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Test for Leave to bring Secondary Market Securities Class Action is not a “Low Bar”

The recent decision in Bradley v. Eastern Platinum Ltd.[1] saw the Superior Court of Justice reaffirm the position that the test for statutory leave to bring a secondary market securities class action “is not a low bar.”[2] Justice Rady, citing the decisions of the Supreme Court of Canada in CIBC v. Green[3], and Theratechnologies[4], refused to grant leave as the claim brought by the plaintiff had no reasonable chance of success at trial. A plaintiff must put forth “both a plausible analysis of the applicable legislative provisions, and credible evidence in support of the claim”[5]; this proved to be an impossibility for the plaintiff, given the evidence led by the defendant.

Where the facts are contentious, as was the case here, the amount and quality of material submitted by the parties will be determinative of whether the motion will fail or succeed. It seems that such situations provide a real opportunity for a defendant to stop a class action before it begins, given that the burden on the plaintiff is substantial.


The proposed class action was brought by Mr. Bradley, a pastry chef from British Columbia and the holder of 2000 shares in Eastern Platinum Ltd. (“Eastplats”). Eastplats, a Vancouver based platinum mining company, at the time operated only one mine: Crocodile River Mine (“CRM”). The mine was located in South Africa and the shares of Eastplats were listed on the Toronto Stock Exchange (“TSX”), the Johannesburg Stock Exchange and the London Stock Exchange’s AIM exchange.

In April 2011, Eastplats issued a news release indicating that production for Q1 of that year had been lower than forecasted. The reasons given for the poor Q1 performance were:

“The traditional slow start in January combined with the introduction of revised support methods [emphasis added] resulted in a significant decrease in production for the quarter.”

At the close of the next trading day following the release of this information, Eastplats’ stock price fell sharply on the TSX from $1.30 to $1.10. The plaintiff sought leave to commence an action under the secondary market provisions in Part XXIII.1 of the Ontario Securities Act (“OSA”).[6] Mr. Bradley alleged that Eastplats failed to disclose: (i) a complete or partial shutdown of operations due to a labour dispute, and (ii) the installation of cement grout packs to shore up CRM’s ceiling. The plaintiff claimed that together, these two issues caused the decrease in production and that both were material changes that should have been disclosed. As such, Eastplats’ share price was artificially inflated, thereby causing damage to shareholders who invested during the class period.

As noted, the facts were contentious, and much was made of the particular support structures used to shore up CRM. The plaintiff contended that Eastplats installed cement grout packs ahead of a planned schedule, which caused the redistribution of manpower and a significant decrease in productivity. The defendants however, claimed that while a new support structure was installed, it was not a cement grout pack system and had no significant impact on productivity.

The Motion:

The test to obtain leave under Part XXIII.1 of the OSA is twofold: the plaintiff must show that the action is brought in good faith and that the action has a reasonable prospect of success. The plaintiff contended he met these requirements by leading sufficient evidence to meet what he described as “the low reasonable possibility of success at trial standard”[7] and that the application was brought in good faith.

Justice Rady began her analysis by noting that the purpose of the leave provisions under the OSA is to weed out wholly unmeritorious claims or those brought by coercive design. Such claims are brought in the hope that a defendant will be bullied into a quick settlement, rather than engage in protracted and expensive litigation.

The Court then noted that, while not required to do so, the defendants filed voluminous evidence to refute the plaintiff’s claims. Following the decisions in Green [8]and Theratechnologies[9] the Court stated that a “robust, meaningful examination and critical evaluation of the evidence,”[10] was required in assessing whether leave should be granted, and that the test is “not a low bar as the applicant [had] asserted.”[11]

Upon examination, Justice Rady found that the body of contradictory evidence simply overwhelmed the plaintiff’s position. In light of this, the Court could not find the plaintiff’s claim to have a plausible prospect for success at trial and so dismissed the application.


