Canadian D&O Securities Class Action in Favour of Corporation and Director and Officer Defendants

February 2, 2018 | smeditor

The recent Supreme Court of Canada decision in Theratechnologies inc. v.121851 Canada inc., here, overturns The Court of Appeal For Quebec and the underlying trial Motions Judge in their decisions to authorize, under s. 225.4 of the Quebec Securities Act, CQLR c V-1.1, a securities class action against Theratechnologies and certain directors and officers alleging non-disclosure of a material change (aka “breach of statutory disclosure obligations”), causing loss to a selling shareholder who didn’t benefit from rise in share value when the alleged material change turned out to be immaterial. A good article on the case and issue can be found, here, on the Osler website.

This posting is not about the D&O securities class action claim, which you are welcome to read, but the fact that there are very few decisions regarding the Quebec Securities Act and breaches of continuous disclosure obligations in the secondary market. This new act was created because “… remedies available to investors injured by misleading disclosure in the secondary trading market were so difficult to pursue, that they were largely illusory.” (as per the Allen Committee).  All level of the court agreed that the trigger for authorization of a securities class action under the Securities Act is a higher standard that art. 1003 of the Code of Civil Procedure, in 225.4 requires “… the action is in good faith and there is a reasonable possibility that it will be resolved in favour of the plaintiff”,  where Civil Procedure requires only “mere possibility of success”.

The “fraud on the market theory” is well documented in the US and Canada, and intended to make it easier to sue issuers, directors, and officers, by removing the obligation of plaintiffs to prove they relied on specific misinformation.

Though plaintiffs have to present some credible evidence in support of their claim, the authorization stage is not a mini-trial and it is considered by many that authorization of securities class action claims in Canada have a relatively low bar. Perhaps this SCC decision is trying to swing the pendulum back. However, this case is not great for setting precedent because the plaintiff made no attempt to suggest that the FDA’s questions to an expert Advisory Committee, regarding a new drug’s efficacy and potential side effects, was in any way a material change in business, operations or capital of the issuer, or that they departed from the regular and routine process of the FDA.

Therefore, the SCC decided there was no reasonable possibility the plaintiffs would succeed.

Perhaps the decision would have been different if the shareholder did not sell at a small loss when the potentially risky information became known, but rather held onto the shares and it turned out that the drug did not finally receive FDA approval and the shares became worthless.

The insurance spin in this case is that a Directors’ & Officers’ Liability Insurance Policy (D&O) would, if purchased, have been triggered in a case like this. But the material difference in coverage would be if the policy was extended to ‘Side-C’ aka, Entity Coverage for Securities Claims. There is no regulated or industry standard wording for this extension, but in many cases it provides coverage for the separate and specific defence and settlement cost of the corporate entity, and not just for the defence and settlement costs of the individual directors and officers. But this extension is often sold by insurance brokers and agents as being the extension required for the policy to respond to any securities claims. Such an interpretation in almost every variant of the extension is incorrect. Side C, in most cases extends the policy to the Issuers costs and those of its parent or other subsidiaries. The concern of such an extension is that many directors and officers are not warned that the policy has a per claim and aggregate limit of liability available to each and every insured party (entities and individuals), for each and every claim in the policy period; or that the policy period may end up being many years in length because there is no guaranteed policy renewal or refreshed limit of liability if there is an ongoing class action securities claim. In the case above the underlying alleged Wrongful Act started in the spring of 2010, but the SCC decision was not until Spring 2015.

These stretched aggregate policy limits and the multiple Insured Parties is not a concern if the defendants are successful, there is no settlement and the limit of liability is significantly greater than the defence costs. But, many research and development based entities, purchase a D&O program that is $5 million or less, and fully extended to the corporate entity. Therefore, many directors and officers have material exposure to insurance risk related to the erosion or exhaustion of policy limits based on entity coverage.

It is difficult to mitigate this exposure by limits alone, unless it is the practice of the company to maintain limits of liability at the ‘burn layer’, which is the maximum foreseeable 52 week hi minus low, times the number of shares held by outsiders, plus at least $10 million in defence costs. And that won’t work because if an unexpected market dip creates a new low, and therefore a much higher burn layer, it is the worst time to attempt to buy higher limits on the D&O program.

Some policy features like “priority of payments” attempt to mitigate this risk, but they have not been adequately tested in court. The best feature is to maintain a reasonable portion of the limit of liability as Side A&B and Side A DIC (difference in conditions) only and reduce exposure to ‘entity coverage’ in the D&O program. But Side C – Securities Claims, is only one example of this risk, and full coverage analysis in conjunction with priorities establish for the insurance program by the directors and officers, is the best way to determine limit adequacy.

If you would like a better explanation of this case or the issues, please call me directly.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at,  416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to

About the Author