Quebec Court of Appeal confirms administrative penalties applications not subject to general rules of prescription

The Quebec Court of Appeal recently dismissed the appeals launched by directors and officers of a reporting issuer, Nstein Technologies, against two judgments rendered by the Court of Quebec in a statutory appeal of a judgment by the Quebec securities tribunal, the Tribunal administratif des marchés financiers (the TMF).

The TMF had granted an application by the Quebec securities regulator, the Autorité des marchés financiers (the AMF), to impose administrative penalties against the appellants for breaches to insider trading and tipping provisions under the Québec Securities Act (the QSA). The AMF’s application essentially stemmed from a decision made by Nstein Technologies’ board of directors to grant options to employees and officers while discussions as to a potential acquisition involving the corporation had taken place.

In the first judgment, rendered on October 19, 2017, the Court of Québec dismissed the exception raised by one of the appellants, alleging that the AMF’s application before the TMF was time-barred as it was filed after the 3-year limitation period provided for by article 2925 of the Civil Code of Québec (the CCQ). In the second judgment, rendered on February 26, 2018, the Court of Québec dismissed the appeal of the TMF judgment.


In an unanimous decision, the Quebec Court of Appeal confirmed the two decisions rendered by the Court of Quebec and made a number of relevant findings as to the legal regime applicable to AMF’s applications for administrative penalties based on section 273.1 QSA, including the following:

  • The general regime of the CCQ does not apply – not even in a complementary manner – to these applications, which do not fall under the jus commune in matters of “persons, relations between persons, and property” pursuant to the CCQ’s preliminary provision.
  • Applications for administrative penalties based on section 273.1 QSA follow the exercise of an administrative power by the AMF, pursuant to a specific mission granted by the Quebec legislator, and do not constitute actions to enforce a “personal right” within the meaning of article 2925 CCQ.
  • Contrary to other recourses under the QSA (e.g., in penal matters), section 273.1 QSA does not provide for any limitation period, such that the criteria of “reasonable time” established by the Supreme Court of Canada for administrative matters is the one applicable. (See Blencoe v. British Columbia (Human Rights Commission), 2000 SCC 44 (“Blencoe“).
  • In order to obtain remedies for unreasonable delays in administrative matters, such as applications for administrative penalties by the AMF, evidence must be made “of significant prejudice which results from an unacceptable delay”(see para. 101 of Blencoe). This argument should therefore be made (along with the required evidence supporting it) before the administrative tribunal, such as the TMF, not for the first time in appeal.

Moreover, the Quebec Court of Appeal applied the new principles established by the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov (2019 SCC 65) and in Bell Canada v. Canada (Attorney General) (2019 SCC 66), both released on December 19, 2019 after the judgments of the Court of Quebec discussed above, to the judicial review and statutory appeal of administrative decisions.  Further details on these decisions can be found in a previous blog post which can be found here.

The Court of Appeal confirmed that the Court of Quebec would have had to apply the standards of appellate review to the statutory appeal of the TMF judgment and proceeded to qualify the errors invoked by the appellants. In a nutshell, the Court of Appeal ruled that the appellants did not invoke any errors of law but only of fact or of mixed fact and law and, as such, that the standard of palpable and overriding error was applicable. The Court of Appeal refused to enter into any detailed analysis of these errors, being of the view that they pertained to the appreciation of the evidence by the TMF and were inside the scope of the latter’s expertise. The Court of Appeal noted that the 51-page judgment rendered by the TMF was detailed, that the conclusions reached were supported by the evidence and that the analysis was clear.

Of importance is also the remark of the Court of Appeal that the mere acceptance of options does not preclude insider trading. The Court relied on section 189.1 QSA, stating in part that “[n]o person prohibited from trading in securities of a reporting issuer (…) by the effect of section 187 or 189 may use the privileged information in any other manner unless he is justified in believing that the information is generally known to the public”, which extends the prohibition to the trading in options.

