2017 QCCA 1894, 2017 QCCA 1894

Schiller c. Catucci 2017 QCCA 1894 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-027096-171 (500-06-000783-163) DATE: NOVEMBER 30, 2017 IN THE PRESENCE OF THE HONOURABLE ROBERT M. MAINVILLE, J.A. HOWARD B. SCHILLER APPLICANT — Defendant v. CELSO CATUCCI NICOLE AUBIN RESPONDENTS — Applicants and VALEANT PHARMACEUTICALS INTERNATIONAL INC. J. MICHAEL PEARSON ROBERT L. ROSIELLO ROBERT A. INGRAM RONALD H. FARMER THEO MELAS-KYRIAZI G. MASON MORFIT LAURENCE PAUL ROBERT N. POWER NORMA A. PROVENCIO LLOYD M. SEGAL KATHARINE B. STEVENSON FRED HASSAN COLLEEN GOGGINS ANDERS O. LONNER JEFFREY W.

UBBEN PRICEWATERHOUSECOOPERS LLP GOLDMAN SACHS & CO. GOLDMAN SACHS CANADA INC. DEUTSCHE BANK SECURITIES INC. BARCLAYS CAPITAL INC. HSBC SECURITIES (USA) INC. MITSUBISHI UFJ SECURITIES (USA) INC. DNB MARKETS INC. RBC CAPITAL MARKETS LLC MORGAN STANLEY & CO. LLC SUNTRUST ROBINSON HUMPHREY INC. CITIGROUP GLOBAL MARKETS INC. CIBC WORLD MARKETS CORP. SMBC NIKKO SECURITIES AMERICA INC. TD SECURITIES (USA) LLC J.P. MORGAN SECURITIES LLC MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED BMO CAPITAL MARKETS CORP. IMPLEADED PARTIES — Respondants JUDGMENT [ 1 ] Howard B.

Schiller (“ Schiller ”) is a former director and the former Executive Vice President and Chief Financial Officer of Valeant Pharmaceutical International Inc. (“ Valeant ”). He seeks leave to appeal a judgment of the Honourable Madam Justice Chantal Chatelain of the Superior Court, District of Montreal (the “ Judge ”), rendered on August 29, 2017 ( 2017 QCCS 3870 ), granting Celso Catucci and Nicole Aubin (the “ Respondents ”) authorisations pursuant to

section 225.4 of the Quebec Securities Act , CQLR, c. V-1.1 (the “ QSA ”) and under articles 574 to 577 of the Quebec Code of civil procedure (the “ CCP ”) for instituting a class action against Valeant, its directors and officers, its auditor and its underwriters.

[ 2 ] Schiller’s leave application was heard at the same time as similar applications seeking leave to appeal the same judgment submitted respectively by Valeant’s underwriters, Valeant’s auditor, another of Valeant’s former directors, J. Michael Pearson, as well as Valeant itself and the other individual defendants. [ 3 ] The description of the classes and sub-classes to the class action, the issues identified by the Judge to be dealt with collectively in the class action, the conclusions sought by the class action, the claims of the Respondents under (

a) Division I of

Chapter II of Title VIII of the QSA (“ Division I ”), (

b) Division II of

Chapter II of Title VIII of the QSA (“ Division II ”), and (

c) under general civil liability principles set out in

article 1457 of the Quebec Civil Code (the “ Civil Code ”), as well as the test for granting leave to appeal pursuant to

article 578 CCP are all set out in the judgment dismissing Valeant’s underwriters application for leave to appeal released at the same time as this judgment, and need not be reproduced here. [ 4 ] Schiller adopts the same grounds for leave to appeal as Valeant’s underwriters. These grounds were rejected by the undersigned in the judgment dismissing the application brought by Valeant’s underwriters for leave to appeal and are therefore also rejected with respect to Schiller’s application.

