Overview

On September 26, 2022, the Court of Appeal delivered its judgment in Badesha v. Cronos Group Inc.,1 overruling the lower court's refusal to grant leave to pursue a proposed claim for alleged misrepresentations in the company's financial results.

Background

In March 2020, Cronos Group Inc. (a Canadian company specializing in medical and recreational cannabis products) issued a press release advising that it would be restating its 2019 financial statements, to reduce the revenue reported in 2019 by $2.5 million for quarter one, and by $5.1 million for quarter three. Cronos reported material weaknesses in its internal controls, and that it had improperly attributed revenue to transactions involving the exchange of cannabis dry flower for cannabis resin.

The appellant sought leave to commence an action against Cronos for misrepresentation under Section 138.3 of Ontario's Securities Act,2 and certification of the claim as a class action under the Class Proceedings Act, 1992.3

The Leave Test

The statutory test for leave to commence an action for secondary market misrepresentations under Section 138.3 of the Securities Act, requires that: (a) the action is being brought in good faith; and (b) there is a reasonable possibility that the action will be resolved in favour of the plaintiff at trial.4

The Decision of the Motion Judge

The Ontario Superior Court of Justice dismissed the motions for leave and certification. In his analysis, the motion judge characterized the appellant's claim as alleging that the defendants made 7,449 separate misrepresentations, and refused to grant leave because the appellant had failed to put forward evidence that each separate alleged misrepresentation materially contributed to the decrease in the share price. The motion judge dismissed the motion for certification on the same basis. 

The Decision of the Court of Appeal

Justice Favreau, writing for the Court of Appeal, held that the motion judge made a palpable and overriding error in characterizing the claim as 7,449 separate misrepresentations, instead of a single misrepresentation. 

The Court held that the single misrepresentation at issue was that Cronos misrepresented its revenues for the first and third quarters of 2019, by treating the proposed transactions as generating revenue.5 The Court noted that Section 138.3 of the Securities Act provides discretion to “treat multiple misrepresentations having common subject matter or content as a single misrepresentation”,6 and found that the motion judge's characterization of the claim was “inconsistent with the structure and wording of the claim itself and the statutory intent”.7

As there was no issue regarding the good faith requirement, the appellant was required to meet only the “reasonable possibility” branch of the test. To do so, the appellant was required to show that there was a misrepresentation, and that it was material.8 The Court of Appeal noted that, based on the Supreme Court of Canada's decision in Theratechnologies Inc v 121851 Canada Inc,9 the “reasonable possibility” test is “meant to be more than a speed-bump but not a mini-trial”.

Given that the corrected financial reports by Cronos in 2020 corresponded with a drop in the share price, there was a reasonable possibility that the action would be successful at trial, and leave should be granted

The Court remitted the question of certification to the Superior Court for determination.

Key Takeaways

  • The court has discretion to treat multiple misrepresentations, having common subject matter or content, as a single misrepresentation under Section 138.3 of the Securities Act, despite the plaintiff seeking a declaration that the misrepresentations must be treated as multiple misrepresentations for the purposes of calculating liability limits.
  • The issue of whether the core representation should be treated as multiple misrepresentations is an issue for trial.
  • The reasonable possibility test is met where there has been a drop in the share price, and there is credible, complex, and competing evidence on whether misrepresentations have a material effect on the share price.

Footnotes

1 2022 ONCA 663 [Badesha].

2 Securities Act, R.S.O. 1990, c. S.5.

3 Class Proceedings Act, 1992, S.O. 1992, c. 6.

4 Badesha, supra note 1 at para 46. 

5 Badesha, supra note 1 at para 40.

6 Badesha, supra note 1 at para 44.

7 Badesha, supra note 1 at para 50.

8 Badesha, supra note 1 at para 47.

9 2015 SCC 18 [Theratechnologies].

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