Managing Securities Litigation Risks in the Age of Uncertainty

The price at which securities of many Canadian issuers are trading has been significantly affected by the global coronavirus pandemic. This will almost certainly impact their risk of litigation arising from the accuracy their public disclosures. For companies that are dual listed in the United States, the risks are likely enhanced.

These risks appear to be exacerbated for issuers whose shares trade on Canadian exchanges as a result of the recent suspension of Ontario limitation periods, giving security holders a longer time within which to commence litigation.

With this in mind, issuers are well advised to continue to work closely with their legal counsel, audit committees, and, as appropriate, auditors to ensure that their risk and financial disclosures are robust, and that material information is disclosed promptly.

Potential civil claims

As our colleagues in the United States have observed, recent event may incite plaintiffs to challenge, with the benefit of hindsight, the extent to which companies have appropriately disclosed risks within their operations or supply chains that make them susceptible to global events like the current Covid 19 pandemic.  Current events may also give rise to allegations regarding whether companies are acting quickly enough to disclose, in a timely manner, the ongoing risks and impacts to their operations arising from the pandemic.

Insurers and issuers whose shares trade on Canadian exchanges should note that pursuant to the recent order made under subsection 7.1(2) of the Emergency Management and Civil Protection Act, limitation periods for the commencement of any action are suspended for the duration of the COVID-19 emergency period, retroactive to March 16, 2020.[1]  This means that even after normal business operations resume, claimants will have a longer time within which to commence litigation, including securities class actions alleging that issuers made misrepresentations or material omissions in their public disclosures.

Measures taken by securities regulators in Canada

Some steps have been taken by securities regulators across Canada in response to the pandemic.  For example, on March 18, 2020, the CSA announced it will introduce blanket relief for market participants in the form of a 45-day extension for regulatory filings (financial statements, management’s discussion and analysis, management reports of fund performance, annual information forms, technical reports, and certain other filings) required to be made on or before June 1, 2020.  The CSA’s news release can be found here.  The SEC, in the United States, issued an order two weeks earlier, on March 4, 2020, similarly providing relief for certain filings, subject to certain conditions.

The CSA and the individual provincial securities regulators have, to date, not provided specific guidance concerning the impact of the global pandemic on corporate disclosure obligations beyond extended dates for regulatory filings.  In contrast, the above noted SEC order was accompanied by a press release in which  SEC Chairman Jay Clayton emphasized the need for US issuers to collaborate with their audit committees and auditors to ensure robust and timely disclosure of all material risks to their business and operations to the fullest extent practicable:

“We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments. How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.”  SEC’s full press release can be found here.

In general, Canada issuers are advised to consider existing law and guidance concerning their continuous disclosure obligations including in National Instrument 51-102 – Continuous Disclosure Obligations, CSA Staff Notice 51-328 – Continuous Disclosure Considerations Related to Current Economic Conditions (January 8, 2009), CSA Staff Notice 51-330 Guidance Regarding the Application of Forward-Looking Information Requirements under National Instrument 51-102 Continuous Disclosure Obligations (November 20, 2009), and, as applicable, OSC Staff Notice 52-719 Going Concern Disclosure Review (December 17, 2010), and to consult with their respective legal counsel, audit committees and auditors.

Delaware Supreme Court holds Delaware corporations can adopt federal-forum selection provisions

On March 18, 2020, the Delaware Supreme Court reversed the Delaware Court of Chancery and held that Delaware corporations can adopt federal-forum selection provisions (FFPs) requiring that claims arising under the federal Securities Act of 1933 (1933 Act) be brought in federal court. The case is styled Salzberg et. al v. Sciabacucchi, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020). Companies should strongly consider using the Salzberg decision as an opportunity to adopt an FFP. Absent such a provision, 1933 Act class actions – which are frequently filed after initial and secondary public offerings – may be brought in state court and cannot be removed to federal court. Because the prospects for obtaining an early dismissal are typically far greater in federal court than in state court, adopting an FFP can provide a significant litigation advantage.

Norton Rose Fulbright has prepared a legal update that discusses the background of the case and the Delaware Supreme Court’s decision in more detail.