The reasons for rejecting those grounds are set out in the judgment respecting the application brought by Valeant’s underwriters and are incorporated herein by reference. They need not be reproduced here. [ 5 ] As a former director and officer of Valeant, Schiller also raises a distinct ground for seeking leave to appeal. He relies on the judgment of this Court in Groupe d’action d’investisseurs dans Biosyntech v. Tsang , 2016 QCCA 1923 [“ Biosyntech ”] in which Schrager J.A. held that

article 1607 of the Civil Code (which permits recovery of damage which is the direct consequence of a harmful act) and the rule in Foss v. Harbottle (1843), 67 E.R. 189 , preclude the recovery by shareholders against directors for damage caused to the corporation by their fault and resulting in indirect damage in the form of loss of share value.

However, Biosyntech did not preclude recovery of damage by shareholders (and, by extension, by other security holders) resulting from the direct harm caused by directors. [ 6 ] These reasons address this distinct ground of appeal raised by Schiller with respect to the application of Biosyntech . [ 7 ] Schiller is sued by the Respondents as an officer and director of Valeant, and for having orchestrated a string of misdeeds, including misrepresentations and failures to disclose, which resulted in dramatic drops in the price or value of Valeant’s securities, leading to significant damages for the class members.

The Respondents specifically identify the alleged misdeeds of Schiller in their proceedings, both in general and specific terms. They specifically refer to Schiller in paragraphs 32, 32.1 and 191 to 194 of their proceedings: 32. At all material times during the Class Period, Howard B. Schiller (“Schiller”) was Valeant’s Director, Executive Vice President and Chief Financial Officer (“CFO”). In his capacity as Valeant’s CFO, Schiller: (

a) certified each Impugned Document that was issued until June 2015, when he ceased to be Valeant’s CFO; (

b) signed each of the Impugned Documents that are Valeant’s AIFs; and (

c) signed and certified Valeant’s Short Form Base Shelf Prospectus dated June 14, 2013, which was supplemented by the Prospectus Supplement dated June 18, 2013 (each an Impugned Document). In January and February 2016, Schiller served as Valeant’s interim- CEO while, according to Valeant, Pearson was on medical leave.

At all relevant times, Schiller was a director and/or an officer of Valeant within the meaning of the Securities Legislation; 32.1 In March 2016, in connection with Valeant’s ad hoc committee investigations, Valeant stated that Schiller had engaged in improper conduct and provided incorrect information to Valeant’s Audit and Risk Committee and auditors, which contributed to Valeant’s financial statement misstatements. Additionally, Valeant stated that it had requested that Schiller resign from the Board of Directors, but that Schiller had declined that request.

In April 2016, Valeant announced that Schiller would not stand for re-election at the Annual General Meeting of Shareholders on June 14, 2016; […] 191. Pursuant to NI 52-109, Pearson, Schiller and Rosiello certified the 10-Qs and 10-Ks signed during the Class Period, attesting to the accuracy of the financial statements, that all material facts were disclosed and that Valeant had adequate internal financial controls; 192. Inter alia , Pearson, Schiller and Rosiello certified, at the relevant times, that: (

i) such documents did not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made; (ii) they were responsible for establishing and maintaining Valeant’s disclosure controls and procedures as well as Valeant’s internal controls over financial reporting; (iii) they had designed the disclosure controls and procedures, or caused them to be designed under their supervision, to provide reasonable assurance that material information relating to Valeant was made known to them by others, particularly during the period in which the documents were being prepared and information required to be disclosed by Valeant in its annual filings, interim filings or other reports filed or submitted under securities legislation was recorded, processed, summarized and reported within the time periods specified in securities legislation; (iv) they had designed the internal controls over financial reporting, or caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP or the international financial reporting standards (“IFRS”), as applicable; and (

v) in respect of Valeant’s annual filings, the Individual Defendants had evaluated, or caused to be evaluated under their supervision, the effectiveness of Valeant’s internal controls over financial reporting and Valeant’s disclosure controls and procedures, at the financial year end and Valeant had disclosed in its annual filings their conclusions about the effectiveness of Valeant’s controls; 193. The Individual Defendants oversaw the preparation and reporting of Valeant’s disclosures to the market and knew or should have known of the foregoing misrepresentations;

194. The Individual Defendants authorized, permitted or acquiesced to the release of the (…) Impugned Documents, which contained the foregoing misrepresentations. [ 8 ] As a matter of fact, on April 29, 2016, as part of its restatement of previously released financial statements, Valeant acknowledged that there had been misstatements regarding revenue recognition and material weaknesses in compliance and with respect to the efficacy of its internal controls.

