a party”. The Court of Appeal pointed out that it is not a decision on case management measures relating to the conduct of the proceeding, as contemplated by Article 32 CCP. In light of the principles laid down in Theratechnologies and the potential for irreparable harm to Amaya as a result of the Superior Court’s decision, the Court of Appeal granted leave to appeal.
The Court then went on to determine whether it was appropriate to compel disclosure of documents prior to the authorization of a class action. In this instance, the appeal dealt with the disclosure of documents prior to the authorization contemplated by section 225.4 of the Act:
225.4. L’action en dommages-intérêts intentée en vertu de la présente section doit être préalablement autorisée par le tribunal.
La demande d’autorisation énonce les faits qui y donnent ouverture. Elle doit être accompagnée du projet de demande introductive d’instance et être signifiée par huissier aux parties visées, avec un avis d’au moins 10 jours de la date de sa présentation.
Le tribunal accorde l’autorisation s’il estime que l’action est intentée de bonne foi et qu’il existe une possibilité raisonnable que le demandeur ait gain de cause.
225.4. No action for damages may be brought under this division without the prior authorization of the court.
The request for authorization must state the facts giving rise to the action. It must be filed together with the projected statement of claim and be served by bailiff to the parties concerned, with a notice of at least 10 days of the date of presentation.
The court 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.
Following a detailed analysis of the provisions of the CCP and the case law, including the principles laid down in Theratechnologies, the Court of Appeal concluded that section 225.4 of the Act does not open the door to the disclosure of documents prior to the authorization of the class action. The purpose of the section, the Court found, is to protect issuers and non-plaintiff shareholders from frivolous lawsuits, rather than to allow applicants to bolster their file before the class action has even been authorized.
Some of the Court’s comments are particularly interesting in this regard:
 The screening mechanism in section 225.4 is indeed designed, above all things, to protect public issuers against frivolous lawsuits brought by investors who have no meaningful evidence to show that they have been the victims of misconduct in the secondary market. It also serves to protect long-term shareholders of the issuer who, not party to the unmeritorious action, would bear the cost of any settlement paid to opportunistic plaintiffs. The screening mechanism thus contributes to protect the public confidence in the capital markets by ensuring that investors will not be held hostage to frivolous litigation. Finally, section 225.4 of the Act helps courts avoid costs and wasted time of frivolous or unmeritorious litigation. In that sense, it shares some of the policy foundation of rules that allow actions to be dismissed summarily as improper proceedings.
 None of the provisions cited, alone or grouped with the others, justifies allowing discovery in a manner that would amount to a change in the policy underlying section 225.4 of the Act. Importantly, it is not “unfair” to require a plaintiff-shareholder to show, according to the terms of the screening mechanism, that his or her proposed action is not a strike suit given the policy behind that rule to protect issuers, innocent shareholders, the markets and the courts. On the other hand, it would potentially be unfair to the issuer and to innocent shareholders, as well as to the justice system, to subject the parties to a “mini-trial” that might result if discovery was allowed. When section 225.4, paragraph 3, refers to the requirement that the putative plaintiff show “a reasonable possibility that it [i.e. the proposed action in the annexed projected statement of claim] will be resolved in favour of the plaintiff”, the legislature refers to a reasonable possibility of that outcome at a trial down the road, one at which, where appropriate, discovery can be sought. At this stage, however, the evidentiary bar is lower than at trial – just some credible evidence to support the view that the suit is not destined to fail.
Finally, notwithstanding the foregoing, the Court of Appeal upheld the Superior Court’s decision regarding the requested disclosure of Amaya’s directors’ and officers’ liability insurance policies, , , partly in light of the wording of Article 20 CCP, but primarily because of Article 2501 of the Civil Code of Québec:
2501. Le tiers lésé peut faire valoir son droit d’action contre l’assuré ou l’assureur ou contre l’un et l’autre.
Le choix fait par le tiers lésé à cet égard n’emporte pas renonciation à ses autres recours.
2501. An injured third person may bring an action directly against the insured or against the insurer, or against both.
The option chosen in that regard by the injured third person does not deprive him of his other recourses.
According to the Court of Appeal, Article 2501 CCQ allows a third party to sue either an insured or its insurer, or both. It would therefore be illogical to allow a suit by a third party against an insured, but deny it access to the latter’s insurance policy, as that document is relevant to the debate. The Court also took the view that section 225.4 of the Act does not apply with respect to Amaya’s insurance policies, in light of the principles set forth in Article 2501 CCQ.
This recent decision of the Court of Appeal restores the balance between the parties in the context of a motion to institute a class action in a securities-related matter, specifically one pursuant to section 225.4 of the Act. The principles set out in this decision provide useful guidance regarding the protective regime section 225.4 creates for the benefit of issuers and non-plaintiff shareholders. Finally, it should be noted that this decision recognizes the distinction between the motion for authorization of a class action and the jurisprudential test established in Theratechnologies, thereby affording additional protection to reporting issuers.