Landmark Changes to the BC Securities Act are Set to Take Effect March 27

As previously reported, on October 21, 2019, the BC provincial government announced sweeping and significant changes to the BC Securities Act which are intended to give the BC Securities Commission (BCSC) the strongest powers in the country to impose tougher consequences for wrongdoers.  The provincial government recently issued an order in council confirming that these changes will take effect on March 27.

The amendments not only broaden the types of misconduct the BCSC regulates, but provide for expanded powers to collect financial sanctions through enhanced abilities to freeze property and new powers to seize registered retirement savings plans.

Particularly troublesome is the power of the BCSC to order significant administrative penalties against persons (including companies) without a hearing and without advance notice to such person.  Following notice of the penalty, persons have a right to dispute the contravention and request an opportunity to be heard.

Many of these changes are unprecedented and no doubt be litigated in the coming years.

One of the originally proposed changes which was certain to be litigated through the courts, BCSC’s ability to ask the Insurance Corporation of British Columbia to refuse issuance of a driver’s license or car insurance to anyone who owes the BCSC more than $3,000, is not being brought into force at this time.  Whether this change is brought in to take effect at a later date remains to be seen.

Yukon Court of Appeal reinstates transaction price as fair value of shares

The Yukon Court of Appeal recently allowed an appeal from a Supreme Court decision that awarded dissenting shareholders US$71.46 per share as fair value of their InterOil shares, a 43% premium over the transaction price of US$49.98. The trial court decision had generally been viewed as an outlier in fair value case law, given that the award represented a significant premium over the transaction price. The Court of Appeal found the transaction price reflected fair value and reduced the award to that amount.

It made a number of highly relevant and important remarks regarding the probity of evidence of fair value in the case at hand (which could also be relevant in other dissent rights matters), including:

  • The transaction price reflected a negotiated price in a competitive market (even without a full auction) among well-informed and sophisticated parties.
  • The transaction price represented a significant premium to the pre-announcement (and thus unaffected) stock price.
  • Large sophisticated institutional investors who were InterOil shareholders, presumably experts in assessing value, accepted the deal price and voted in favour of the second plan of arrangement.
  • Other interested bidders, such as OilSearch, chose not to increase their bids.

The Court of Appeal also noted the fair value set by the trial court at US$71.46 per InterOil share would have implied that a prospective purchaser of InterOil would have been willing to pay approximately US$1 billion more than the total amount Exxon paid for all the shares. The Court of Appeal agreed with Exxon it was unreasonable to believe, given the number of sophisticated parties involved in the transaction, that US$1 billion in value was simply “left on the table.”

The Court of Appeal decision underscores that fair value awarded in dissent proceedings must be rooted in “reliable and objective market evidence,” where such evidence is available, which should not be set aside in favour of “theoretical derivations of value [that are] rife with speculation or uncertainty.”  This Yukon Court of Appeal decision could serve as an important roadmap to Canadian courts in future dissent rights cases.

Directors and officers face increased liability risk due to climate change

Climate change has been a focus in the United States for quite some time now, and the US Securities and Exchange Commission (SEC) published interpretive guidance on climate change disclosures a decade ago. However, the times are changing—and the potential liability for directors and officers has never been higher. Climate change disclosures have been debated at the highest levels of the SEC, and the Plaintiffs’ bar can be expected to broaden their lawsuits beyond the usual fossil fuel producer or utility targets.

Norton Rose Fulbright has prepared a legal update that discusses the evolution of the SEC’s position with respect to climate change and describes the latest developments impacting director and officer liability.

US federal court holds unsponsored ADRs may be subject to US securities laws

On January 28, 2020, in a case that potentially expands the liability of foreign companies, the US District Court for the Central District of California denied a foreign defendant’s motion to dismiss securities law claims brought by US purchasers of its unsponsored, unlisted American Depository Receipts (ADRs). Specifically, in Stoyas v. Toshiba Corp., — F. Supp. 3d —, No. 15-cv-4194, 2020 WL 466629 (C.D. Cal. Jan. 28, 2020), the District Court held that Plaintiffs sufficiently pled that their purchases of Defendant’s unsponsored ADRs on the over-the-counter (OTC) market constituted domestic transactions in securities, as well as alleging the Defendant’s plausible participation in the establishment of the ADR program so that the Defendant’s alleged conduct was “in connection with” Plaintiffs’ purchases. The District Court permitted Plaintiffs’ separate claims under Japanese securities laws to go forward as well, concluding that principles of international comity and forum non conveniens did not bar the exercise of supplemental jurisdiction over such claims.


