There are three takeaways from the Court of Appeal decision in Amaya Inc. v Derome:1
Right of appeal: a judgment handed down before an action under the secondary market liability regime of the Securities Act (SA) is authorized may be appealed under the second paragraph of Article 31 of the Code of Civil Procedure (CCP), even if the action is a class action.
Disclosure of documentary evidence: under the SA rules, a plaintiff in an action against an issuer cannot compel the issuer to disclose documentary evidence to it before the action is authorized by the court under Section 225.4 SA.
Insurance policies: however, a plaintiff may, before the action is authorized, require the issuer to provide it with a copy of its insurance policies.
Sections 225.2 and following of the SA were enacted to make it easier to seek recourse against Quebec public issuers whose shares are traded in the secondary market, and their officers and directors, for breaches of their continuous disclosure obligations. Whereas the Quebec Civil Code civil liability regime requires the plaintiff to establish causation between such breaches and the decision to acquire or dispose of a security, the SA statutory regime creates a presumption that securities acquired or disposed of following a breach (misrepresentation or failure to make a required disclosure) were sold or acquired as a result of the breach and that the breach in question caused the change in value of the defendant issuer’s shares.
Section 225.4 SA provides a mechanism for screening out frivolous or unmeritorious actions (strike suits). To bring an action, the plaintiff must first convince the court that the action (1) is in good faith and (2) has a reasonable possibility of success. If the action proposed by the plaintiff is a class action, then the plaintiff must also demonstrate that the authorization criteria set out in Article 575 CCP are met.
In Amaya Inc. v Derome, investors wanted to bring a secondary market liability class action against Amaya Inc. (now The Stars Group Inc.). To demonstrate that its action had a reasonable possibility of success as required by Section 225 SA, the investors sought to have the Superior Court compel disclosure of Amaya internal documents, including internal control procedures for stock transactions and documents relating to corporate governance. Citing, among other things, fairness and the requirement of cooperation set out in the CCP, the Superior Court granted the application. In effect, the judge, Barak Barin, determined that, if the screening mechanism in Section 225.4 LSA constituted an additional hurdle for the applicants, then they should be given the means to overcome it.
This reasoning did not convince the Court of Appeal, which overturned the decision on this point.
Right of appeal
The appeal posed an initial difficulty: what is the right of appeal where there is a double screening mechanism: the SA screening mechanism (Section 225.4 SA) and the class action screening mechanism (Article 575 CCP)? The Court of Appeal determined that these mechanisms must be treated separately in two sequential steps. In applications such as the one at issue, the Section 225.4 SA screening mechanism will generally be applied first and separately from the class action authorization screening mechanism. The Court therefore ruled that jurisprudence limiting the right of appeal from judgments rendered prior to the authorization of class actions did not apply in this case.
Furthermore, because the judgment caused irremediable injury to the defendant, the Court granted the defendant leave to appeal pursuant to the second paragraph of Article 31 CCP.
The Court then determined that ordering document disclosure prior to authorization went against the purpose of the screening mechanism set out in Section 225.4 SA. That screening mechanism is designed to protect issuers, the other shareholders, the markets and the courts from the negative effects of frivolous or unmeritorious litigation. Its purpose is not to turn authorization hearings into mini-trials, but rather to quickly screen out unmeritorious actions. Document disclosure should therefore not be ordered at this stage. For the Court of Appeal, this situation would not make it unfairly difficult for the plaintiffs, since the judge applying the Section 225.4 SA screening mechanism would take such absence of disclosure into account in his or her evaluation.
Lastly, the Court nonetheless ordered the disclosure of the issuer’s insurance policies, for a different reason that is discussed in a separate legal update.
This decision clarifies the interaction between the securities and class action screening mechanisms where the two exist in combination. It also serves as a reminder that public issuers are entitled to protection against strike suits and that requests for authorization under Section 224.5 SA must not turn into mini-trials. As a result, this Court of Appeal decision helps to harmonize Canadian law in this area as it indicates that this aspect of the screening mechanism provided at Section 225.4 SA is similar to what exists in Ontario and elsewhere in the country for the same type of action.
The author wishes to thank articling student Michel Bélanger-Roy for his assistance in preparing this legal update.
1 Amaya Inc. v Derome, 2018 QCCA 120.