In Miller v. FSD Pharma Inc. (Miller), a decision released June 23, 2020, Morgan J. of the Ontario Superior Court of Justice granted leave to proceed with a putative secondary market securities class action under s. 138.3 of Part XXIII.1 of the Ontario Securities Act (OSA) against FSD Pharma Inc. (FSD), a new entrant into the Ontario cannabis production market.[1] The Miller decision is significant for two reasons. First, the Court applied the “market impact” test for assessing the materiality of the alleged misrepresentations. Second, the Court adopted a contextual approach to assessing materiality under the market impact test, highlighting the importance of the manner in which corrective information is disclosed to the public.

Background to the Decision

In late November 2018, FSD made statements regarding its 220,000 square foot, $55 million construction project (the Project) that misrepresented material facts regarding its progress. Specifically, FSD’s third quarter Management Discussion and Analysis (MD&A) represented to shareholders that the first phase of construction would be completed by the end of December 2018, and that the construction timeline and budget remained in line with FSD’s expectations.

In reality, the Project was in crisis.[2] The construction timeline was unknown, and FSD’s Project partner, Auxly Cannabis Group Inc. (Auxly), had told FSD that it did not have capacity to complete the Project. Significantly, the building permit for construction was not issued until December 21, 2018, leaving just one week between Christmas and New Years to complete the entire Project.[3]

On January 8, 2019, FSD published a press release with a single, corrective footnote stating that the first phase of construction would now be completed in 2019.[4] The market did not react to this information immediately. Specifically, it was not until February 2019, after FSD announced the termination of its agreement with Auxly, that the market dropped nearly 20% for FSD’s securities.[5]

Materiality was a central issue on the motion for leave. Whereas the Plaintiff advocated for the “reasonable investor” test for materiality, FSD argued for the narrower “market impact” test. According to the Plaintiff, the Project’s timeline was material because it was the sort of information a reasonable investor would want to know. According to FSD, the change disclosed on January 8, 2019 was not material because it did not have a significant impact on the market price of FSD’s securities following the correction.

The Court’s Analysis

The Market Impact Test Applies

The Court accepted FSD’s argument that the appropriate test for materiality on a motion for leave under s. 138.8 of the OSA is the market impact test. Specifically, the test is whether the information in question would reasonably be expected to have a significant effect on the market price or value of the company’s securities. Although some recent Superior Court decisions have suggested that the reasonable investor test may apply on a motion for leave under s. 138.3,[6] the Court followed the established caselaw from Kerr v. Danier Leather Inc. (2007) and Cornish v. Ontario Securities Commission (2013).

A Contextual Approach to Materiality

However, while the Court agreed with FSD that the market impact test applies on a motion for leave, it did not accept that the information allegedly withheld regarding the Project was immaterial simply because the January 8, 2019 press release had no immediate impact on the market price of FSD’s securities.

Here, the Court emphasized that corrective disclosure must be interpreted contextually, and that the materiality of alleged misrepresentations must be assessed in light of the form and content of the corrective disclosure. Specifically, citing the Supreme Court’s decision in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., Morgan J. emphasized that even though the market impact test analyzes materiality in economic terms, the assessment is a fact-specific inquiry, and hence, a court may consider contextual evidence which helps to explain, interpret, or place omitted information in a broader factual setting.[7]

The Court applied this contextual approach to the facts, and found that although the February 2019 announcements were not themselves corrective disclosure, they provided the fact-specific context for FSD’s “diminutive” footnote in the January 2019 press release. That is, in order to accurately understand the corrective disclosure, one had to consider the unstated context that emerged in February 2019 – namely, the fact that the Project was in crisis and FSD’s partnership with Auxly had fallen apart.

The Court found that, viewed in this context, the form of the January 2019 corrective disclosure downplayed the seriousness of the Project’s delay. It was no surprise, according to the Court, that a “small-print footnote buried in an otherwise distractingly positive press release” did not instigate an immediate reaction in the market.[8] Likewise, the Court found that the content of the corrective disclosure downplayed the significance of the information. The dates for the completion of the Project were “only the tip of an iceberg” given the deterioration of the Auxly partnership and the importance of the Project to FSD’s success.[9]

Key Takeaways

Miller is significant for two reasons. First, the Court rejected the reasonable investor test for the purpose of seeking leave on a motion under s. 138.8 of the OSA, holding that the narrower, market impact test applies to the definition of materiality instead. While some recent Superior Court decisions have suggested otherwise, Miller is consistent with leading appellate cases such as Kerr and Cornish.

Second, the Court confirmed that the market impact test for materiality will be applied contextually on a s. 138.8 motion for leave, and that the form and content of corrective disclosure will be scrutinized carefully. As a result, the fact that the market does not initially react to the alleged corrective information – especially when the information is buried in a disclosure document or lacks important context – will not necessarily insulate an issuer from a secondary market securities class action under s. 138.3 of the OSA.

[1] The author understands that FSD has served a Notice of Appeal of the Miller decision.

[2] Miller v. FSD Pharma Inc., at para 30.

[3] Miller v. FSD Pharma Inc., at para 34.

[4] Miller v. FSD Pharma Inc., at para 35, 45.

[5] Miller v. FSD Pharma Inc., at para 51.

[6] See, for example, Wong v. Pretium Resources (2017), and Paniccia v. MDC Partners Inc. (2018), and Cappelli v. Nobilis Health Corp. (2019). However, see also Dugal v. Manulife Financial (2013) at footnote 28.

[7] Miller v. FSD Pharma Inc., at para 23.

[8] Miller v. FSD Pharma Inc., at para 35.

[9] Miller v. FSD Pharma Inc., at para 68.


The author would like to thank Tiana Corovic for her contributions.