Valeant also indicated that improper conduct by Schiller resulted in the provision of incorrect information and contributed to the misstatement of financial results: Based on the results of the AHC Review, the Company's review of its financial records, and other work completed by management, the Company and the ARC have concluded that material weaknesses in the Company's internal control over financial reporting existed that contributed to the material misstatements in the consolidated financial statements described above.

These material weaknesses relate to the tone at the top of the organization and the accounting and disclosure for non-standard revenue transactions particularly at or near quarter ends . The improper conduct of the Company's former Chief Financial Officer [Schiller] and former Corporate Controller, which resulted in the provision of incorrect information to the ARC and the Company's independent registered public accounting firm, contributed to the misstatement of financial results .

In addition, as part of this assessment of internal control over financial reporting, the Company has determined that the tone at the top of the organization, with its performance-based environment, in which challenging targets were set and achieving those targets was a key performance expectation, may have been a contributing factor resulting in the Company's improper revenue recognition and the conduct described above . (Valeant’s Annual Report on Form 10-K for the year ended December 31, 2015, as reproduced at par. 54 of the Judge’s judgment.

Emphasis added) [ 9 ] Notwithstanding these allegations and the acknowledgement by Valeant of his improper conduct, Schiller submitted to the Judge that the class action should not be authorized against him since he could not be held liable for the damages suffered indirectly by shareholders and noteholders as a result of his actions. The Judge dismissed that submission for the following reasons: [307] Individual Defendant Howard B.

Schiller argues that he cannot be properly sued because when a director or officer causes an injury to the corporation through his fault, he can be sued by the corporation which he injured but not by the stockholders whose securities were indirectly affected as a result. [308] In support of his argument, he notably relies on the matter of Groupe d'action d'investisseurs dans Biosyntech v. Tsang , [2016 QCCA 1923] which confirms that a damage by ricochet is not recoverable under Quebec law because it is not a direct damage. [309] However, Mr.

Schiller's argument is ill-founded because the claim against the Individual Defendants here is not based on the loss that they may have caused to the corporation, but on the loss that they have allegedly caused directly to the class members through their own fault.

The fact that the class members may be "victims by ricochet" does not prevent them from having sustained a direct damage in the circumstances of this case. [310] In fact, relying on Infineon , [2013 SCC 59] the Court of Appeal in Biosyntech specifically acknowledged "that a victim by ricochet has a recourse as long as the damage claimed is not by ricochet , i.e. it is direct." The Court of Appeal also offered insight as to what would constitute direct damages suffered by a shareholder which is distinct from the damage suffered by the corporation.

The Court of Appeal endorsed the example given by the first judge as to what would constitute a direct damage suffered by a shareholder pursuant to the acts of a director. That example applies perfectly to this case: [ Biosynthec , par. 30-31]. [3[0]] [...] The Supreme Court has since confirmed in Infineon that a victim by ricochet has a recourse as long as the damage claimed is not by ricochet, i.e. it is direct .

Appellants (or other shareholders of the class) have admitted, in the proceedings before the Superior Court sitting in bankruptcy and insolvency, that the damages claimed are by ricochet. [31] Another example of direct damage suffered by a shareholder resulting from the acts of a director was described by the judge as the hypothetical case of the shareholder who purchases his shares based on the negligent or fraudulent misrepresentation of directors.

Such a scenario causes the shareholder to have parted with his money to buy worthless shares and thus, suffers harm independent from the company giving rise to a good cause of action against directors for damages directly suffered by the shareholder ... (Emphasis by the Judge) [ 10 ] In his application for leave to appeal, Schiller does not dispute that the class action may proceed against him with respect to certain Division II rights of recourse.