The Superior Court noted that applications brought under these provisions are now commonly brought with voluminous amounts of evidence, produced by either or both the plaintiff and defendant. A defendant may be well advised to meet an application with compelling evidence, especially in instances where the facts are disputed. Such preparation will now see a defendant in a real position of succeeding in ending a class action early. Similarly, the interpretation of Green and Theratechnologies, has resulted in the leave provisions under the OSA becoming a real burden for a plaintiff to discharge. A plaintiff should truly examine the foundations of their claim before moving under these provisions; real scrutiny at an early stage may save much time and money. In some ways, these leave applications seem to be approaching the summary judgment test, which is an interesting but perhaps not unwelcome development.

[1] 2016 ONSC 1903
[2] Ibid per Justice Rady at para 51
[3] 2015 CarswellOnt 18336
[4] Theratechnologies inc. v. 121851 Canada inc., 2015 CarswellQue 2765
[5] Ibid at para 39.
[6] R.S.O. 1990, c. S.5.
[7] Supra note 1, at para 5
[8] Supra note 3
[9] Supra note 4
[10] Supra note 1 at para 51
[11] Ibid
Test for Leave to bring Secondary Market Securities Class Action is not a “Low Bar”

Supreme Court of Canada considers Limitation Period for Secondary Market Securities Class Actions


On December 4, 2015, the Supreme Court of Canada released its highly anticipated decision1 in a trilogy of shareholder class actions under the secondary market liability provisions of the Ontario Securities Act2 (the “OSA”). At issue was whether section 28 of the Class Proceedings Act, 19923 (the “CPA”) operates to suspend the limitation period applicable to a claim under section 138.3 of the OSA at the time when a plaintiff files a statement of claim or motion for leave under section 138.8 of the OSA, or whether the limitation period is suspended only once leave has in fact been granted.

A majority of the Supreme Court restored the Court of Appeal for Ontario’s previous decision in Sharma v. Timminco4 (“Timminco”) that a plaintiff must obtain leave from the court to proceed with the statutory claim within the three-year limitation period under section 138.14 of the OSA and that it was not sufficient to simply issue a statement of claim alleging that the defendants were liable under the OSA. The Court also considered the application of nunc pro tunc orders to retroactively permit otherwise time-barred actions to proceed. In doing so, the Court rejected a bright-line test for the application of limitation periods in secondary market class actions in favour of leaving motion judges with a residual discretion to permit otherwise time-barred claims to proceed.

Procedural Background

In IMAX Corp. et al. v. Silver and Cohen (“IMAX”), the Superior Court of Justice had already granted leave before the decision in Timminco was released. However, after the release of Timminco, the defendants applied for summary judgment to dismiss the proceeding as time-barred. Justice van Rensburg dismissed the motion and granted leave nunc pro tunc as the expiry of the limitation period occurred while the case was under reserve by the court.

In Celestica Inc. et al. v. Trustees of the Millwright Regional Council of Ontario Pension Trust Fund et al. (“Celestica”), the Ontario litigation was held in abeyance as a parallel proceeding made its way through the courts in the United States. The plaintiffs filed a notice of motion to seek leave after Timminco was released. The Superior Court of Justice applied the doctrine of special circumstances and refused to strike the claim as statute-barred. Justice Perell determined that leave could be granted nunc pro tunc if the plaintiffs satisfied the test for leave.

In Canadian Imperial Bank of Commerce et al. v. Green and Bell (“CIBC”), the Superior Court of Justice would have granted the application for certification under the CPA and leave to proceed under the OSA. However, on the penultimate day of the motion, the Court of Appeal released its decision in Timminco. Consequently, Justice Strathy dismissed the leave application and the statutory action as time-barred by the three-year limitation period.

On appeal, a five-member panel of the Court of Appeal determined that its previous decision in Timminco was incorrect and had unintended consequences as it deprived class members of an important benefit of the class action regime; that is, the suspension of the limitation period under section 28 of the CPA. In addition, the Court of Appeal held that it undercut the ability of investors to initiate class actions in compliance with the limitation period. The Court of Appeal therefore overruled Timminco and held that a plaintiff had three years from the date a misrepresentation was made to commence a secondary market misrepresentation claim (as opposed to three years to both commence a claim and obtain leave to pursue it).

