Executive Summary: Key Legal and Evidentiary Issues

• Scope and materiality of Canopy’s quantitative misstatements in BioSteel’s revenues, receivables, growth figures and related goodwill, and their impact on consolidated financial statements.
• Significance of alleged qualitative misrepresentations about governance, the Code of Conduct, and the effectiveness of disclosure controls (DC&P) and internal control over financial reporting (ICFR) across the entire class period.
• Evidentiary weight of Canopy’s own corrective disclosures and financial restatements, including admitted “material misstatements” and acknowledged material weaknesses in ICFR and DC&P.
• Role of expert evidence on materiality and earnings manipulation, and the judge’s preference for market-impact evidence (share price drops and trading volume) over complex statistical tools.
• Viability of an oppression remedy under the CBCA based on shareholders’ reasonable expectations created by public governance statements, and whether those expectations can be treated on a class-wide, objective basis.
• Satisfaction of statutory tests for leave under s. 138.8 OSA and certification under s. 5(1) CPA, including common issues, class definition (global, non-U.S. purchasers), and the suitability of a class proceeding as the preferable procedure.

Background and facts of the case

Canopy Growth Corporation is a Canadian cannabis company headquartered in Ontario, listed on the Toronto Stock Exchange and the NASDAQ, and incorporated under the Canada Business Corporations Act. In October 2019, Canopy acquired approximately 76.7% of BioSteel Sports Nutrition Inc., a sports-nutrition business. Canopy promoted the acquisition to investors as strategic diversification into a product line expected to provide more stable, predictable revenue growth than its core cannabis business. BioSteel’s 2019 share purchase agreement included a price-adjustment mechanism tied to a multiple of BioSteel’s 2019 net revenue. BioSteel’s selling shareholders, several of whom were officers and directors of BioSteel, therefore had a financial incentive to report the highest possible 2019 revenues. Canopy publicly disclosed BioSteel’s 2019 net revenue as $14.54 million and stated that no significant purchase-price adjustment was required, effectively signalling to the market that the acquisition price remained appropriate. However, BioSteel minority shareholders asserted that 2019 net revenue was actually $22.74 million, which would have triggered a roughly $24.1 million upward purchase-price adjustment in their favour. KPMG, Canopy’s long-time external auditor, concluded in its audit work that the disputed additional revenue should be rejected. In April 2020, the BioSteel minority shareholders sued both Canopy and KPMG, alleging that BioSteel’s net revenue had been understated by 56% and seeking $24.1 million in damages representing the alleged adjustment amount. In its Statement of Defence to the BioSteel action, Canopy pleaded that BioSteel had “artificially inflated” revenue, that many of the alleged sales were undocumented, lacked written contracts, had no realistic prospect of collection, and showed no clear transfer of control. Canopy further pleaded that BioSteel’s executives had a financial incentive to overstate revenue, aligning with the purchase-price adjustment mechanism. Despite pleading that position in the BioSteel litigation, Canopy did not publicly disclose to its own investors that BioSteel’s revenues had been inflated for personal gain by BioSteel executives, or that BioSteel’s internal controls and Canopy’s oversight had failed to prevent this.

Alleged misrepresentations and corrective disclosures

The plaintiff, Craig Dziedziejko, brings a proposed securities class action on behalf of investors who acquired Canopy shares between June 1, 2021 and June 22, 2023. He alleges two main categories of misrepresentation: quantitative misstatements in financial results and qualitative misstatements about governance and controls. On the quantitative side, Canopy’s financial statements for fiscal 2022 and the first three quarters of fiscal 2023 allegedly overstated BioSteel’s revenue, growth, and related receivables, while understating losses and impairments such as goodwill. These inflated BioSteel results in turn distorted Canopy’s consolidated revenues, receivables, growth metrics, and net losses. On the qualitative side, Canopy and its senior officers allegedly misrepresented that the company maintained effective Disclosure Controls and Procedures and Internal Control over Financial Reporting, and that executives and employees complied with an ethical Code of Conduct and robust governance framework. The claim further alleges that Canopy’s executives failed to act on known control failures and misconduct, particularly at BioSteel, while continuing to reassure the market about governance and control systems.

