Corporate commercial litigation has commenced against cannabis company Canopy Growth in relation to its Biosteel sports drink subsidiary. “Material misstatements” and financial problems in this division have been reported in business media. A carriage motion in Dziedziejko v. Canopy Growth Corporation recently reached the Ontario Superior Court of Justice as law firms battled to represent shareholders in proposed BioSteel class actions.
Carriage Orders and the Law
Where multiple proposed class action lawsuits are commenced in relation to the same subject matter, a court is usually tasked with determining which one should proceed. This is typically done through a motion brought pursuant to section 13.1(4) of the Class Proceedings Act, 1992. Under that section, a court has the power to stop competing actions. Section 13.1(4) requires a court to determine “which proceeding would best advance the class members’ claims efficiently and cost-effectively.” It lists the various criteria a court must consider in making that determination. Specifically, a court must consider the theories of the case advanced in each proceeding, the likelihood of success of the various proceedings, the expertise and experience of the lawyers seeking to lead the proposed class actions and the funding of each proceeding. Case law has further expanded on the types of factors to be considered by courts on such a motion.
Three Competing Proposed Class Actions Against Canopy Growth
Proposed class actions against Canopy Growth were commenced by three law firms, each of whom sought to represent a class of shareholders of Canopy. The actions were primarily related to the disclosure by Canopy that it had “materially overstated the revenue, revenue growth, profitability and goodwill” associated with Biosteel, that it had “deficient internal controls over its financial reporting” or ICFR and that it had “faulty, nearly non-functioning disclosure controls and proceedings” or DC&P. According to Canopy, due to “inflated revenue,” it had overpaid the minority shareholders of Biosteel. The three proposed actions varied in their causes of action, although all three advanced claims under the civil liability provisions of Part XXIII.1 of the Securities Act, notably section 138.3, which concerns the secondary market.
The Court began its decision by noting that the motion involved “looking at how the three competing claims are structured, the theory of each case, the causes of action, the named defendants, the class definitions and periods, etc.”
Each Proposed Action Included A Different Class Period
The first proposed class action was brought by representative plaintiff Stephen Leonard, the second by plaintiff Brad Twidale and the third by plaintiff Craig Dziedziejko. Each action concerned a class period ending on June 22, 2023, the date of a corrective disclosure made by Canopy. However, each action had a class period that began on a different date. The Twidale class period began on May 31, 2022, the date of issuance by Canopy of its financial statements, while the Leonard class period began several days earlier on May 27, 2022, the date on which Canopy issued a press release containing prior notice of the financials. The Dziedziejko class period began even earlier on June 1, 2021, based on alleged misrepresentations concerning BioSteel’s revenue found in Canopy’s financial statements that month. In other words, the Dziedziejko action included the broadest number of potential class members of the three proposed class actions, while the Twidale action included the smallest.
Differences in Causes of Action Between the Proceedings Were Relatively Minor
Leonard and Twidale’s proposed actions included claims of misrepresentation in the primary market and negligent misrepresentation. In addition, the Leonard action included a claim of fraud. Conversely, the Dziedziejko proposed action did not include such tort allegations; instead, it focused on a claim for oppression under the Canada Business Corporations Act. Ultimately, however, the Court noted that the distinctions among the three proceedings in relation to the causes of action they included were relatively minor since the primary basis on which all three would likely “rise or fall” was the claim under section 138.3 of the Securities Act.
Differences in Subject Matter Between the Proceedings Did Not “Amount to Much”
The Court noted that Leonard’s proposed class action included warrants and shares, although the number of warrants traded during the relevant class period was “relatively small.” The Twidale proposed action included call options, but these were not included in the claim under the Securities Act. The Court concluded that the differences in subject matter between the proceedings did not “amount to much.”
Differences in Defendants Named in the Proceedings Might Be Beneficial or Detrimental
Each of the proposed actions named Canopy Growth, the company’s CEO and CFO and the company’s auditor KPMG as defendants. However, the Leonard and Twidale actions also named other Canopy Growth directors and two former BioSteel directors. The Court noted it was uncertain whether naming the directors of Canopy Growth would add anything “to the liability or damages calculus of the claims.” According to the Court, there was some chance a benefit might be gained and an equal chance of lost time and effort. The Court also noted that the claims against the former directors of BioSteel, while “understandable,” might not “precisely fit as a truly necessary ingredient of the case.”
A Shorter Class Period Should Not Necessarily Be Determinative in Granting Carriage
On the issue of efficiency, counsel for the Twidale action suggested that that action would be the most efficient by containing the shortest of the three class periods. However, the Court noted that defining efficiency in that manner “puts it at odds with other goals of class actions.” The Court went on to note that the factors listed in section 13.1 of the Class Proceedings Act, 1992, “are intended to foster access to justice, not to eliminate it for some claimants with credible claims to expedite it for a smaller and thus inevitably more manageable class of claimants.”
The Court then focused on the justification given by counsel for the Dziedziejko action for the broader class included in that action. Counsel referenced an earlier shareholder dispute that pertained to the 2019 acquisition of a majority stake in BioSteel by Canopy Growth. That earlier action named both Canopy Growth and KPMG as defendants. In their pleadings in that action, those entities had made certain allegations in their defence. Counsel for the Dziedziejko action contended that, based on those pleadings, it was apparent that “Canopy and KPMG knew a year before the start of the Leonard/Twidale class periods that BioSteel had deficient ICFR and DC&P.” It was argued, therefore, that Canopy and KPMG’s failures “were not isolated to the May 2022 financial reporting, but rather dated back to previous years.”
The Court noted that the Dziedziejko action included “thousands of potential class members who invested in Canopy shares” between the start of that action’s class period and the start of the class periods in the Leonard and Twidale actions. Further, the materials adduced on the carriage motion were “sufficient to predict a good chance of success for a class claim dating back to June 1, 2021.”
Court Concludes That The Real Difference Between the Actions is the Length of the Class Period
The Court concluded its decision by stating that a carriage motion “is not the place for a court to dismiss what looks from the outset like a serious claim by thousands of shareholders.” Including the claims of those shareholders was consistent with the “efficiency goals” of section 13.1 and “the other important class action goals of access to justice and behaviour modification.” For this reason, it granted carriage of the proposed class action to the Dziedziekjo action and stayed the Leonard and Twidale actions.
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