Theratechnologies Inc. V. 121851 Canada Inc.

On February 24, 2012, the Superior Court rendered Quebec's first decision on the application of the new provisions of the Securities Act (the Act) regarding secondary market liability. These new provisions are inspired by the Allen Report published by the Toronto Stock Exchange in 1997, and were adopted by all the other provinces and territories pursuant to the efforts of the Canadian Securities Administrators.

The decision authorized the plaintiff to bring an action for damages pursuant to section 225.4 of the Act (“section 225.4”) by means of a class action. This decision was confirmed by the Court of Appeal in July 2013, and, on September 30, 2013, Theratechnologies filed an application for leave to appeal to the Supreme Court (SCC).

In this case, the petitioner accused Theratechnologies of having failed to disclose itself in a timely manner the fact that the FDA had raised a question about the unrevealed side effects of Theratechnologies' leading drug, tesamoralin, which it knew would be published on the internet prior to the approval hearing and could have affected its outcome, the whole constituting a material change in its activities, operations or capital.

Theratechnologies petitioned the court of appeal for leave to appeal this decision on the grounds that the Superior Court, despite having acknowledged that the authorization mechanism provided for in the Act differs from that governing class actions, failed to apply it correctly. Indeed, section 225.4 provides that an authorization mechanism must be applied before an action may be brought under the secondary market liability regime set out in sections 224.2 et seq. of the Act. In order to obtain such a court authorization, the plaintiff must demonstrate 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 of Appeal first acknowledged that there is a right to appeal with leave under articles 29 and 511 of the Québec Code of Civil Procedure (C.C.P.) against a judgment rendered under section 225.4 of the Act, and therefore granted such a leave in this case.

Since a judgment authorizing the institution of a class action is without appeal under Quebec legislation (art. 1010 par. 2 C.C.P.), the judgment authorizing both an action under section 225.4 and a class action may be appealed with leave, but only in respect of the action under section 225.4.

The court thus recognized that such an authorization has the effect of ordering that an irremediable thing be done that the final judgment cannot remedy, seeing as, first, one of the admitted goals is to shield vulnerable markets from the undue pressures of the high costs of strike suits and, second, by granting such an authorization to institute an action for secondary market liability, the trial judgment triggered the application of specific measures regarding the burden of proof and quantification of damages.

In the appeal on the merits, the court specified that criteria must govern the analysis of whether there is a reasonable possibility of succeeding on appeal under section 225.4. More specifically, it emphasized the following elements: The criterion set forth in section 225.4 is more stringent than that of colour of right under article 1003 (b) C.C.P. that applies to authorizations to institute a class action; this more stringent criterion results from the lawmakers' intent to implement a reliable filtering mechanism; the goal of this filtering mechanism is to protect reporting issuers against strike suits, those opportunistic actions that are brought solely for the purpose of obtaining a quick settlement based on conjecture rather than on a right that is grounded in real and tangible evidence; and while the plaintiff's burden of proof is greater than the simple burden of demonstration currently required in class actions, judges apprised of a motion for authorization must not conduct an in-depth analysis of the evidence presented, but must limit themselves to a summary appreciation of the right of action invoked.

The Court of Appeal claimed it was satisfied that the criteria of section 225.4 had been met and refused, at this preliminary stage, to rule on the issue of whether or not the questions raised by the FDA regarding the side effects of tesamorelin constitute a material change in the activities, operations or capital of Theratechnologies. The court therefore referred this question to the trial judge.

On September 30, 2013, Theratechnologies requested the intervention of the SCC based inter alia on the different interpretation trends that stem from the decisions rendered in British Columbia, Ontario and Quebec on the applicable standard to grant the authorization to bring an action in damages under the secondary market liability regime. Considering the importance of predictability in the application of securities legislation and the emphasis of securities regulators on maintaining a harmonized approach across the country, Theratechnologies alleged that it is in the national interest that the Supreme Court clarifies the interpretation of this test.

Theratechnologies also argued that the Court of Appeal failed to adduce the evidence in order to apply properly the criterion set forth by the Supreme Court to trigger the obligation of a public company to divulge a material change. More particularly, Theratechnologies submitted that the Court of Appeal should have analyzed the evidence to determine if the plaintiff has a reasonable possibility of success to establish that an external event, namely the documents published by the FDA, constituted a change in Theratechnologies' business, operations or capital that is material.

Theratechnologies Inc., the appellant, was represented by Philippe Charest-Beaudry and Pierre Lefebvre of Fasken Martineau DuMoulin LLP.

121851 Canada Inc., the respondent, was represented by Michel Savonitto of Savonitto & Associés Inc.