Screening Secondary Market Liability Actions: The Supreme Court Raises The Bar For Plaintiffs

On April 17, 2015, the Supreme Court of Canada (SCC) rendered its opinion in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18 (Theratechnologies), its first decision on the Quebec statutory secondary market liability regime adopted in 2007 pursuant to a reform of the Quebec Securities Act (QSA). Like its sister statutes in other provinces, although the QSA regime facilitates a plaintiff's burden, mostly by presuming that variation in market price is linked to a misinformation or omission, it also imposes an authorization process under which a claimant must establish that its action is brought in good faith and has a reasonable possibility of success.

Adopting a similar approach as the Quebec Court of Appeal, the SCC clarified the test applicable to the authorization of claims pursuant to the QSA by comparing it to the less stringent test applicable to authorization of a class actions in Quebec and by specifying the evidence and the analysis of the evidence to be performed by the court seized with an authorization motion under the QSA.

In contrast with the Quebec Court of Appeal1, however, which had authorized the class action claim pursuant to s. 225.4 QSA by the shareholders of Theratechnologies Canada Inc. (Thera), a public company listed on the Toronto Stock Exchange, the SCC reversed on the result and held that the evidence brought forward by the plaintiffs shareholders did not establish a reasonable possibility that the action could succeed.

More precisely, the SCC held that queries made by a regulator, the U.S. Food and Drug Administration (FDA) in this case, during the authorization process of a drug were not material if the issues raised by the regulator had been previously mentioned in public disclosures of the issuer. In this respect, the SCC commented on the expected knowledge of a reasonable investor and concluded that if previous public disclosures made by an issuer addressed certain issues and specified that they were not significant, a reasonable investor should have known that the questions raised by the regulators regarding the same issues were not material.

In doing so, the SCC ruled on whether a material change had occurred, whereas the lower courts had decided that this question should be left for the merits stage. As a result, the SCC confirmed that the analyses of judges deciding motions to pursue secondary market liability claims under the QSA and similar statutes may have to be comprehensive enough to determine whether or not a material change occurred.

Facts

Thera develops and markets therapeutic products. Under the QSA, Thera is a reporting issuer which must comply with continuous disclosure obligations. As such, in the event of any non-public material change that would reasonably be expected to have a significant effect on the market price or value of its securities, Thera is obliged to issue a news release disclosing the nature and the substance of this change.

In 2009, Thera filed an application with the FDA for approval of a major drug called Tesamoreline. The ensuing approval process took place in 2009 and 2010 and involved the FDA questioning Thera on the product, including asking about the risks of side effects of the drug. Thera did not disclose to the public the specific questions posed by the FDA, which included queries about the risks of diabetes and cardiovascular diseases. Nor did Thera respond directly to the FDA questions.

The ultimate step of the FDA approval process is a public hearing where all interested parties can be heard. May 27, 2010 was selected by the FDA as the date for the hearing. In accordance with FDA practice, on May 25, 2010, i.e. two days prior...