Indeed, subsections 225.8(1), 225.9(1), 225.10(3), and 225.11(1) of the QSA contemplate Division II claims against directors and officers of issuers in certain statutorily defined circumstances, notably when the director or officer authorized, permitted or acquiesced to the release of a document or the making of an oral statement containing a misrepresentation or in the failure to make timely disclosure. [ 11 ] Schiller’s specific ground of appeal is thus strictly limited to the claims based on general civil liability under

article 1457 of the Civil Code . He claims that in dismissing his submissions, the Judge, basing herself on Biosyntech , relied on the principle that victims by ricochet may obtain damages from directors provided that they have sustained a direct injury. However, he asserts that the Judge then failed to consider whether, on the face of the Respondent’s proceedings, he committed distinct faults or whether the injuries allegedly suffered were distinct from and independent of the loss suffered by Valeant.

This would constitute an error in the Judge’s application of subsection 575(2) CPP dealing with the criterion for authorizing a class action requiring that “the facts alleged appear to justify the conclusions sought”. [ 12 ] He further submits that had the Judge carried out this analysis, she could only have concluded that the allegations against him refer to his misconduct as a director and officer of Valeant, misconduct which was internalized by Valeant and reflected in its public representations to the market.

Moreover, the Respondents would have failed to allege that the class members suffered an independent loss due to his distinct faults. In other words, Schiller asserts that the loss in share and note value, which is the injury alleged, is the consequence of the harm suffered by Valeant, and not an immediate and direct consequence of the faults he allegedly committed.

[13] Schiller has failed to convince me that I should grant leave to appeal on this basis. It is clear from the Judge’s reasons that sheclosely analysed the Respondent’s proceedings and that she found these to include claims “against the individual Defendants […] notbased on the loss that they have caused to the corporation [Valeant], but on the loss that they have allegedly caused directly to the classmembers through their own fault”: par. 309 of the Judge’s reasons.

It is thus incorrect to claim, as Schiller does, that the Judge failed toconsider whether, on the face of the Respondent’s proceedings, he committed distinct faults or whether the injuries allegedly sufferedwere distinct from and independent of the loss suffered by Valeant. [14] Schiller’s complaint cannot therefore be with the failure of the Judge to carry out the analysis, but rather with the results of thatanalysis, with which he disagrees. [15] The extracts of Respondents’ proceedings reproduced above make abundant reference to Schiller’s specific faults, includingmisrepresentations which he is alleged to have made or authorized.

In Biosyntech, there were no specific allegations with respect tomisrepresentations by specific directors. On the contrary, here the Respondents allege specific improper conduct, misrepresentations andother misdeeds by Schiller, including certifying documents containing untrue statements and certifying financial statements containingmisrepresentations.

Only a full evidentiary record and full arguments will determine whether these allegations can be proven andwhether the evidence which will be submitted can sustain a conclusion of liability and an order for damages against Schiller within theframework of general civil liability principles, including the principles set out in Biosyntech. [16] As I pointed out in the judgment with respect to the application for leave to appeal brought by Valeant’s underwriters, this Courtand the Supreme Court of Canada have consistently held that the judge’s function in deciding to authorize a class action is limited tofiltering out untenable claims, since the burden on those seeking authorization to bring a class action is only to establish a prima faciecase or an arguable case: Infineon Technologies et al. v.

Option consommateurs, 2013 SCC 59, [2013] 3 S.C.R. 600, at par. 65, 67 and68. In Sibiga v. Fido Solutions inc., 2016 QCCA 1299, at par. 34, Kasirer J.A. expressed himself as follows in this regard: [34] While the compass for appellate intervention is indeed limited, so too is the role of the motion judge. In clear terms, particularlysince its decision in Infineon [Infineon Technologies et al. v. Option consommateurs, 2013 SCC 59 , [2013] 3 S.C.R. 600], theSupreme Court has repeatedly emphasized that the judge's function at the authorization stage is only one of filtering out untenableclaims.

