Insider trading ruling highlights differences between Quebec and the rest of Canada

ruling that dismissed allegations that a former chief executive officer improperly profited from inside trading nearly a decade ago provides guidance over allegations of insider trading, clarifies insider trading rules applicable to corporate officers, and sheds light on the meaning of privileged information under the Quebec Securities Act (Act).

“It’s an important decision in the sense that it is one of the only, if not the only case in Quebec, where there is a judgment following a civil action based on an allegation of insider trading,” noted Raynold Langlois, who successfully defended Claude Chagnon against an action seeking damages of more than $23 million brought by Quebecor Media Inc. and Vidéotron Group Ltd.

“It will be helpful for lawyers involved in corporate governance and who advise officers and directors of corporations as to how they should conduct themselves when they obtain information or hear rumors that could be indicative of a prospective transaction in their company. That’s always a very difficult opinion to give, and this judgment certainly goes a long way in clearing up the law,” added Langlois of Langlois Kronström Desjardins.

Vidéotron alleged that Chagnon profited from insider knowledge when he received 1,2 million Vidéotron stock options as part of his compensation package on January 19, 2000, while in possession of privileged information concerning takeover talks with Toronto-based Rogers Communications Inc. The suit, launched in 2002, alleged that these actions were contrary to s.187 of the Act, and that it was accordingly entitled to damages under s.226 and s.228 of the Act. The suit also alleged that Chagnon breached his duty of loyalty as director and officer under articles 322 and 323 of the Civil Code of Quebec of directors & officers’ fiduciary duty, and his pre-contractual duty to inform under the good faith doctrine.

In Le Groupe Vidéotron Ltée and Quebecor Media Inc. v. Claude Chagnon, Quebec Superior Court Judge Brian Riordan held that the meaning of “privileged” or inside information, pursuant to the Act, must be considered in its entire context, and according to the perspective of a “reasonable investor.” The Court noted that the concept of privileged information has evolved, and now no longer contains the term “material fact.”  Under s. 5 of the Act, privileged information is now defined as “any information that has not been disclosed to the public and that could affect the decision of a reasonable investor.”

Judge Riordan pointed out, however, that information per se shall not be considered to be privileged. Instead it is necessary to determine whether the “type of information” can influence a securities-trading decision.

Once it is determined what the test is and what criteria need to be examined, then it is necessary to analyze the facts of the case, observed Sophie Melchers, a partner with Montreal-based Ogilvy Renault who practices mainly in the areas of commercial, corporate and securities litigation,

“Here in Quebec the test of privileged information doesn’t require the suing party to demonstrate that the information, had it been known by the public, would have materially affected the stock price of the securities,” said Melchers, who represented Quebecor and Vidéotron in the case. “All you need to show in Quebec is that the information would have affected the decision of a reasonable investor. A decision over  insider trading then is truly one that rests on the facts of the case.”

According to Maryse Bertrand, a corporate and securities lawyer with Davies Ward Phillips & Vineberg LLP, the Chagnon case is of note because it sheds new light over the relationship between mens rea and an insider trading infraction under s. 187 of the Act. The Act provides two civil sanctions for breaching s.187: under s.226 there is an obligation to indemnify the other party to the transaction for damage suffered while under s.228 there is also an obligation to repay all profits derived from the use of the information.

Judge Riordan held that acts constituting breaches of s. 187 that are sanctioned by s.226 and s.228 are distinct and autonomous. The Court held that civil liability under s.228 is a quasi-punitive sanction applicable where privileged information has been exploited for profit, and therefore liability under this section requires some level of bad faith or culpable intent. The Court concluded that it is possible to be liable under s. 226 without being liable under s.228.

“The ruling is interesting because the judge clearly makes a distinction between s.226 and s.228 of the Act,” said Bertrand. “Mens rea is not required to establish an insider trading infraction or to recover damages suffered as a result of the transaction under s.226. But in order to trigger the civil remedy of s.  228, it is absolutely necessary to establish culpable intent.”

After considering the opinion of conflicting expert testimony by two acknowledged experts in corporate governance, Justice Riordan also found in favor of Chagnon when he concluded that Vidéotron’s former CEO did not breach his duty to disclose to the board. The court held that the plaintiffs bore the greater burden of proof.

Quebecor Media and Vidéotron are appealing the conclusions made by the Court over the issue of duty to disclose and duty to loyalty but not his findings over insider trading.

This story was originally published in The Lawyers Weekly.

Leave a Reply

Your email address will not be published. Required fields are marked *