Québec Court of Appeal dismisses HEXO securities class action

On April 16, 2025, the Québec Court of Appeal dismissed the appeal of Martin Dionne against HEXO Corp. and Sébastien St-Louis, its former chief executive officer, affirming the Superior Court's decision to deny authorization for a securities class action¹. 

The case in appeal centered on two main alleged misrepresentations:

• regarding a five-year supply agreement between HEXO and the SQDC (Quebec’s cannabis commission), which included a take-or-pay clause for 20,000 kg of cannabis in the first year; and
• about the licensing status of Newstrike Brands Ltd.'s Block B facility, acquired by HEXO, which was later found to be inadequately licensed.

Superior Court decision

The Superior Court presided by Justice Silvana Conte, denied the authorization for a class action, finding no reasonable possibility of success for the claims under the Securities Act and the Civil Code of Québec. The court concluded that HEXO's statements about the SQDC agreement did not amount to a revenue guarantee and that the Block B licensing issue was not material to HEXO's business operations and to investors. Justice Conte emphasized that the take-or-pay clause in the SQDC agreement was accurately described by HEXO and did not mislead investors into believing revenue was guaranteed. Furthermore, the court noted that the cannabis market was new and volatile, and reasonable investors would understand that contractual commitments might not always result in actual revenue.

Court of Appeal analysis

The Court of Appeal upheld the Superior Court's decision. The court found no error in the lower court's application of the law or its assessment of the evidence. The court emphasized that the alleged impugned statements about the SQDC agreement were accurate descriptions of the contract terms and did not guarantee revenue. 

Additionally, the court agreed the Block B licensing issue was immaterial, given the facility's limited impact on HEXO's overall operations and the fact the market was already aware of the suspension of operations at the Niagara facility. Justice Marcotte highlighted that the appellant's expert evidence did not demonstrate that the licensing deficiency had a significant effect on HEXO's stock price, and the broader context of the company's operations and market conditions supported the conclusion that the issue was not material.

Dissenting opinion

Justice Bachand partially dissented, holding that the first instance judge made palpable and overriding errors in dismissing the appellant's secondary market claim related to the Newstrike Block B licensing deficiency. Justice Bachand believed the expert report provided credible evidence linking the 10.2% decrease in HEXO's share price to the disclosure of the licensing issue, warranting further consideration at trial. Justice Bachand emphasized that the materiality of the licensing deficiency should be assessed in light of the significant market reaction and that the appellant had presented a plausible analysis supported by credible evidence. He held that the case should proceed to trial to fully explore the implications of the licensing issue on investor decisions and HEXO's stock price.

Conclusion

The Court of Appeal's decision underscores the importance of contextual evidence and common sense in assessing materiality in securities litigation. The court's ruling affirms that not all contractual terms or operational issues rise to the level of material misrepresentations under the Securities Act or the Civil Code of Québec. 

The decision also highlights the rigorous scrutiny applied by courts in evaluating the sufficiency of evidence at the authorization stage in the context of securities class actions, ensuring only claims with a reasonable possibility of success proceed to trial. This approach aims to balance the protection of investors with the need to prevent unmeritorious litigation that could burden companies and the judicial system.

Takeaways

• While the certification process in civil class actions amounts too often to a rubber-stamping exercise, the leave application under the Securities Act warrants a rigorous analysis by the court. With proper evidence and strong opposition, defendants can succeed against unmeritorious claims, thus avoiding the nuisance and costs associated with an action on the merits.
• The court will closely scrutinize the context and content of alleged misrepresentations in securities litigation, considering both the specific statements of the claim and the broader market conditions.
• Expert evidence on materiality must be sufficiently linked to the specific issues at hand to support claims of material misrepresentation, demonstrating a clear connection between the alleged misrepresentation and its effect on investor decisions.

Note that Norton Rose Fulbright was successful in having discontinued or dismissed five different class actions dealing mainly with the same issues, in the US (United States District Court, Southern District of New York and the Supreme Court of the State of New York), Ontario and Quebec.

The authors represented HEXO Corp. and Sébastien St-Louis against which the Application to Bring an Action pursuant to section 225.4 of the Quebec Securities Act and Application for Authorization to Institute a Class Action were dismissed in first instance and in appeal.