Notably, after the Court of Appeal’s decision in CIBC, the OSA was amended to provide that the three-year limitation period is suspended on the date a notice of motion for leave to commence the action is filed with the court.5 A similar provision is found in the securities acts of Alberta, Manitoba, and New Brunswick.6 However, the Supreme Court’s decision is applicable in those provinces that have not yet amended their securities legislation in the same manner as Ontario.


The Supreme Court delivered a complex and split decision based on competing interpretations of the interaction between Part XXIII.1 of the OSA and section 28 of the CPA. A majority, comprised of McLachlin C.J., and Rothstein, Cromwell, and Côté JJ., held that section 28 of the CPA does not operate to suspend the limitation period for secondary market liability claims under section 138.3 of the OSA, as it then stood, until leave to proceed with such claims is granted by the court.7

The same majority also held that an order granting leave to proceed with an action can be made nunc pro tunc, where leave is sought before the expiry of a limitation period:

The courts have identified the following non-exhaustive factors in determining whether to exercise their inherent jurisdiction to grant such an order: (1) the opposing party will not be prejudiced by the order; (2) the order would have been granted had it been sought at the appropriate time, such that the timing of the order is merely an irregularity; (3) the irregularity is not intentional; (4) the order will effectively achieve the relief sought or cure the irregularity; (5) the delay has been caused by an act of the court; and (6) the order would facilitate access to justice.8

The dissenting view, adopted by Moldaver, Karakatsanis, and Gascon JJ., would have affirmed the Court of Appeal’s decision in CIBC overruling Timminco and that section 28 of the CPA will suspend the limitation period once the plaintiff commences a class action and pleads the statutory claim for misrepresentation based on section 138.3 of the OSA and the facts supporting the claim.9 In that context, the dissenting justices decided that none of the class actions were statute-barred.

However, while Côté J., writing on behalf of McLachlin C.J. and Rothstein J., declined to grant leave nunc pro tunc, in a separate decision, Cromwell J. would have exercised his discretion to grant an order nunc pro tunc for leave to proceed with the action based on the following analysis.

First, the plaintiffs had been diligent in advancing their action. There was no doubt that the plaintiffs intended to seek leave and that significant time and effort was invested in the development of their case.10

Second, neither the plaintiffs, nor the defendants considered the prospect that the cause of action under section 138.3 of OSA would be statute-barred if the certification and leave motion did not occur and leave was not granted before expiry of the three-year limitation period. It was only until the Court of Appeal’s decision in Timminco that the parties faced the prospect that the plaintiffs’ claim was irremediably statute-barred.11

Third, extending the limitation period in this particular case would not undermine the purpose of limitation periods. To the contrary, according to Cromwell J., “[h]olding that the plaintiffs’ claim is irremediably statute-barred is to defeat that claim by allowing the defendants to take advantage of an after-the-fact ‘gotcha’— a technical defence, the application of which in this case does not further either the purpose of the limitation defence or reinforce public confidence in the administration of justice.”12

Fourth, the court has an obligation to protect unrepresented putative class action members. Indeed, until Timminco, it was reasonable for these class members to assume that their action was sheltered.13

Finally, the plaintiffs’ statutory claim had a reasonable chance of success and should therefore be resolved on its merits rather than as a result of the expiry of a limitation period.14

In the result, the statutory claim in CIBC was permitted to proceed.


In the IMAX case, a majority of the Supreme Court was of the view that the statutory action was time-barred. However, Côté J., writing on behalf of McLachlin C.J. and Rothstein J., would grant leave nunc pro tunc in favour of the plaintiffs who were parties to the original claim because the parties agreed to suspend the limitation period while the leave application was under reserve. They would not grant leave in favour of the plaintiffs who were not plaintiffs at the time when argument on the leave application concluded. In their view, granting relief to the plaintiffs against those defendants in this context would undermine the strict limitation period set out in section 138.14 of the OSA.15

Yet, Cromwell J., in a separate decision, was of a different view and exercised his discretion to grant an order nunc pro tunc in favour of all plaintiffs on the basis that the law in Ontario is currently unsettled with respect to whether parties can be added to an existing cause of action after the limitation period has expired in cases where the limitation period is contained “under another Act” (that is, not in the Limitations Act, 2002).16 Cromwell J. indicated that recent commentary takes the view that discretionary jurisdiction may apply to other limitation periods contained in different legislation, such as the OSA in this case (citing Dentons’ lawyers, Christina Porretta and Rahim Punjani’s “The Clock Strikes: A Review of the Limitations Act, 2002, A Decade Later” (2015), 44 Adv. Q. 346 at 375 for this proposition).