The May 10, 2023 corrective disclosures and market reaction

On May 10, 2023, Canopy issued a Material Change Report, press release, and a U.S. Current Report (together referred to as corrective disclosures). In these documents, Canopy acknowledged that it had released “material misstatements” in its financial statements during fiscal 2022 and the first three quarters of fiscal 2023; warned that those financial statements and KPMG’s audit report could “no longer be relied upon”; announced that it would restate the affected financial statements; and flagged that revenues would be reduced and balance-sheet items adjusted. Canopy also warned that it was reassessing its DC&P and ICFR and expected to report one or more material weaknesses in ICFR. These disclosures did not yet specify the full magnitude of the misstatements or the precise causes of the revenue-recognition errors, but the market impact was immediate and severe. On May 11, 2023, the first trading day after the initial corrective disclosures, Canopy’s shares traded at unusually high volume and fell about 14% on the TSX and 15% on NASDAQ. Trading volume roughly doubled relative to the previous day, suggesting that investors were reacting directly to the new information and reassessing the risk and value of Canopy’s shares.

The June 22, 2023 restatement and further details

On June 22, 2023, Canopy released its 2023 Annual Report and a further news release. The Annual Report described in detail how BioSteel had improperly recognized revenue: in some cases where product had been ordered but not shipped; in others where it was shipped without legally enforceable contracts or payment terms; and in still others where shipped product was not accepted by customers because of short remaining shelf life. These patterns mirrored the very concerns Canopy had raised earlier in its defence to the BioSteel minority-shareholder lawsuit regarding inflated 2019 revenues. The June disclosures also detailed restatements showing that BioSteel’s revenues, growth metrics, and accounts receivable had been significantly overstated across multiple quarters, while consolidated Canopy revenues and receivables were correspondingly reduced and losses increased. Canopy disclosed that, as of March 31, 2023, its Disclosure Controls and Procedures and ICFR were ineffective, and that material weaknesses in ICFR had led to material misstatements in its prior financials. It identified weaknesses in the control environment, including failures to design and maintain effective controls over revenue recognition for BioSteel, delayed goodwill impairment, and errors in recording redeemable non-controlling interests. A final set of corrective disclosures reinforced the scale of the overstatements, highlighted that a majority of misstatements related to BioSteel’s international sales (even though Canopy had repeatedly touted strong international growth), admitted that Canopy had overpaid certain BioSteel minority shareholders because the option payments were based on inflated revenues, and disclosed that several BioSteel leaders had been terminated and that Canopy was considering legal action to recover losses. Canopy further admitted that the entire $57.4 million of goodwill allocated to BioSteel should have been impaired as of September 30, 2022, representing 42% of Canopy’s total goodwill at that time, and that securities regulators were investigating: the SEC had opened a formal investigation and the OSC had an ongoing inquiry. The market again reacted sharply. On June 23, 2023, the first trading day after the final corrective package, Canopy’s stock price dropped an additional 12% on the TSX and 14% on NASDAQ, once more on high trading volumes. Over the ten trading days after June 22, 2023, the volume-weighted average price of Canopy’s shares was about 62% lower on the TSX and 60% lower on NASDAQ than on May 10, 2023, the last day before the first corrective disclosures.

The alleged qualitative misrepresentations: code of conduct and controls

Throughout the class period, Canopy disseminated a Code of Conduct and governance statements describing a strong ethical framework, board oversight, and robust audit and governance committees. The Code stated that the company and all its subsidiaries would act in strict compliance with applicable law and “the highest standards of business integrity and ethics,” that all business activity must be based on honesty and integrity, and that violations of the Code could lead to discipline up to termination. Canopy’s public materials also stressed the responsibilities of the board, audit committee, and governance committee to oversee ethics, financial integrity, and effective corporate governance. The plaintiff argues that these statements were materially misleading because Canopy knew, at least by the time of its defence in the 2020 BioSteel lawsuit, that BioSteel management had intentionally inflated revenues for personal financial gain, in breach of the very standards set out in the Code. Yet the executives responsible remained in their roles, and there is no evidence that Canopy meaningfully overhauled or strengthened monitoring of BioSteel’s financial reporting during the class period. In addition, Canopy’s continuous disclosure representations repeatedly stated that there were no changes in ICFR and DC&P over the relevant periods, even though the company later admitted that these controls were ineffective and had material weaknesses as of March 31, 2023. Plaintiff’s counsel argue that, taken together, these admissions strongly support an inference that ICFR and DC&P were materially deficient throughout the restatement period and likely back to at least the start of the class period, if not to the 2019 acquisition of BioSteel.

