On January 23, 2023, the Superior Court of Québec refused to authorize (certify) a securities class action brought against HEXO Corp., a licensed producer and distributor of medical and recreational cannabis, and its Chief Executive Officer, Mr. Sébastien St-Louis .
The Plaintiff sought authorization to institute a class action against Defendants for damages resulting from misrepresentations and breaches of disclosure obligations in both the primary and secondary markets, under Division II of the Quebec Securities Act  (QSA) and under article 1457 of the Civil Code of Québec (CCQ).
Section 225.4 QSA, like the other provincial securities acts, allows for secondary market claims on authorization from the court where the plaintiffs are in good faith and there is a reasonable possibility that the action will be resolved in their favor on the merits.
While the ordinary rules of civil liability require the Plaintiff to prove fault, damages, and a causal link between the two, the QSA regime facilitates an investor’s recourse in the secondary market, by removing the civil liability requirements requiring a plaintiff to prove a causal link between reliance on false or misleading information and the damage he or she has suffered.
The Court agreed with the Defendants that there was “no reasonable possibility” that the secondary market claim filed under the QSA had a reasonable chance of success, or that the Plaintiff had demonstrated an arguable case for a primary market class action or a civil liability class action for misrepresentation under the general principles at civil law.
Because the test for instituting a statutory claim under the QSA is more demanding than pursuant to the general rules respecting class actions (a reasonable possibility of success rather than a mere arguable case), the practice is for the court to begin its analysis with the claims under the Securities Act.
Plaintiff’s first ground was based on the supply agreement between HEXO and the Société Québécoise du Cannabis (“SQDC”).
The Cannabis Supply Agreement Between HEXO and the Société Québécoise du Cannabis
HEXO signed a five-year supply agreement with the SQDC, the province-owned corporation tasked with selling cannabis products in Québec. Pursuant to this agreement, HEXO agreed to supply the SQDC with 20,000 kg of products in the first-year post-legalization, 35,000 kg in the second year, and 45,000 kg in the third year. The agreement contained a take or pay clause. In the press release announcing this agreement, HEXO added that SQDC had the right to terminate the agreement in certain circumstances and inserted cautionary language that one should not read the agreement as an assurance that actual product volumes will be supplied by HEXO.
Plaintiff claimed that HEXO had made misrepresentations  with respect to the supply agreement, by stating that the agreement “guaranteed” revenues associated with the sale of 20,000 kg of cannabis products.
The Court disagreed that HEXO had misled investors, noting that “[t]he fact that the SQDC did not fulfill its first-year purchase commitment or that defendants decided not to enforce the take or pay features are not evidence that the public statement were untrue or misleading at the time they were made. As stated previously, the Court does not make assessments with the benefit of hindsight.”
The Acquisition of Newstrike: The Regulatory Issues
HEXO purchased Newstrike, another publicly traded Canadian cannabis producer in 2019. This acquisition resulted in the addition of 470,000 square feet in production space. HEXO announced that this acquisition would boost production and revenues. Later it was revealed that a block amounting to 17% of the Newstrike Niagara Facility and 4% of the cultivation area was not adequately licensed. Plaintiff, however, did not allege any facts or provided any credible evidence that Defendants knew or should have known about the licensing deficiencies. To the contrary, Plaintiff’s evidence showed that the problem only came to light on the very day that it was first disclosed by HEXO.
The Court also noted that, at the time of statements, HEXO had temporarily suspended its operations of the Niagara facilities as part of cost-cutting measures, making the licensing deficiencies entirely immaterial as “[c]ommon sense dictates that such information could not reasonably be expected to have any impact on the investor decision to buy or sell HEXO securities let alone a significant one.”
HEXO did not consider this situation to merit disclosure and the Court agreed that by not disclosing it, HEXO did not fail to omit a material fact . The Court also agreed that HEXO did not fail to disclose a material change in relation to the same facts.
Newstrike Synergies, Q4 Revenue Projections for 2019, and Fiscal Guidance for 2020
Plaintiff further claimed that the “accretive synergies” mentioned by HEXO in the amount of $10 million were a misrepresentation. However, as pointed out by Justice Conte, he does not allege misrepresentation of a material fact, appearing only to rely on the fact that the synergies were not realized in order to conclude that the statement was untrue or misleading. This, as Justice Conte notes, is “backwards reasoning”, just like the estimates or forecasts that were not realized.
Plaintiff argued that HEXO should have revised its revenue projections downward but as Justice Conte notes, “a change in financial results is not, in itself, a change in the issuer’s business, operations or capital, there can be no breach of a timely disclosure.”
Plaintiff thus failed to meet the threshold of a reasonable possibility of success at trial in respect of his secondary market claim under the QSA and also failed to meet the less demanding arguable case threshold for his primary market claim.
This case stands as a reminder that the mere non-realization of targets and projections is not in itself evidence that a statement contains misrepresentations as to material facts at the time it is made. Importantly, it is a reminder to issuers of the importance of including reserves and cautionary language in its statements in this regard.
This decision is also one of several recent decisions from the Superior Court refusing a proposed class action under the Securities Act for want of sufficient evidence. However, with the recent judgment of the Court of Appeal overturning the dismissal of the authorization of the securities class action in Nseir v. Barrick Gold , and the more general trend from the Court of Appeal overturning first-instance decisions refusing to authorize class actions, any appeal of Justice Conte’s judgment in this matter will certainly be watched closely.
Plaintiff has 30 days from the notice of the judgment to appeal to the Court of Appeal.
 Dionne c. Hexo Corp., 2023 QCCS 162
 CQLR c V-1.1
 The word “misrepresentation” is defined as follows is section 5 of the Securities Act:
“misrepresentation” means any misleading information on a material fact as well as any pure and simple omission of material fact;
 Para. 
 The expression “material fact” is defined as follows in section 5 of the Securities Act:
“material fact” means a fact that may reasonably be expected to have a significant effect on the market price or value of securities issued or securities proposed to be issued;
 Para. 
 Levy v. Loop Industries Inc., unreported judgment, file no. 700-06-000012-205, July 19, 2022; Graaf c. SNC-Lavalin Group Inc., 2022 QCCS 3727; Notice of Appeal, 2022-11-21 (C.A.) 500-09-030289-227; Nseir c. Barrick Gold Corporation, 2020 QCCS 1697, reversed by the Court of Appeal, 2022 QCCA 1718.
 Nseir c. Barrick Gold Corporation, 2022 QCCA 1718.