Executive Summary: Key Legal and Evidentiary Issues

• The appeal challenged the refusal to authorize a securities class action under Quebec’s Securities Act and Civil Code article 1457.

• HEXO’s public statements about a take-or-pay cannabis supply deal and licensing status of a facility were central to the misrepresentation allegations.

• The majority of the Court of Appeal upheld the lower court's dismissal, finding no reasonable prospect of success concerning the SQDC agreement.

• Justice Bachand found that the lower court judge made palpable and overriding errors regarding misrepresentations about the Newstrike Block B licensing.

• A partial authorization of the class action was granted—limited to the Block B licensing issue under the Securities Act.

• The appeal was dismissed in part, but one judge (Marcotte J.A.) dissented on the Block B issue, favoring full dismissal.

Background and basis of the proposed class action

Martin Dionne sought authorization to launch a class action against HEXO Corp. and its CEO, Sébastien St-Louis, alleging misrepresentations in violation of Quebec’s Securities Act and general civil liability under article 1457 of the Civil Code of Québec. The alleged misrepresentations involved two key events:

1. The SQDC supply agreement: HEXO entered into a 5-year agreement with the Société des alcools du Québec (SAQ), acting through its future cannabis retail subsidiary, the SQDC. HEXO publicly stated this agreement guaranteed sales of 20,000 kg of cannabis in the first year via a take-or-pay clause. Dionne argued HEXO’s failure to enforce this clause and the resulting revenue shortfall amounted to a misrepresentation of financial certainty to investors.

2. Newstrike Block B licensing: HEXO acquired Newstrike Brands and announced the facility was fully licensed. However, it later disclosed in November 2019 that one section—Block B—lacked a license, a fact known internally since July. Dionne claimed the delay and the initial statement amounted to misleading disclosure, particularly in light of a significant stock drop following the November announcement.

Superior Court decision and appeal

The Superior Court denied authorization for the class action, holding that Dionne failed to meet the required thresholds under both section 225.4 of the Securities Act and article 575 of the Code of Civil Procedure. The Court ruled that HEXO's statements about the SQDC deal were not guarantees and noted that investors should have understood the risks in a volatile, newly legalized market. It also found that the Block B licensing issue was immaterial based on the facility’s size and the absence of inventory losses or regulatory sanctions.

Dionne appealed, arguing the judge misunderstood the applicable legal standards and improperly discounted expert evidence regarding the impact of the Block B disclosure on stock price.

Court of Appeal’s reasoning and divided outcome

The Court of Appeal was split:

• Justice Bachand, writing for the minority, found the trial judge had committed palpable and overriding errors by misreading the impact of the Block B licensing issue and dismissing the expert report that showed a statistically significant stock drop following the disclosure. He found a reasonable possibility of success and would have authorized that part of the claim under the Securities Act and article 1457 C.C.Q.

• Justice Marcotte, with whom Justice Healy concurred, disagreed. She emphasized that the trial judge correctly considered contextual evidence showing the deficiency was minor and had no material impact. She concluded that no part of the claim met the legal standard for authorization.

Final decision

The Court dismissed the appeal, affirming the full dismissal of the class action. However, it’s notable that there was a judicial split, with Justice Bachand favoring partial authorization of the claim regarding the Block B licensing deficiency.

This case clarifies the rigorous evidentiary and legal thresholds for securities class actions in Quebec, especially under sections 225.4 and 225.5 of the Securities Act, and reaffirms the role of judicial discretion in assessing market materiality.