In the result, the statutory claim in IMAX was permitted to proceed.


In the Celestica case, a majority of the Supreme Court, consisting of McLachlin C.J. and Rothstein, Cromwell, and Côté JJ., held that the statutory action was time-barred and would deny the nunc pro tunc order on the basis that no motion for leave was filed before the expiry of the limitation period.17

Thus, of the cases decided by the Supreme Court, only the Celestica case was held to be time-barred and prohibited from proceeding.


The Supreme Court determined by a narrow margin that section 28 of the CPA does not operate to suspend the three-year limitation period that applies to the statutory cause of action under section 138.3 of the OSA when an intention to seek leave is pleaded in a class action for common law misrepresentation. Therefore, under the OSA, as it then was, a representative plaintiff had three years to both commence a claim and obtain leave of the court to pursue it.

While the Supreme Court restored the Court of Appeal’s initial strict interpretation in Timminco, it also produced a mix of views on the court’s inherent jurisdiction to grant orders nunc pro tunc and ameliorate the harsh consequences of statutory limitation periods in class action proceedings. This is perhaps the most significant implication of the majority of the Supreme Court’s decision and lower courts will be faced with the challenge of refining the boundaries of the court’s power to effectively back-date an order or judgment.

On a final note, while the trilogy of decisions dealt largely with limitation periods, the Supreme Court also confirmed its previous articulation of the test for leave to proceed with secondary market securities class actions in Theratechnologies Inc. v. 121851 Canada Inc.18 The Supreme Court further affirmed the Court of Appeal’s decision in CIBC that although a class action would not be the preferable procedure to resolve a reliance-based claim in common law negligent misrepresentation, certain issues related to the intent and conduct of the defendant should be certified as common issues in order to advance the litigation.
1 Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60 [CIBC].
2 Securities Act, RSO 1990, c s.5.
3 Class Proceedings Act, 1992, SO 1992, c 6.
4 Sharma v. Timminco, 2012 ONCA 107, leave to appeal to SCC refused, [2012] SCCA no. 157.
5 See OSA, supra note 2, s 138.14(2).
6 Securities Act, RSA 2000, c S-4, s 211.095(2); The Securities Act, CCSM, c S50, s 197(2); and Securities Act, SNB 2004, c S-5.5, s 161.9.
7 CIBC, supra note 1 at para. 53.
8 Ibid at paras. 90 and 130.
9 Ibid at para. 162.
10 Ibid at para. 136.
11 Ibid at paras. 137-139.
12 Ibid at para. 141.
13 Ibid at paras. 142-143.
14 Ibid at para. 144.
15 Ibid at para. 106.
16 Ibid at paras. 151-152.
17 Ibid at para. 111.
18 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18.

Supreme Court of Canada considers Limitation Period for Secondary Market Securities Class Actions

Procedural Fairness Owed to Defendants May Redefine how Plaintiffs Proceed under the OSA


The Court of Appeal in Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v. SNC-Lavalin Group Inc.[1] recently determined whether, once leave to assert a claim under part XXIII.1 of the Ontario Securities Act (the “OSA”)[2] has been granted, plaintiffs may later move to amend their claim under Rule 26.01 of the Rules of Civil Procedure without also obtaining leave under the OSA. The Court’s response was twofold: if the amendment is substantive and essentially involves a new misrepresentation, then the requirement of subsection 138.8(1) of the OSA must be satisfied, but if the amendments are not substantive, then only the requirements of Rule 26.01 apply.