Expert evidence and the court’s approach to materiality

Both sides filed expert reports on materiality and on whether the financial anomalies suggested intentional earnings management. The plaintiff’s expert, Professor Ramy Elitzur, used Benford’s Law and the Beneish Manipulation Index to infer a high likelihood of earnings manipulation over the class period. Canopy’s experts, former PricewaterhouseCoopers partners Jacqueline Peterson and Jake Dwhyti(e), criticized the plaintiff’s methodology as statistically unsound and misapplied, pointing to sample-size issues, conflation of tests, over-reliance on p-values, and misuse of Beneish’s model at the quarterly level and via singular component ratios. The judge ultimately regarded this statistical debate as unhelpful at the leave and certification stage. He emphasized that Benford’s Law and the Beneish Index may flag numerical anomalies but do not, by themselves, identify causation or intent. Instead, the court preferred a more direct, doctrinally grounded approach to materiality. Relying on Supreme Court of Canada and Ontario Securities Commission authority, the judge held that a significant, immediate market reaction to corrective information is powerful evidence of materiality. Here, the sharp price drops and high trading volumes immediately following the May 10 and June 22 corrective disclosures provided strong objective proof that the misstatements and control weaknesses were important to reasonable investors and had a significant effect on the market price of Canopy’s securities. The court also noted that Canopy itself had repeatedly characterized the misstatements as “material” in its own restatements and regulatory filings, which further supports materiality for purposes of Ontario Securities Act liability.

The statutory secondary-market claim under the Ontario Securities Act

The plaintiff sought leave under s. 138.8 of the Ontario Securities Act to commence a secondary-market misrepresentation claim under s. 138.3. To obtain leave, the plaintiff had to show that the action was brought in good faith and that there was a reasonable possibility that the claim would be resolved in his favour at trial. The judge found the good-faith requirement easily satisfied: the claim was supported by an affidavit from the plaintiff, there was no evidence of a strike-suit or abusive litigation strategy, and the pattern of corrective disclosures and price declines reflected a genuine investor-protection concern rather than speculation. On the substance of the misrepresentation claim, the judge held that Canopy’s restatements and corrective disclosures amounted to admissions that previous financial statements contained untrue statements and omissions of material facts. These quantitative misstatements, along with qualitative misrepresentations regarding the effectiveness of ICFR, DC&P, and adherence to the Code of Conduct, were capable of being material misrepresentations under the OSA. The judge rejected defence submissions that the BioSteel revenue restatement was immaterial due to its percentage of overall revenue and that governance representations were too vague or non-actionable to matter. The evidence of substantial price drops immediately following disclosure of the problems, coupled with Canopy’s own language describing “material misstatements” and “material weaknesses,” was sufficient to meet the relatively low “reasonable possibility of success” threshold at this preliminary stage. Accordingly, leave to proceed under s. 138.8 was granted.

The oppression remedy claim under the CBCA

Alongside the OSA claim, the plaintiff advanced an oppression remedy claim under s. 241 of the Canada Business Corporations Act, on behalf of the same group of shareholders. He alleged that Canopy and its CEO, David Klein, engaged in conduct that was oppressive, unfairly prejudicial to, or unfairly disregarded the interests of shareholders. The alleged oppressive conduct included failing to rectify known deficiencies in BioSteel’s ICFR and DC&P; failing to terminate or adequately supervise BioSteel executives who had intentionally inflated revenue; persisting in issuing public disclosures praising Canopy’s governance, Code of Conduct, and effective controls, despite knowing of BioSteel’s problems; and continuing these practices throughout the class period, thereby leaving shareholders exposed to inflated valuations and sudden value destruction when the problems emerged. The court’s task at certification was not to decide whether oppression had occurred, but whether the pleadings disclosed a reasonable cause of action under the CBCA and whether the oppression remedy could be litigated on a class-wide basis. The judge held that the plaintiff and class members had an arguable basis for “reasonable expectations” grounded in Canopy’s public statements, Code of Conduct, governance structure, and statutory and regulatory obligations. These expectations included accurate financial reporting, adherence to ethical and governance standards, and prompt corrective action (including termination or discipline) when wrongdoing came to light. The alleged conduct—continuing to rely on and promote BioSteel’s performance despite known irregularities, failing to fix controls, and disregarding Code violations—could, if proven, constitute oppressive or unfairly prejudicial conduct that unfairly disregarded shareholders’ interests. Importantly, the court rejected Canopy’s argument that oppression claims are inherently individualized and therefore unsuitable for class treatment. Relying on Supreme Court of Canada and Ontario authority, the judge emphasized that reasonable expectations in shareholder-oppression cases are assessed objectively and contextually and can derive from public statements and the “compact” among shareholders and the corporation. Where expectations are based on common public representations, they can be shared by all shareholders and litigated as common issues.