The Court stressed that the law does not impose an onerous burden on the person seeking authorization.

"He or she need onlyestablish a 'prima facie case' or an 'arguable case'", wrote LeBel and Wagner JJ. in Vivendi, specifying that a motion judge "must not dealwith the merits of the case, as they are to be considered only after the motion for authorization is granted" [Vivendi Canada Inc. v.Dell’Aniello, [2014] 1 S.C.R. 600, par. 37]. (Emphasis added) [17] I have not been persuaded that a prima facie overriding error was committed by the Judge when she concluded that there was anarguable case for finding that Schiller caused direct damage to the shareholders and noteholders.

Whether the Respondents can sustaintheir case against Schiller or whether a defence based on Biosyntech can be sustained by Schiller will be determined on the merits of theclass action, with the benefit of a complete evidentiary record and full arguments. It is not at the authorization stage that Schiller’sliability under general civil law principles should be decided, as the Court has consistently held in Carrier v. Québec (Procureurgénéral), 2011 QCCA 1231, par. 37; Lambert (Gestion Peggy) v. Écolait ltée, 2016 QCCA 659, par. 37-38; Sibiga v. Fido Solutions inc.,2016 QCCA 1299, par. 83; Belmamoun v.

Ville de Brossard, 2017 QCCA 102, par. 82-83 and 96; Société québécoise de gestioncollective des droits de reproduction (Copibec) v. Université Laval, 2017 QCCA 199, par. 60 and 69; and Asselin v. Desjardins Cabinetde services financiers inc., 2017 QCCA 1673, par. 40-43. [18] Schiller has consequently failed to convince me that he has met the demanding test to grant an appeal of the Judge’s decisionbased on the specific ground he raises. FOR THESE REASONS, THE UNDERSIGNED JUDGE: [19] DISMISSES the Application for leave to appeal brought by Howard B. Schiller, with legal costs. ROBERT M. MAINVILLE, J.A.

Mtre André RyanMtre Shaun E. FinnBCFMtre Jessica M. StarckBENNETT JONESFor ApplicantMtre Shawn FaguyMtre Vincent DoréFAGUY & CIE, AVOCATS INC.Mtre Michael George RobbSISKINDSMtre Garth Fraser MyersMtre Jonathan PtakKOSKIE MINSKYFor Respondents

Mtre Éric Préfontaine Mtre Allan David Coleman OSLER, HOSKIN & HARCOURT For Valeant Pharmaceuticals International Inc., Robert L. Rosiello, Robert A. Ingram, Ronald H. Farmer, Theo Melas-Kyriazi, G. Mason Morfit, Laurence Paul, Robert N. Power, Norma A. Provencio, Lloyd M. Segal, Katharine B. Stevenson, Fred Hassan, Colleen Goggins, Anders O. Lonner and Jeffrey W. Ubben Mtre Pierre Y. Lefebvre LANGLOIS AVOCATS Mtre Noah Michael Boudreau FASKEN MARTINEAU DuMOULIN For Pricewaterhousecoopers LLP Mtre Robert Torralbo Mtre Simon Jun Seida BLAKE, CASSELS & GRAYDON For J.

Michael Pearson Mtre William McNamara Mtre Marie-Eve Gingras SOCIÉTÉ D’AVOCATS TORYS For Goldman Sachs & Co., Goldman Sachs Canada Inc., Deutsche Bank Securities Inc., Barclays Capital Inc., HSBC Securities (USA) Inc., Mitsubishi UFJ Securities (USA) Inc., DNB Markets Inc., RBC Capital Markets LLC, Morgan Stanley & Co. LLC, Suntrust Robinson Humphrey Inc., Citigroup Global Markets Inc., CIBC World Markets Corp., SMBC Nikko Securities America Inc., TD Securities (USA) LLC, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and BMO Capital Markets Corp.

Date of hearing: November 22, 2017