Shareholder applied for certification of securities action of action on behalf of all shareholders
The Ontario Court of Appeal has overruled a lower court’s characterization of a proposed securities class action against a cannabis company as separate misrepresentations and has found a basis to treat it as a claim for a single misrepresentation.
In Badesha v. Cronos Group Inc., 2022 ONCA 663, the appellant wanted to bring a class action on behalf of those holding shares in Cronos Group Inc. between Aug. 14, 2018, and Mar. 30, 2020. Cronos was a Canada-based company that focused on the cultivation, manufacturing, and marketing of cannabis and cannabis-derived products for medical and recreational purposes.
The appellant alleged that the company’s public filings mischaracterized the cannabis dry-flower/resin exchange transactions as generating revenue, which amounted to misrepresentation under s. 138.3 of Ontario’s Securities Act. He moved for leave of the court under s. 138.8 of the Securities Act and for certification of the action under Ontario’s Class Proceedings Act.
The Ontario Superior Court of Justice dismissed the leave and certification motions. The motion judge characterized the appellant’s statement of claim as alleging that the defendants made 7,449 individual misrepresentations. He found no reasonable possibility that the appellant could succeed at trial because the appellant provided no evidence that each of the alleged misrepresentations materially contributed to the drop in the company’s share prices at the time.
The appellate court granted leave for the appellant to proceed with the misrepresentation action under s. 138.3. The court remitted the issue of whether the action should be certified as a class proceeding, including as a global class proceeding, to the Superior Court for determination.
Misrepresentation a single act against shareholders
The appellant’s claim, when read generously, did not allege 7,449 individual misrepresentations and instead alleged that Cronos misrepresented its revenues for two quarters in 2019, the appellate court found. These alleged material misrepresentations affected share prices at that time and were corrected in 2020.
The appellate court found that the motion judge prematurely assumed that the alleged misrepresentations should be treated as multiple individual misrepresentations. The appellate court instead found a basis to treat the claim as alleging a single misrepresentation, given the way that the claim was pleaded and given the core commonality among the alleged misrepresentations.
The appellate court said that the motion judge’s characterization of the claim was inconsistent with its structure, its wording, and statutory intent, which led to an erroneous application of the test for leave under s. 138.8.
There was sufficient evidence to support a finding that the appellant had a reasonable possibility of success, the appellate court held. The court accepted that there was conflicting evidence on the issue of whether misrepresentations or other factors like the COVID-19 pandemic reduced share prices. However, the court noted that there were admitted misrepresentations and that the company’s share prices dropped around the time when it publicly announced corrections.
The motion judge primarily based the decision to refuse leave on his erroneous characterization of the claim, the appellate court said. If the judge properly approached the claim, he would have found a reasonable possibility that the appellant would succeed at trial, said the court.