Certification as a class action and the definition of the class

Having granted leave under the OSA, the court turned to certification under s. 5(1) of the Class Proceedings Act. The judge concluded that both the OSA and oppression claims satisfied the low cause-of-action threshold, that there was an identifiable class, that there were numerous common issues, that a class action was the preferable procedure, and that the proposed representative plaintiff and litigation plan were appropriate. The certified class consists of all persons or entities (excluding various insiders and BioSteel selling shareholders) who acquired Canopy securities in the secondary market between June 1, 2021 and June 22, 2023, and held some or all of those securities until the close of trading on May 10, 2023 or June 22, 2023, provided that they either resided in Canada at the time of acquisition (regardless of the exchange) or acquired on an exchange in Canada or any non-U.S. exchange (regardless of residence). The class definition deliberately excludes those who purchased only on U.S. exchanges, since a separate U.S. class action is pending in federal court. Canopy had urged the court to exclude foreign shareholders altogether, arguing against a global class, but the judge rejected that position. He held that non-Canadian investors who bought on Canadian or other non-U.S. exchanges could reasonably expect their rights to be determined by Canadian courts, particularly given Canopy’s Canadian incorporation, Ontario headquarters, and TSX listing. The court also noted that the CBCA oppression claim must be pursued in a Canadian court. On common issues, the court certified a series of questions concerning whether the identified disclosure documents contained misrepresentations, which defendants (including Canopy, its CEO, CFO, and KPMG) are liable, and how per-share damages should be calculated under the OSA; whether Canopy and Klein engaged in conduct that was oppressive or unfairly prejudicial or that unfairly disregarded the interests of the class; what remedies should be ordered under s. 241; and several ancillary issues concerning aggregate damages, vicarious liability, administration costs, and any special procedures. The judge concluded that these issues are common to all class members and that their resolution would significantly advance the litigation, with little left to be determined individually other than, potentially, damages allocation if aggregate assessment proves impracticable.

Preferable procedure and representative plaintiff

In evaluating preferability, the court emphasized the three classic goals of class actions: judicial economy, behaviour modification, and access to justice. Individual actions by dispersed shareholders would be uneconomic, particularly for smaller investors whose potential recovery would not justify the costs of complex securities litigation. A class proceeding allows common liability issues under the OSA and the CBCA to be resolved in a single forum, avoids duplication of evidence and expert testimony, and provides a credible enforcement mechanism likely to influence corporate and board behaviour going forward. The judge accepted Craig Dziedziejko as an appropriate representative plaintiff. He understood his responsibilities, shared the same interest in the common issues as other class members, and faced no apparent conflicts. The court found the litigation plan workable and suitable for advancing the case through common-issues trial and any necessary damages or remedy phase. Canopy’s criticism that the plaintiff had not yet sought court approval for third-party funding, despite indicating that he might, was given little weight; funding arrangements are primarily a matter between the plaintiff, class counsel, and the court, not the defendants, and any later need for formal approval can be addressed if and when it arises.

Outcome and status of monetary relief

This decision is procedural rather than final on liability or damages. The court granted leave to proceed with the statutory secondary-market misrepresentation claim and certified the action as a class proceeding under the Class Proceedings Act, with both the OSA claim and the CBCA oppression claim moving forward. The successful party on these motions is the plaintiff, Craig Dziedziejko, who was approved as representative plaintiff, and his lawyers were appointed as class counsel. KPMG, which had reached a tentative settlement prior to the hearing, did not contest the motion on the merits and its role is not substantively addressed in these reasons. As for financial relief, the court did not determine damages, compensation, or any monetary award in this ruling. The reasons end by inviting written submissions from the parties on costs of the motion, with no dollar figure yet fixed. Accordingly, while the plaintiff succeeded in obtaining leave and certification, the total amount of any damages, compensation, or costs ultimately payable to or by any party has not yet been determined in this decision.