In June 2015, Plaintiffs filed a class action lawsuit under Sections 10(b) and 20(a) of the US Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder, as well as claims under Japan’s Financial Instruments & Exchange Act (JFIEA), against Defendant Toshiba Corporation (Toshiba) based on the alleged deliberate use of improper accounting practices. The District Court dismissed the Plaintiffs’ complaint with prejudice, 191 F. Supp. 3d 1080 (C.D. Cal. 2016), concluding that the OTC market on which the ADRs were exchanged was not an “exchange” under the Exchange Act and that the Plaintiffs failed to adequately plead Defendant’s involvement in the ADR transaction at issue. The District Court also dismissed the Plaintiffs’ claims under JFIEA on the basis of international comity and forum non conveniens.

On appeal, the US Court of Appeals for the Ninth Circuit, 896 F.3d 933 (9th Cir. 2018), reversed the District Court’s decision in light of Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), and relevant Second Circuit Court of Appeals cases. In Morrison, the US Supreme Court held that US securities laws only apply extraterritorially to (1) “transactions listed on domestic exchanges” and (2) “domestic transactions in other securities.” The Ninth Circuit agreed with the District Court that the OTC market did not qualify as an “exchange” under Morrison’s first prong. It held, however, that ADRs were “securities” under the Exchange Act and would therefore be subject to US securities laws if purchased in a “domestic transaction.” In determining whether a transaction is “domestic,” the Ninth Circuit adopted the Second Circuit’s standard in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), which provides that a “transaction occurs when the parties incur irrevocable liability.” The Ninth Circuit acknowledged that specific allegations regarding this irrevocable liability standard, i.e., where purchasers incurred the liability to take and pay for securities and where sellers incurred the liability to deliver securities, in addition to allegations regarding Defendant’s involvement in the ADR transaction to make its alleged conduct to be “in connection with” Plaintiffs’ purchases as required by Section 10(b), were missing from Plaintiffs’ complaint. To that end, the Ninth Circuit remanded the case for Plaintiffs to amend their complaint.

After the US Supreme Court denied Defendant’s petition for certiorari to review the Ninth Circuit’s decision, Plaintiffs filed a second amended complaint (SAC) with the District Court.

The District Court’s decision

On remand, the District Court denied the Defendant’s motion to dismiss the SAC.

First, the District Court held that Plaintiffs adequately alleged that the ADR transaction was “domestic” under Morrison. The Plaintiffs alleged, for instance, that the tasks carried out by the broker, the placement of buy orders, the payment of the purchase price and the transfer of title all took place in a single transaction in the United States, which the District Court held led to a “plausible inference that the parties incurred irrevocable liability within the United States.” In contrast, the Defendant argued that the Plaintiffs would have first purchased Toshiba stock in a foreign transaction and then, in a second transaction, deposited the shares with the issuer in exchange for the ADRs at issue here. The court stated if “discovery ultimately reveals that the ADR transaction involved an initial purchase of common stock in a foreign transaction, as the Defendant contends, [that] can be a matter properly raised at the summary judgment stage.”

Second, the District Court held that the Plaintiffs sufficiently pled that the Defendant’s alleged conduct was “in connection with” the ADR transaction. In reaching this conclusion, the District Court focused on whether the Defendant participated in or consented to the establishment of the unsponsored ADR program. The District Court pointed, for instance, to Plaintiffs’ allegations regarding “the nature of the . . . ADRs, the OTC Market, the Toshiba ADR program, including the depositary institutions that offer Toshiba ADRs, the Form F-6s, the trading volume, the contractual terms, and Toshiba’s plausible consent to the sale of its stock in the United States as ADRs.” Further, the District Court focused on the Plaintiffs’ allegation that the Bank of New York Mellon, one of Toshiba’s ten largest shareholders and one of the depositary institutions for Toshiba ADRs, held 1.3 percent of Toshiba’s outstanding stock, and the Plaintiffs’ assertion that it is unlikely for that many shares to be obtained without the consent, assistance or participation of Toshiba. Based on the foregoing, the District Court concluded that the Plaintiffs sufficiently alleged Toshiba’s plausible participation in the establishment of the ADR program.