The plaintiffs commenced an action against SNC-Lavalin Group Inc. (“SNC”) in 2012 after public allegations against the company resulted in a corrective decline in the price of SNC’s shares. The plaintiffs obtained an order certifying the proceeding as a class action and sought leave (without opposition by SNC) to commence an action under Part XXIII.1 of the OSA, which governs actions for damages related to misrepresentation and imposes a limitation period to commence an action.[3] The plaintiffs’ original claim included the following allegations:

  • that SNC misrepresented certain agreements that resulted in a USD$56 million profit for SNC; and
  • that SNC misrepresented certain conduct of two former employees related to SNC’s presence in Bangladesh.

Over the course of the next two years, as ongoing criminal and regulatory investigations resulted in further allegations against SNC, the plaintiffs made multiple amendments to their Statement of Claim. SNC opposed the last round of these amendments on the basis that they required fresh leave under subsection 138.1(1) of the OSA, which ought to be refused because the amendments were statute barred by operation of the limitation period set out in subsection 138.14(1).

In January 2015, the Ontario Superior Court dismissed the plaintiffs’ motion to amend on the basis that to decide otherwise would result in procedural unfairness to the defendants. In his decision, Justice Perell observed that “[o]btaining leave cannot be used as a procedural bait-and-switch tactic or as a procedural bait-and-pile-on tactic,”[4] spurring legal commentators to query about the future impact of this decision on class actions.

The appeal was allowed in part. The Court of Appeal held that certain of the proposed amendments related to misrepresentations that had not been previously pleaded and as such, had become statute barred. The non-substantive amendments were allowed to proceed.


While it is too early to predict the effect of this decision on other actions brought under the OSA, the Court’s careful weighing of the purpose and objectives of Part XXIII.1 indicates that courts will be vigilant in ensuring that claims that are out of time are not “piggy-backed” onto existing allegations. This is consistent with the general principle enshrined in Rule 26 that amendments not tenable at law are prohibited.

[1] 2015 ONCA 718, 2015 CarswellOnt [“Drywall Acoustic”].

[2] RSO 1990 c S 5.

[3] Ibid – see s. 138.3(1), which sets out that there is a right of action for damages for a person or company who acquires or disposes of an issuer’s security between a document’s release and public  correction of a misrepresentation in the document, regardless of whether the person or company relied on the misrepresentation; see s. 138.8(1), which requires leave of the Court to commence an action under s. 138.3; and see s. 138.14(1), which establishes a three-year limitation period to commence the action, beginning on the date the document containing the misrepresentation was initially released.

[4] Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v SNC-Lavalin Group Inc., 2015 ONSC 256, 2015 Carswell Ont 195 at para 7.

Procedural Fairness Owed to Defendants May Redefine how Plaintiffs Proceed under the OSA

Ontario Proposes Whistleblower Regime

On October 28, 2015, the Ontario Securities Commission (OSC) published proposed OSC Policy 15-601 – Whistleblower Program (Policy). The proposed Policy provides for the adoption of a whistleblower program by the OSC with the aim to encourage individuals to report information on securities- or derivatives-related misconduct. The whistleblower program is designed to further the OSC’s mandate to protect investors from unfair, improper, or fraudulent practices, and to foster fair and efficient capital markets. If implemented, the whistleblower program would be the first of its kind for securities regulators in Canada.

In developing the proposed Policy, the OSC reviewed written comments received regarding OSC Staff Consultation Paper 15-401: Proposed Framework for an OSC Whistleblower Program, which was released on February 3, 2015 (as discussed in our previous client alert). In addition, the OSC considered the dialogue about the whistleblower program that took place at its June 2015 public roundtable. As a result, the proposed Policy sets out a structured program that includes how information may be submitted to the OSC, whistleblower protections, eligibility and monetary amounts for whistleblower awards.

Who is eligible to be a whistleblower?

