Vecchio Longo Consulting Services Inc. v. Aphria Inc. 2022 ONSC 4753

COURT FILE NO.: CV-19-00614086-00CP

DATE: 20220818

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

VECCHIO LONGO CONSULTING SERVICES INC.

Plaintiff

• and -

APHRIA INC., VICTOR NEUFELD, COLE CACCIAVILLANI, CLARUS SECURITIES INC., CANACCORD GENUITY CORP., CORMARK SECURITIES INC., HAYWOOD SECURITIES INC. and INFOR FINANCIAL GROUP INC.

Defendants

Joel P. Rochon, Peter R. Jervis, Douglas M. Worndl, for the Plaintiff.

Dana M. Peebles and Bryn E. Gray or the Defendants Aphria Inc., Victor Neufeld, and Cole Cacciavillani.

David Di Paolo and Graham Splawski for the Defendants Clarus Securities Inc., Canaccord Genuity Corp, Cormark Securities Inc., Haywood Securities Inc., and INFOR Financial Inc.

HEARD: August 18, 2022

PERELL, J.

REASONS FOR DECISION

A. Introduction

1The Defendant Aphria Inc. is an “issuer” under the Ontario Securities Act,¹ and the Defendants Victor Neufeld, Carl Merton, and Cole Cacciavillani were directors and officers of Aphria (collectively, the Aphria Defendants).

2On February 7, 2019, pursuant to the Class Proceedings Act, 1992,² the Ontario Securities Act, and Other Canadian Securities Legislation³, Rochon Genova LLP commenced a proposed class action on behalf the Plaintiff Vecchio Longo Consulting Services Inc. (“Vecchio”) against the Aphria Defendants for:

a. an oppression remedy pursuant to the Ontario Business Corporations Act;⁴

b. common law misrepresentation;

c. misrepresentation in the primary market pursuant to s. 130, Part XXIII of the Ontario Securities Act; and

d. misrepresentation in the secondary market pursuant to s. 138.3, Part XXIII.1 of the Ontario Securities Act.

3Vecchio also sued Canaccord Genuity Corp., Clarus Securities Inc., Cormark Securities Inc., Haywood Securities Inc., and Infor Financial Group Inc. (collectively, the Underwriters) for misrepresentation in the primary market pursuant to s. 130, Part XXIII of the Ontario Securities Act.

4These defendants were the underwriters for a $258 million Prospectus Offering made by Aphria that closed on June 28, 2018, which was during the Class Period of the proposed class action. The Prospectus Offering was a “bought deal” in which the Underwriters purchased and then sold the Aphria shares pursuant to a prospectus.

5Some of Vecchio’s causes of action concern the effect of alleged misrepresentations by the Aphria Defendants on the buying and selling of shares in the secondary market. The alleged misrepresentations concerned:

a. what is known as the “Nuuvera Transaction”; and

b. what is known as the “LATAM Transaction”. Some of Vecchio’s causes of action concern the effect of alleged misrepresentations by the Aphria Defendants about the Nuuvera Transaction on the purchases of shares in the bought deal Prospectus Offering.

6On August 6, 2021, after a leave and certification motion:⁵

a. The action was discontinued against Mr. Merton.

b. The common law misrepresentation and the oppression remedy was discontinued against the Aphria Defendants;

c. Leave was granted to Vecchio to assert the misrepresentation claim in the secondary market (s. 138.3, Part XXIII.1 Ontario Securities Act) against the Aphria Defendants (except Mr. Merton);

d. The action was certified as a class action against the Aphria Defendants (except Mr. Merton) with Vecchio as the Representative Plaintiff to advance claims of misrepresentation in the secondary market.

e. The misrepresentation claim in the primary market (s. 130 Part XXIII Ontario Securities Act) was certified as a class action against the Aphria Defendants (except Mr. Merton) and the Underwriters, conditional upon Class Counsel bringing a motion within one hundred days for the appointment of a Representative Plaintiff for a class of Class Members that purchased Aphria shares in the primary market during the Class Period.

