The leave requirement for secondary market actions: Is there a reasonable chance of success?

November 21, 2013 | Yves Robillard

In July 2013, the Québec Court of Appeal provided a ruling on the criteria for, and the right to appeal from, a decision granting leave to institute an action for damages related to the acquisition or disposition of securities in the secondary market1.

The ruling determined that: (a) the leave to institute such action will be granted if the petitioner shows a reasonable chance of success; and (b) that the judgment granting such leave could be appealed with the authorization of the Court of Appeal. In other words, the Court of Appeal dismissed the arguments made by the issuer of securities that there should be a mini-trial on the merits before leave is granted, and that any decision granting leave should be automatically subject to appeal.”

Legislation introducing statutory liability related to the acquisition or disposition of securities in the secondary market was adopted by the Canadian provinces in 2007. Essentially, such legislation allows actions to be taken against an issuer and its directors, officers, and professionals that are involved in any omission or misrepresentation affecting the price of such issuer’s securities in the secondary market. Significantly, it exempts the plaintiff from having to prove reliance on the misrepresentation in acquiring or disposing of the issuer’s securities, and also provides for a special mechanism to assess damages. In light of such enhanced rights, and in order to prevent frivolous “strike suits”, the new action was made available subject to a Court’s decision to grant leave to pursue such action.

The test on whether leave should be granted is premised on a plaintiff demonstrating that the action is being brought in good faith and that there is a “reasonable possibility” that the action will be resolved in favour of the plaintiff.

The concept of “reasonable possibility” has been reviewed in detail by a number of Courts (predominately in Ontario and British Columbia), which has resulted in a wide range of definitions being put forward for such concept. Such definitions include: “something more than a de minimis possibility”, “more than a mere possibility of success, but is a lower threshold than a probability”, “more than merely raising a triable issue”, “not a mini-trial on the merits”, etc.

While all offer varying interpretations, what all the above definitions share are the qualities of being very subjective and being practically impossible to apply with any degree of certainty or foreseeability. What is between a possibility and a probability, the so-called “reasonable possibility”, is a concept that can challenge armies of philosophers and think tanks for centuries: when does a possibility turn into a probability?

According to the Court of Appeal, “reasonable possibility” is not defined, but is simply rephrased: the plaintiff must show a “reasonable chance of success”. In effect, the term “possibility” is substituted with the term “chance”, with plaintiffs and defendants continuing to be left in the dark. In the words of Voltaire, “chance is a word void of sense; nothing can exist without a cause.”

Beyond the conceptual and the philosophical debates that may ensue, the Court of Appeal ruling still provides some guidance on the do’s and don’ts regarding the leave requirement:

  1. The cause of action must be particularized and based on documents or affidavits that appear credible.
  2. The arguments of the plaintiff must not be analyzed in detail, but have to be based on a plausible analysis of the law.
  3. The plaintiff must show that his recourse is not opportunistic or made with a view to force the defendant into a Court settlement.

The Court of Appeal repeatedly states in its ruling that the purpose of the leave requirement is to screen out strike suits. Perhaps the real test is whether an action is or is not an obvious strike suit, where in the latter case, such leave would not be granted. Unfortunately for issuers who saw the leave requirement as a means to easily get rid of costly lawsuits at an early stage, it seems that even plaintiffs with difficult cases will still have their day in court.

1. Theratechnologies Inc. v. 121851 Canada Inc., 2013 QCCA 1256 

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