Under the proposed Policy, a whistleblower is an individual who voluntarily provides original information relating to a violation of Ontario securities law that has occurred, is ongoing or is about to occur. The proposed Policy expands the list of individuals who are eligible to be whistleblowers. The list of eligible individuals now includes directors and officers, chief compliance officers, in-house legal counsel and culpable whistleblowers provided that there is a reasonable basis to believe that:

a. the subject is engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors;

b. the subject is engaging in conduct that will impede an investigation of the misconduct; or

c. in circumstances where the whistleblower provided the information to the relevant entity’s audit committee, chief legal officer, chief compliance officer or the individual’s supervisor, at least 120 days have elapsed since the whistleblower provided the information.

What type of information would entitle a whistleblower to be eligible for an award?

To be eligible for a whistleblower award, the OSC expects that information will relate to a serious violation of Ontario securities law and will be:

a. original information;

b. information that has been voluntarily submitted;

c. of high quality and contain sufficient timely, specific and credible facts; and

d. of meaningful assistance in investigating the matter

How will whistleblower awards function?

For a whistleblower to receive a monetary award, the OSC requires an individual to report information and misconduct that results in administrative proceedings or a settlement under section 127 of the Ontario Securities Act or section 60 of the Commodity Futures Act. Upon final resolution of a matter, the OSC would offer an eligible whistleblower a monetary award between 5-15 percent of the total monetary sanctions imposed in a hearing or settlement where total sanctions or voluntary payments exceed CA$1 million. If the total sanctions imposed or voluntary payment is equal to or greater than CA$10 million, the award would be capped at a maximum amount of CA$1.5 million. However, if the monetary sanctions imposed or voluntary payment is equal to or greater than CA$10 million, and the OSC in fact collects an amount equal to or greater than CA$10 million in respect of the proceeding, the whistleblower may be awarded up to a maximum of CA$5 million.

The determination of an award under the proposed whistleblower program is discretionary and requires the OSC to analyze the established criteria provided by the proposed Policy. Some factors that may increase the amount of an award to a whistleblower are:

a. the timeliness of the whistleblower’s initial report;

b. whether the whistleblower’s assistance saved time in the investigation;

c. the whistleblower’s efforts to remedy the harm caused by the violations of Ontario securities law; and

d. any unique hardship the whistleblower experienced as a result of the report.

Other factors that may decrease the amount of a whistleblower award are:

a.the whistleblower refused to provide additional information or assistance to the OSC when requested;

b.whether the whistleblower unreasonably delayed reporting the violations; and

c.the degree to which the whistleblower was culpable or involved in the violations.


The whistleblower program is expected to increase the OSC’s effectiveness in gaining high quality information in enforcing matters such as insider trading, accounting, disclosure violations and registrant misconduct. Further, the whistleblower program is expected to encourage companies to self-report misconduct to the OSC.

To avoid investigations by the OSC and potential monetary sanctions, it is imperative that companies implement appropriate procedures and conduct scrupulous oversight to ensure compliance with Ontario securities legislation.


The OSC is inviting feedback and written comments on the proposed Policy until January 12, 2016.

The OSC’s aim is to have a whistleblower project established in the spring of 2016.

For more information about the proposed Policy, please contact Jason A. Saltzman, Michael Schafler or Matthew Fleming at Dentons.

This article was co-authored by Tom Budziakowski an articling student in Dentons’ Toronto office.

Ontario Proposes Whistleblower Regime

Theratechnologies inc. v. 12185 Canada inc: Supreme Court of Canada raises the bar for obtaining leave to bring secondary market securities class actions

In Theratechnologies inc. v. 12185 Canada inc.[1], the Supreme Court of Canada has ruled that requirements that plaintiffs demonstrate that their claims have been brought in good faith and have a reasonable chance of succeeding are no mere “speed bump” on the way to obtaining judicial authorization to bring an action against reporting issuers, directors and officers, or experts for damages resulting from the purchase or sale of securities in the secondary market.

Justice Abella, writing for a unanimous Supreme Court, allowed the defendant reporting issuer’s appeal and concluded that the plaintiff investor was not authorized to proceed with an action for damages suffered as a result of the defendant’s alleged failure to disclose material changes.

