A National Precedent for Securities Regulation in Theratechnologies: An Uncommon Phenomenon In Canada
It’s not often that nation-wide securities judgments are issued in Canada. Securities regulation in Canada is polycentric in nature, such that each province is governed by its own legislation and securities commission. The Supreme Court of Canada (“SCC”) decision of Theratechnologies Inc. v 121851 Canada Inc., 2015 SCC 18, [Thera] is interesting because – although the judgment related to the province of Quebec – it has implications across the board, as most provinces have similar provisions within their respective securities legislations.
In 2009, Thera filed a new drug application for approval from the US Food and Drug Administration (“FDA”) regarding a drug that was said to decrease the amount of excess abdominal fat in HIV patients. In the interim, while the pharmaceutical company waited to hear back about the status of the application, the results of the clinical trials were habitually disclosed to the company’s shareholders.
As per normal procedure, the FDA posed various questions about the drug to an expert Advisory Committee, including the potential side effects, such as diabetes, that the drug might have. The FDA’s policy was to publish on its website all the materials related to the drug application before an Advisory Committee meeting took place. Being available to the public, these questions were then dispersed by stock quotation enterprises that led to a drop in the company’s share price. Although Thera believed that the side effects were minor, it never published a response to these questions. Thera’s reasoning for this was that the information within the materials (being the information published on the website and the results of the clinical trial, which were regularly disclosed to shareholders) already provided sufficient clarification.
One of Thera’s shareholders requested judicial authorization under s. 225.4 of Quebec’s Securities Act, RSQ, c V-1 [QSA] to bring about a class action proceeding for damages. Under S. 73 of the QSA, once a material change has been made to a company’s business, operations or capital, the company is obliged to make timely disclosure of those changes to its shareholders. The plaintiff alleged that the information that diabetes was among the potential side effects of the drug, and the FDA’s questions about those side effects amounted to a material change sufficient to claim breach of s. 73 of the QSA.
At the lower courts, the action was allowed to proceed – in other words, the plaintiff was given permission to make a claim as a class action (not necessarily that the claim of a breach of timely disclosure would be upheld in court). Thera appealed to the SCC and its decision was released in April of 2015.
The rest of the case falls within the analysis of what the test for judicial authorization of an action for damages entails. The latter part of s. 225.4 states that there are two criteria that must be satisfied before the court will allow an action for damages for breach of a company’s disclosure obligations to secondary markets to proceed: “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.”
The Court also made an important distinction between the general laws governing class action proceedings in Quebec under article 1003 of the Code of Civil Procedure, CQLR c C-25.01 and s. 225.4 of the QSA. The QSA requires a “reasonable possibility” of the plaintiff being successful, which is to be established prior to the case commencing. This is a higher threshold than article 1003, signaling a more rigorous screening process for class action proceedings in the world of securities.
The SCC clarified the test for judicial authorization regarding secondary market timely disclosure as follows:
To promote the legislative objective of a robust deterrent screening mechanism so that cases without merit are prevented from proceeding, the threshold requires that there be a reasonable or realistic chance that the action will succeed (Thera, para 38).[…] [This] requires the claimant to offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim (Thera, para 39).
The Court stated that this requirement best realizes the objective of the screening mechanism: to ensure that cases that have little chance of success do not receive the green light. Although a full analysis of the evidence is not necessary before a proceeding commences, there still has to be sufficient evidence of success in the plaintiff’s favour.
Applying the test to the facts of this case, as noted above, s. 73 of the QSA requires timely disclosure of a material change in the company. The SCC ruled that there was insufficient evidence to support such change. Thera was regularly disclosing information about the clinical trials and no new information was available to be released when the FDA mentioned the potential side effects in their published materials. Consequently, the Court held that there was no reasonable possibility that the action would be resolved in favour of the plaintiff.
The implications of the decision are two-fold. First, since the two-pronged criteria in s. 225.4 of the QSA is also found within the various securities acts of every province, this clarification applies to those jurisdictions as well. This should make public companies feel safer against class actions because the threshold for judicial authorization has been clarified and set at a high bar for the plaintiff to overcome. More importantly, this decision also implies a step towards increased consistency within securities legislations across the country.
Could this be a glimpse into the future of a new “Securities Act (Canada)”? Similar to what our friends down south in the US have done, there have been conversations for some time now and supportive studies about bringing together all the securities legislations and commissions of individual provinces and fusing them under one Canadian act or body. Cases like Thera bring to surface the power of the courts to influence legislatures. If the highest court in the country starts to make grand statements about how provincial securities acts should be interpreted and these acts are more or less identical to each other, why wouldn’t Parliament allow for a single federal legislation or commission to regulate our securities laws nationally? It would be interesting to see where the road leads us and if this trend is ever manifested within our legislation in the years to come.