The Supreme Court has handed down a judgment that marks a tremendous victory for Theratechnologies and public corporations in general. This important decision is a reminder of the continuous disclosure requirements of corporations and clearly defines the burden to be met by investors seeking authorization to bring a class action under the secondary market liability regime of the Securities Act (the “SA“).
This new liability regime was adopted to facilitate actions brought by shareholders trading on the secondary market who believe they have suffered damages due to a corporation’s misrepresentation or failure to disclose information. In order for shareholders to benefit from this advantageous regime, they must use the authorization mechanism under section 225.4 SA requiring proof of “a reasonable possibility that [the case] will be resolved in favour of the plaintiff.” Although this authorization mechanism has been in force in Ontario since 2002 and in Québec since 2007, this is the first time that the Supreme Court has specified its parameters:
 The Quebec legislature used different language in s. 225.4 [than what is used in article 1003 of the Code of Civil Procedurefor authorizations to institute a class action] to create a more meaningful screening mechanism in the securities context so that costly strike suits and unmeritorious claims would be prevented. Courts are given an important gatekeeping role, which requires them to conduct a preliminary examination of the impugned action or inaction to assess whether it could be said to have a reasonable possibility of success.
The corporation 121851 Canada Inc. (“121851“) alleged that Theratechnologies failed to disclose a material change while undergoing the Food and Drug Administration‘s (“FDA“) approval process of its flagship drug, tesamorelin, as required under section 73 of the SA. To satisfy the criterion of “a reasonable possibility” of success, 121851 needed to demonstrate, after a preliminary examination of the evidence, the existence of a material change. The Court confirmed that in order for there to be a material change within the meaning of the SA, it is important not only to determine whether the information has had a significant effect on the security’s market price, there must also have been a change in the business, operations or capital of the issuer.
In this particular case, throughout the FDA approval process, Theratechnologies always disclosed the results of the tesamoralin studies, especially as regards the drug’s possible side effects. During the FDA approval process, the American agency posed questions to its advisory committee about the potential side effects of tesamoralin. Two days before Theratechnologies was to be heard by the advisory committee, the FDA made these questions public, prompting waves of panic on the market and a drop in Theratechnologies’ share price. It is important to bear in mind that the FDA subsequently approved tesamorelin, and that the share price quickly recovered.
After a close examination of the evidence, the Supreme Court concluded that 121851 had failed to discharge its burden of proof regarding the existence of a material change in Theratechnologies’ business, operations or capital, and found that Theratechnologies had complied with its continuous disclosure requirements:
 […] A reasonable investor who read Thera’s news releases would have known that blood sugar issues and diabetes were potential side effects of the drug, and that Thera’s clinical trials had found they were not clinically significant.
 Finally, even if Thera had issued a press release on May 11, 2010 after it received the FDA’s briefing materials, it is not clear what reassurance Thera could have provided at this stage, given that the outcome of the FDA process, as every reasonable investor would have known and as Thera repeatedly made clear, is always uncertain. As the U.S. Supreme Court acknowledged in TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438 (1976), there are risks of excessive disclosure, which could “simply . . . bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decision making”: pp. 448-49, cited in Cornish, at para. 41: p. 448-449, cited inCornish, par. 41.
Because the evidence revealed that Theratechnologies did in fact meet its continuous disclosure requirements, the Supreme Court refused to grant 121851 the authorization to bring a class action based on the secondary market liability regime of the SA.
Save The Date – Implications of this decision will be discussed at an upcoming Fasken Martineau Seminar taking place on May 20th in our Montreal offices. Invitation to be sent out separately and re blogged.