The decision directs courts in all Canadian provinces to more rigorously apply securities law requirements that oblige plaintiffs to obtain judicial authorization before proceeding with secondary market securities class actions. Plaintiffs, in the wake of Theratechnologies, must adduce sufficient evidence to demonstrate a reasonable chance of success, lest their claim be denied at the outset.

The Facts

In 2010, Theratechnologies Inc. (“Thera”), a pharmaceutical research and development company based in Montreal and listed on the Toronto Stock Exchange, was awaiting FDA approval for an HIV drug then under development.

The FDA posed various questions about the proposed drug to an expert advisory committee. These questions were posted to a public FDA website and Thera elected not to make any related disclosure to investors. Subsequently, third party stock quotation companies issued press releases stating that use of Thera’s drug could cause unwanted side effects. The market reacted negatively to these reports and the plaintiff, 121851 Canada Inc. (“121851”), sold its shares and suffered a loss.

121851 took the position that the FDA’s questions represented a material change requiring disclosure pursuant to section 73 of Quebec’s Securities Act[2]. As is the case in every province, 121851 needed judicial authorization before bringing an action against Thera. The relevant test under section 225.4 of Quebec’s Securities Act is two-fold and is mirrored in the securities legislation of all other provinces: a court must be satisfied that any given secondary market claim (1) is brought in good faith, and (2) has a reasonable possibility of being resolved in favour of the plaintiff.

Both the motion judge, at first instance, and Quebec Court of Appeal held that there was sufficient evidence to conclude that the plaintiff’s claim had a reasonable chance of success. The Supreme Court, however, disagreed.

The Supreme Court’s Approach and Decision

The issue before the Supreme Court was whether 121851’s claim had a “reasonable possibility” of succeeding within the meaning of section 225.4 of Quebec’s Securities Act. In a unanimous decision, the Supreme Court allowed Thera’s appeal and held that an action should not be authorized.

The Supreme Court clarified that, in order to establish that it has a realistic chance of success, a claimant must offer “some credible evidence in support of its claim”[3]. A full analysis of the evidence is not required. Instead, a plaintiff must adduce “sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant’s favour.”[4]

Applying these principles, the Supreme Court focussed on whether Thera failed to disclose a “material change” within the meaning of section 5.3 of Quebec’s Securities Act[5]. The court held that there was no evidence suggesting that Thera, by electing not to disclose the FDA’s questions, had failed to make any required disclosure. Specifically, the information Thera elected not to disclose did not contain any new information about the drug or its side effects; in fact, there was no evidence to suggest that the FDA’s questions departed in any way from its routine drug approval procedure[6]. Because the evidence did not credibly suggest that there was a material change requiring disclosure under Quebec’s securities laws, the Supreme Court held that there was no reasonable possibility of success and, accordingly, 121851’s action was not authorized.

Outcome and Impact

The securities legislation in all Canadian provinces contain threshold requirements analogous to section 225.4 of Quebec’s Securities Act: a claimant must establish that their action is brought in good faith and has a reasonable chance of succeeding[7]. Accordingly, Theratechnologies will have a far-reaching impact and, given the Supreme Court’s decision, will likely result in courts approaching provincial “reasonable chance for success” requirements with increased analytical rigour. The message to plaintiff’s counsel is clear: evidence showing the fundamental merits of a claim must be adduced before a court will authorize an action for damages in secondary market securities disputes.

The Supreme Court provides general guidance only, however, as to what evidence will establish that a given claim has a reasonable chance of succeeding. Although the authorization stage for secondary market liability actions “should not be treated as a ‘mini-trial’”[8], plaintiff’s counsel should view Theratechnologies as a call for increased evidentiary diligence. According to the court, “a case with a reasonable possibility of success requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.”[9] Only time, and subsequent consideration and application by lower courts, will determine exactly how provincial authorization threshold requirements have been impacted by Theratechnologies.

