An Ontario court has certified a proposed shareholder class action against Canopy Growth Corp. and a couple of its executives over alleged disclosure failures that arose in connection with the company’s acquisition of its sports drink subsidiary BioSteel in 2019.
The Ontario Superior Court of Justice green lit a proposed class action on behalf of investors who acquired shares of Canopy between June 1, 2021 and June 22, 2023 — seeking damages based on the alleged impact on the company’s share price of misrepresentations in its disclosure regarding its financials, the financials of its subsidiary, BioSteel Sports Nutrition Inc., and alleged weaknesses in its governance and internal controls that allowed those misstatements.
None of the allegations have been proven.
“The fact that Canopy made both quantitative and qualitative misstatements is not controversial,” the court said, noting that the company later issued disclosure that admitted the misstatements, and corrected them.
One of the major issues that the court considered in determining whether to certify the case as a class action revolved around a dispute over whether the allegedly deficient disclosures were “material” under securities law, and whether the plaintiff met the test for proceeding with an action alleging secondary market misrepresentation.
Both sides submitted expert evidence on the materiality issue. However, the court ultimately deemed the academic debate over materiality to be fundamentally unhelpful.
“The deepest problem with the entire statistical approach is … that it seems altogether detached from the real subject matter it is meant to highlight,” the court said in its decision.
“The [debate] has the feel of organic chemists examining the microscopic, molecular interactions of dairy, wheat, tomato and pineapple drops in a petri dish, as a way of opining on, but never mentioning, the good or bad taste of a Hawaiian pizza,” it said.
Indeed, ultimately, the court said that the market was a more important gauge of whether the disclosures were material or not.
“… This is an instance where the market speaks louder than the experts,” the court said.
“There is no indication that anything else transpired beside the corrective disclosure announcements to impact Canopy’s share price so dramatically downward. The coincidence of timing serves to confirm the fact that the downward movement of the market reflected the impact of Canopy having disclosed material misstatements and made material changes to its financial reporting,” it said, in ruling that the plaintiffs have a potentially viable case.
Additionally, the court noted that the failure of a similar claim against Canopy in a U.S. court doesn’t undermine the proposed Ontario class action.
“… The U.S. decision turned on legal requirements that do not exist under either the [Ontario Securities Act or Canadian corporate law], and addressed issues not relevant in Canadian litigation,” the court said.
“The U.S. ruling provides no support for Canopy’s position in the present action. The plaintiff has valid causes of action against Canopy for misrepresentation under the [Ontario Securities Act] and for oppression under the [Canada Business Corporations Act],” the court ruled in certifying the claim.