The District Court next analyzed whether comity or forum non conveniens principles warranted dismissal of the Plaintiffs’ claims. Because the Plaintiffs and the proposed class were all US nationals and plausibly satisfied Morrison’s requirements to plead a domestic transaction, the District Court held the allegations in the case were “sufficient to permit this case to move forward in this forum.” The District Court also stated that “[i]n light of the court’s conclusion that Plaintiffs have sufficiently alleged Securities Exchange Act claims, the court concludes that comity and forum non conveniens do not compel dismissal of Plaintiffs’ JFIEA claim.” The District Court did not elaborate on the latter point, noting that it declined to review prior briefing on this issue to which the Defendant referred the Court. In light of the foregoing, the District Court decided to continue to exercise supplemental jurisdiction over the Plaintiffs’ JFIEA claim.


Stoyas signals the potential expansion of liability for foreign entities who have unsponsored ADRs issued in the US. One critical feature will be the extent to which the foreign entity participates in, or consents to, the unsponsored ADR program in order to make any alleged misconduct to be “in connection with” the purchase and sale of the ADRs. Foreign entities therefore might wish to review the degree to which they are involved in unsponsored ADR programs as part of a comprehensive risk analysis of potential liability under US securities laws.

Stoyas might also open the door for courts to exercise supplemental jurisdiction over foreign-law claims where US investors adequately allege US securities claims in the same suit.

One thing is for certain: Stoyas bears watching as the case proceeds into discovery and as to how persuasive the decision is for other US federal courts.

An investigator’s misconduct can lead to a stay of proceedings

In the last 5 years, investigators with the Quebec securities regulator, the Autorité des marchés financiers (AMF), have more and more often turned to authorizing judges to secure search warrants allowing them to enter people’s homes and collect evidence. The hearings before the authorizing judges are held ex parte and authorization is granted on the basis of the affidavit filed by the AMF investigator.

Despite the Zalat v. R. (2019 QCCA 1829) being a criminal case, the teachings of the Quebec Court of Appeal, described below, are easily transposable to a securities litigation setting.

The Quebec Court of Appeal in Zalat ordered a stay of the proceedings against Zalat for possession and careless storing of a restricted weapon, on account of the misconduct of the main investigator, Sergeant-Detective McCann, which was found to have undermined the integrity of the judicial process. The firearm had been seized by the police during the execution of a search warrant which was authorized by a judge on an ex parte basis, relying on a sworn affidavit of McCann setting out information provided by a police informant as verified by the police.

Five failings of McCann were analyzed by the Court of Appeal:

  1. His systematic and intentional destruction of notes of discussions with any of the thirty-odd police informants under his control (including the one on whom he relied in his affidavit to obtain the search warrant targeting Zalat’s home) after he had completed a “source report”.
  2. His patently unreasonable interpretation of the Montreal Police Service Policy which required McCann to place all documents regarding a police informant in a sealed, confidential envelope to be sent to a specific team within the Police Service, which not only did not justify his destruction of his notes, but also breached his duty to preserve evidence. In so acting, McCann’s conduct denoted unacceptable negligence, indifference or carelessness towards the criminal process and the rights of an accused.
  3. His knowledge that the destruction of the notes of his discussion with the police informant in this case would prevent Zalat from being able to use them in Court. The Court highlights McCann’s testimony under oath that he took as few notes as possible, “knowing what could come of them in court”.
  4. The affidavit signed by McCann and presented to the authorizing judge was found lacking in many respects.

