Representative Plaintiffs Jon-Erik and Nicole Dillon (the Dillons) sought authorization from the Superior Court of Quebec (Court) to bring a class action against Wayland Group Corp (Wayland) under the general civil liability regime in Quebec (Art. 1457 Civil Code of Quebec (CCQ)).
Wayland is a federal licensed producer and distributor of cannabis with production facilities in Canada and in Europe. During and prior to the Class Period (January 26, 2018 to April 23, 2019), Wayland listed its common shares on the Canadian Securities Exchange and on the Frankfurt Stock Exchange.
The proposed Class Period :
- begins with the release of Wayland’s 2016 Annual Information Form (AIF) and the CEO and CFO certifications attesting that the 2016 AIF did not contain any misrepresentations. Its shares at that time were trading at $4.11 per share on the CSE.
- ends when Wayland announced that it was not able to file its 2018 audited annual financial statements and MD&A, causing the price for Wayland shares to close that day at $0.90 per share.
This announcement foreshadowed the financial losses and lack of internal controls at Wayland and lack of integrity of its founder and former CEO, later revealed by the resignation of Wayland’s auditor, the resignation of the founder and former CEO, the OSC’s enforcement proceeding against him relating to a previous Ponzi scheme, and Wayland’s CCAA Proceeding.
The Dillons argued that those who invested in Wayland’s securities suffered monetary damages when the value of their securities dropped as a result of the disclosure of Wayland misrepresentations as to:
- The costs and timing of each phase of the expansion of its main cannabis production facility;
- The funding status of the first phase of the expansion;
- The use of the proceeds from Wayland’s public offerings; and
- The production of cannabis expected as of the beginning in 2019
Justice Bisson’s discussion on the jurisdiction of the Quebec courts under Art. 3148 CCQ, dependent on whether a fault was committed in Quebec or an injury was suffered in Quebec, is noteworthy.
Was a Fault Committed in Quebec?
During the Class period, Wayland was an “Issuer” in Québec (as it had securities outstanding as per section 5 the Quebec Securities Act (QSA)). Wayland was a “Reporting Issuer” in Ontario and elsewhere in Canada.
Reporting Issuers select one province as their primary regulator, and then rely on the vast similarities between each province’s Securities Act to achieve compliance across Canada with each province’s continuous disclosure regime.
Wayland’s principal regulator during the Class Period was Ontario. As a result, Wayland was required to comply with Part XVIII of the Ontario Securities Act. Its equivalent in the QSA is Title III. Under Section 74 QSA found in Title III,
“An issuer that is not a reporting issuer [in Québec; like Wayland] shall provide any disclosure prescribed by regulation in accordance with the conditions determined by regulation.”
The applicable regulation in Québec is Regulation 51-102 Respecting Continuous Disclosure Obligations, which is nearly identical to National Instrument 51-102 “Continuous Disclosure Obligations”. It contains numerous provisions prescribing the contents of an AIF.
The Court found that the residents of Québec who purchased Wayland shares did so at least in part in reliance, directly or indirectly, upon the representations from Wayland management about the company and its business, operations and finances as disclosed in its public SEDAR filings, such as the 2016 AIF. Insofar as the 2016 AIF contained the above alleged faulty representations of material fact and faulty omissions of material fact which rendered the disclosure misleading, the Court found that a fault was committed in Quebec, giving the Quebec courts jurisdiction under Art. 3148 CCQ.
Was Injury Suffered in Quebec?
Where financial damage is merely recorded in Québec, that fact is not sufficient to ground the Quebec courts’ jurisdiction under Article 3148 CCQ as per Poppy Industries Canada Inc. v. Diva Delights Ltd., 2018 QCCA 163, par. 40-41.
In this instance, the Court found that on a prima facie basis, there was a disputable argument to be made that the loss alleged to have been incurred by the Plaintiffs was not merely a loss recorded in Québec, but rather an injury that was really suffered in Québec because the Plaintiffs:
- Reside in Québec;
- Made their purchase and sell orders for Wayland securities in Québec;
- Received confirmation of their purchase and sell orders in Québec;
- Held the securities in Québec; and
- Suffered monetary loss in Québec.
As a result, on this ground as well, the Court found that it had jurisdiction over the matter.
The author would like to thank Mikaela Mailly for her contribution to this article.