In the recent decision of Amaya Inc. v Derome, the Quebec Court of Appeal reinforced the legislative purpose of the leave requirement in secondary market class actions, as being the protection of public issuers and their long-term shareholders, and not the plaintiff-shareholders. The decision represents an important step towards achieving greater balance and consistency amongst Canadian provincial securities regimes.
Reversing the lower court, the Quebec Court of Appeal held in Amaya that Quebec’s statutory securities regime creating civil liability for secondary market disclosures should be harmonized with the approaches taken in the rest of the country in respect of both documentary disclosure prior to the authorization, and the judicial leave hearing itself. The Court of Appeal held that defendant issuers are not required to assist plaintiffs in securing evidence upon which he or she might base a secondary market civil action.
The Application Decision
At first instance, in Derome v. Amaya inc., the petitioners in Amaya brought a proposed secondary market class action against Amaya Inc., and during the pre-authorization stage, sought disclosure of certain information and documents from the respondents. The request was rooted in the Supreme Court of Canada’s decision in Theratechnologies Inc. v 121851 Canada Inc., where Abella J. held that “[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.” The Superior Court determined that Quebec’s securities legislation allows documentary disclosure at the pre-authorization stage, even if it is prohibited in other Canadian provinces.
The Court of Appeal Decision
On appeal, the Superior Court’s decision was reversed. The Court of Appeal determined that plaintiff-shareholders are generally not entitled to documentary disclosure prior to authorization in Quebec (except insofar as the defendants’ insurance policies are concerned). In doing so, the Court held that the purpose of the judicial authorization requirement in s. 225.4 of the Quebec Securities Act “is to protect public issuers, innocent shareholders, the markets and the courts, but not plaintiff-shareholders”. Accordingly, the Court of Appeal rejected the view, taken by the motion judge, that “fairness” requires that plaintiff-shareholders receive pre-authorization documentary disclosure. Instead, it held that “[t]he judge should have identified the purpose of the screening mechanism more narrowly as one that seeks to deter opportunistic or abusive litigation by plaintiff-shareholders who inappropriately wish to take advantage of the favourable conditions for secondary market actions against issuers."
In reaching this conclusion, the Court of Appeal specifically endorsed the approach taken in other provinces, such as in Ontario under Ainslie v CV Technologies Inc., in which “courts have held, in respect of disputes as to how evidence may be adduced prior to leave, that the defendant issuers are not required to assist plaintiffs in securing evidence because that would risk undermining the protection against strike suits and amplifying the scope of the proceedings to the equivalent of a mini-trial." It found this approach follows from “the purpose of the screening mechanism… as reflecting an ‘overriding policy concern [...] for long-term shareholders, who are unfairly affected by the volatility of share prices that results from spurious claims, 'requir[ing] that unmeritorious actions be screened out ‘as early as possible in the litigation process’." Accordingly, the Amaya Court concluded that, as in other provinces, “the Quebec screening mechanism was not enacted to level the playing field for plaintiffs and that it should be interpreted so that defendant issuers are not required to assist plaintiffs in securing evidence upon which he or she might base a secondary market civil action."
Moving Forward
The Amaya decision continues a trend in Canadian appellate courts, heralded by the Supreme Court of Canada’s decision in Canadian Imperial Bank of Commerce v. Green, towards a more balanced assessment of the purposes of the secondary market liability legislation. Rather than viewing the primary object of the legislation as being the compensation of investors through the imposition of civil liability, as some earlier cases had held, decisions like Amaya appropriately recognize that the secondary market liability regime is designed principally for the regulatory purpose of deterring inadequate disclosure by issuers at the front end, with investor compensation as a result of inadequate disclosure being a secondary goal. This reflects the point noted by the Amaya Court that weighting the regime too far in favour of investor compensation ultimately prejudices “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 growing consensus on this point among provincial courts is an important development in the increasing maturation of Canadian securities class actions.