He purposefully failed to inform the authorizing judge that he was the officer in control of the police informant on whom he relied in his affidavit.

He drafted his affidavit to lead the authorizing judge to believe that he gained knowledge of the facts alleged in his affidavit through a document provided by the police informant where no such document existed.

He attributed to the police informant information that was a lot more precise than what had in fact been provided by the police informant.

He destroyed the notes of the discussion with the police informant, prohibiting any verification of the accuracy of the statements in the “source report” and his affidavit.

  1. McCann’s favouring of the end result of his search and seizure, regardless of the impact of his conduct on the process leading to the seizure. The Court highlights McCann’s comment to the trial judge that whatever decision she reached on the possible exclusion of the seized evidence, he knew that he had taken a firearm off the streets and “that’s what mattered”.

The Court held that the authorization process leading to the issuance of a search warrant could not perverted in this way and that courts should not tolerate such a lack of transparency in an ex parte proceeding seeking permission to search a person’s home. This was a clear case warranting a stay of proceedings.

Alberta Court Finds that Administrative Penalty Survives Bankruptcy

In January 2020, Madam Justice B.E. Romaine of the Court of Queen’s Bench of Alberta (Court) ruled that an administrative penalty levied against the Respondent by the Alberta Securities Commission (ASC) survived his discharge from bankruptcy. (See Alberta Securities Commission v Hennig, 2020 ABQB 48)

The administrative penalty was levied in 2008 against the Respondent after the ASC found that he was responsible for misrepresentations in the financial statements of a public company of which he was a director and officer; that he financially benefited from the misrepresentations; that he participated in market manipulation; and that he made ongoing misrepresentations to ASC staff.

An appeal by the Respondent was later dismissed.

The Respondent filed an assignment in bankruptcy in 2010.  Nearly a decade later, Romaine J. was tasked with deciding whether the administrative penalty should survive the Respondent’s discharge from bankruptcy.

A discharge from bankruptcy releases an individual bankrupt from all provable claims in bankruptcy, subject to certain statutory exemptions under s. 178(1) of the Bankruptcy and Insolvency Act (BIA).

The Respondent argued that the statutory exemptions should be construed narrowly and not as capturing his administrative penalty.  The ASC argued that the statutory exemptions should capture any decision of a regulatory authority that involves the public interest.

Romaine J. did not accept either submission – at least not fully.  She interpreted s. 178(1) purposively.  The purpose underlying BIA, s. 178(1)(e) was precluding dishonest debtors from benefitting from their dishonesty.  Not all administrative penalties should survive a bankrupt’s discharge; however, the Respondent’s administrative penalty resulted from conduct that caused property to pass based on fraudulent misrepresentations and false pretenses.

The Respondent’s administrative penalty was imposed in response to his fraudulent conduct, and consistently with the ASC’s mandate to protect the public interest and promote the integrity of the capital markets, and would therefore survive any discharge from bankruptcy under BIA, s. 178(e)


Insider trading prosecutions may increase after Second Circuit decision lowered barriers to convict

The Second Circuit recently determined that the criminal securities fraud provisions that were enacted as part of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) have less onerous requirements for proving insider trading than under the general antifraud provisions of the Securities Exchange Act of 1934 (Exchange Act), specifically Section 10(b) of the Exchange Act. Section 10(b) has been the traditional way for prosecutors to charge insider trading. Pursuant to Supreme Court rulings, an insider must breach a duty of confidentiality and receive a “personal benefit” in order to have engaged in the illegal tipping of material, non-public information to others. Similarly, in order to prosecute the recipient of a tip for insider trading, prosecutors had been required to prove that the tippee knew that the source of the information had breached his or her duties by disclosing the information. In a 2-1 opinion issued on December 30, 2019, the Second Circuit upheld the convictions of several defendants for, among other things, violating the Sarbanes-Oxley securities fraud provision by engaging in insider trading despite the jury’s acquittal on the Section 10(b) charges because of the lack of proof that the tipper received a personal benefit. United States v. Blasczczak, No. 18-2825 (2d Cir. Dec. 30, 2019).

To read the full article, please click on this link.