Following several years in which the number of class actions declined (as we reported in 2018 and 2019), 2019 saw the filing of the second-highest number of securities class actions in
Cannabis Securities Class Actions Growing Like Weeds
Since the enactment of Part XXIII.1 of the
In the latter part of 2018, the Canadian government passed the Cannabis Act, S.C. 2018, c.16, which was designed to, among other things, regulate the production, distribution, marketing, and sale of recreational cannabis. The public markets seized upon the widespread optimism and the new opportunities that came with its legalization. Since that time, the industry has been subject to significant restrictions and oversight by securities regulators and licensing authorities. Consequently, the volatility of the market, along with the dashed dreams of many investors, has caught a number of industry players in a web of litigation.
At the time that the Cannabis Act was passed by
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Licensed cannabis producers had failed to provide sufficient information in their financial statements and their MD&A for an investor to understand their financial performance, especially insofar as information that related to recording growing cannabis plants at their fair value;
- Some issuers had failed to consistently comply with securities requirements for forward looking information and in their guidance for providing balanced disclosure; and
- Almost 75% of the issuers with cannabis operations in
the United States had failed to provide sufficient disclosure about the risks related to their US operations. - Earle v.
CannTrust Holdings Inc. et al (Ontario Superior Court ), where the plaintiffs claim that public statements made byCannTrust in relation to its compliance with cannabis licensing requirements were false, after it was reported thatCannTrust was illegally producing and selling cannabis from unlicensed locations, which caused a massive drop inCannTrust's share price, an OSC cease trade order, andCannTrust's ultimate application for creditor protection pursuant to the Companies' Creditors Arrangement Act (Canada );7 - Miller v.
HEXO Corp. (Quebec Superior Court ), where the plaintiffs allege thatHEXO made false representations in press releases and other disclosure documents about the expected revenues from a contract of cannabis supply with theQuebec government and the expected revenues to be generated in the acquisition of another cannabis producer;8 - Dillon v.
Wayland Group Corp. (Quebec Superior Court ), where the plaintiffs claim that there were misrepresentations pertaining to the timing and cost of Wayland's expansion of its cannabis growing facility inLangton, Ontario , including the funding of that expansion and the amount of cannabis production that Wayland could achieve in 2019;9 and - Harpreet v.
Cronos Group Inc. (Ontario Superior Court ), where the plaintiffs allege that Cronos inflated its revenues from cannabis products by improper accounting from bulk transactions, and misrepresented those revenues in interim financial statements, in its MD&A, and in press releases.10 - Automatic dismissal of class actions after one year, unless certification materials have been filed by the plaintiffs or a timetable has been agreed to or fixed by the Court; and
- Tolling period for limitations periods has been amended to allow for limitation periods to run against class members once they are no longer actively involved in the class action.
In November of 2019 and as a consequence of significant growth and activity in the cannabis sector, CSA Multilateral Staff Notice 51-359 was published to outline the regulators' additional areas of concern.5 In that Notice, Staff of the securities regulatory authorities in each of
Not surprisingly, these Notices also prophesized (or recorded) the battleground for securities class actions in the cannabis industry, and in 2019 and 2020, several proposed class actions alleging secondary market liability against cannabis industry issuers (and, in some cases, against their officers, directors, auditors, and underwriters) were commenced, including:
- Miller v.
The cannabis sector must also still grapple with traditional product liability class actions, like
What's next for the cannabis industry? Our view is that the ongoing disclosure of issuers will continue to attract intense scrutiny from regulators and participants in the public markets, especially considering the volatility of this market and the negative publicity surrounding some of the large players in cannabis production and sales. We also expect to see a surge of securities class actions against cannabis companies in the US (including Canadian companies listed on US exchanges), which are similarly focused on disclosure deficiencies. In fact, NERA has reported that 8 out of the 12 US securities class actions commenced in 2019 against cross-listed Canadian companies carried on business in the cannabis industry.13 This may continue until class counsel determine that this is not a fruitful avenue for potential claims, which may coincide with growing maturity and progress in the cannabis industry in respect of statutory and financial disclosure.
Whoa - What about the Recent Amendments to the Class Proceedings Act (
On
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Preliminary motions that may narrow or dispose of issues in a proceeding can be brought by defendants in advance of certification motions;
On the other side of the coin, the amendments have clarified prior inconsistent case law relating to the three-year limitation period for proposed class actions that are commenced pursuant to Part XXIII.1 of the Securities Act. In particular, the amendments confirm that secondary market liability class actions will be considered to have been "commenced" upon the issuance of the originating process, and not at the time of the mandatory motion for leave to proceed pursuant to Part XXIII.1 of the Securities Act (to address previous cases where limitation period defences accrued after the issuance of the claim but before the motion for leave could be scheduled or heard).
What impact will all of these amendments have on Part XXIII.1 claims going forward? Time will tell, but considering the high stakes often involved with these class actions, it is unlikely that plaintiffs' counsel with significant, reasonable secondary market claims will be deterred. However, there may be an inclination by class counsel to proceed with their claims in provinces other than
Footnotes
1 Trends in Canadian Securities Class Actions: 2019 Update,
2 The amendments to
3 NERA at p. 3.
4 CSA Staff Notice 51-357, "Staff Review of Reporting Issuers in the Cannabis Industry".
5 CSA Multilateral Staff Notice 51-359, "Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry".
6 Miller v
7 Earle v
8 Miller v
9 Dillon v
10 Harpreet v
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12 Langevin v.
13 NERA at p. 4.
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Cassels
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