[1] 2015 SCC 18.
[2] CQLR, c V-1.1.
[3] Theratechnologies, supra note 1 at para 39.
[4] Ibid.
[5] A material change is defined as “a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or a decision to implement such a change made by the directors or by senior management of the issuer who believe that confirmation of the decision by the directors is probable.”
[6] Theratechnologies, supra note 1 at paras 48 and 51.
[7] British Columbia (Securities Act, RSBC 1996 c 418, s 140.8(2)); Alberta (Securities Act, RSA 2000 c S-4, s 211.08(2)); Saskatchewan (Securities Act, 1988, SS 1988-89 c S-42.2, s 136.4(1)); Manitoba(Securities Act, CCSM c S-50, s 191(2)); Ontario (Securities Act, RSO 1990 c S-5, s 138.8(1)); New Brunswick (Securities Act, SNB 2004 c S-5.5, s 161.41(1)); Nova Scotia (Securities Act, RSNS 1989 c 418, s 146H(1)); PEI (Securities Act, RSPEI 1988 c S-3, s 129(2)); Newfoundland and Labrador (Securities Act, RSNL 1990 c S-13, s 138.8(2)).
[8] Theratechnologies, supra note 1 at para 39.
[9] Ibid.

Theratechnologies inc. v. 12185 Canada inc: Supreme Court of Canada raises the bar for obtaining leave to bring secondary market securities class actions

UPDATE: Zungui Class Action Settlements against Remaining Defendants Approved by Court

**This blog post was co-authored by Dentons’ Michael Schafler and Michael Beeforth.

On August 27, 2013, Justice Perell released his decision (2013 ONSC 5490) approving three settlements valued at $10.85 million, bringing the class action against Zungui Haixi Corp. (“Zungui”) and others to a close. Under the approved settlements, Zungui will pay $8.1 million, auditors Ernst & Young (“E&Y”) will pay $2 million and the company’s underwriting syndicate (CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities LP and Mackie Research Capital Corporation) will pay $750,000. In an earlier May 2013 decision, Perell J. had certified the class action for settlement purposes in respect of the Zungui and E&Y settlements.

As summarized here, the proposed class action brought by Zungui’s investors stemmed from an August 22, 2011 announcement that E&Y had suspended its audit of Zungui’s 2011 financial statements. The company’s shares immediately dropped by 77% and were subsequently cease-traded. The proposed class was comprised of various groups of investors (each represented by separate counsel), including purchasers in the initial December 2009 IPO, investors who received shares in exchange for securities of a Zungui subsidiary prior to the IPO, and secondary market purchasers.

The proposed plan of distribution under the settlements allocated various levels of compensation to the investor groups depending on, amongst other factors, when investors acquired or sold their shares. The plan did not, however, contemplate any compensation to class members who acquired shares on or following the August 22, 2011 E&Y disclosure (though the settlements included a release of these class members’ claims). One investor who had purchased his shares on August 22, 2011 objected to the fairness of the plan of distribution on the basis that the August 22, 2011 disclosure “[did] not clearly foreshadow the events that followed” and that “there was no way of knowing that the worst possible outcome would come to pass, with investors unable to trade their shares ever again”.

In considering whether the plan of distribution was fair and reasonable, Perell J. noted that if class members such as the objecting investor had appreciated that the parties had only included them in the class as a bargaining chip and would eventually exclude them from the plan of distribution while releasing their claims, those investors would likely have opted out of the class action. As it stood, Perell J. found it “inappropriate and unfair to include August 22, 2011 purchasers as Class Members and then exclude them from the Plan of Distribution”. He thus revised the plan to include August 22, 2011 purchasers but discounted their claims to reflect the increased risk of their investments.

While the precedential value of this decision is likely limited by the fact that the court’s authority to vary the plan of distribution was expressly provided for by the settlement agreements, Perell J. made it clear that he would not have approved the settlements without this authority. Perell J. also noted that s. 26 of the Class Proceedings Act, 1992 provides the court with ample discretion and scope for creativity in determining or approving a plan of distribution where a judgment has been issued. Based on these comments, class counsel would be wise to expressly advise settling class members of the court’s ability to vary distributions, especially in cases involving objecting class members or other potential fairness concerns.

UPDATE: Zungui Class Action Settlements against Remaining Defendants Approved by Court