f. Each Underwriter Defendant was ordered to deliver within thirty days an affidavit listing their respective purchasers of shares in the $258 million Prospectus Offering

7Vecchio now brings a motion for the following relief:

(a) an Order Dismissing this Action against the defendants Clarus Securities Inc., Canaccord Genuity Corp., Cormark Securities Inc., Haywood Securities Inc., and Infor Financial Inc. (the “Underwriters”) on a without costs basis;

(b) an Order Certifying the section 130 of the Securities Act Prospectus Claim, which had been conditionally certified against the Defendants Aphria Inc., Victor Neufeld, and Cole Cacciavillani (the “Aphria Defendants”) by Court’s order in this Action dated August 6, 2021 (“Initial Leave and Certification Order”), as a class proceeding pursuant to section 5 of the Class Proceedings Act, 1992;

(c) an Order appointing the Plaintiff as a representative plaintiff of the entire class, including Prospectus Class;

(d) an Order defining the “Prospectus Class” or “Prospectus Class Members” for the purposes of the Prospectus Claim as follows:

All persons, other than Excluded Persons, wherever they may reside or be domiciled, who acquired Aphria common shares in the primary market in the offering made pursuant to the Prospectus, where excluded persons are defined as the Defendants, their past and present subsidiaries, affiliates, officers, directors, senior employees, partners, legal representatives, heirs, predecessors, successors and assigns, and any individual who is a member of the immediate family of an Individual Defendant.

(e) an Order further amending the draft Amended Fresh as Amended Statement of Claim which is attached as Schedule “A” to the Initial Leave and Certification Order, to the form of Class Proceedings Act, 1992, S.O. 1992, c. 6 (“CPA”), current as of the date this action was commenced pleading attached as Schedule “A” to the present Consent Order, which is to be filed with the Court in that form;

(f) an Order amending the Common Issues set out in Schedule “B” to the Initial Leave and Certification Order to the form of Revised Common Issues attached as Schedule “B” to the present Consent Order, and certified pursuant to section 5(1) of the CPA, without condition;

(g) an Order approving the Plaintiff’s Amended Litigation Plan attached as the Amended and Updated Litigation Plan to the present Consent Order as Schedule “C”;

(h) an Order approving the short form and long form notices of certification of this action as a classproceeding and the granting of leave under Part XXIII.1 of the OSA and the relevant provisions of the Other Canadian Securities Legislation, and of the dismissal of this Action against the Underwriters, substantially in the form attached to the present Consent Order as, respectively, Schedule “D” (the “Short Form Notice”) and Schedule “E” (the “Long Form Notice”), (together, the (“Notices”);

(i) an Order directing that Notices be disseminated substantially in accordance with the Notice Plan attached to the present Consent Order as Schedule “F”;

(j) an Order that nothing in this Order constitutes an admission of fact or liability by the Aphria Defendants, and they reserve all rights to fully defend the Amended Fresh As Amended Statement of Claim without restriction, including the right to dispute the jurisdiction of the Court over claims based on the purchase of shares on foreign exchanges, and claims under the concordant provisions of the Other Canadian Securities Legislation;

(k) an Order that a Class Member, which includes any Secondary Market Class Member and any Prospectus Class Member, may opt out of this proceeding only in accordance with the directions set out in the Short Form Notice or the Long Form Notice, including providing particulars of the date(s), price(s) and number(s) of Aphria securities purchased during the Class Period and held through 08:25 ET December 3, 2018 by no later than the date that is 90 calendar days after the date on which the Notice is first published (the “Opt Out Deadline”) and ordering that no person may opt out of this proceeding after the Opt Out Deadline, and a person who opts out in accordance with the directions set out in the Short Form Notice or the Long Form Notice shall not be a Class Member on or after the date such person opts out of the proceeding;

(l) an Order appointing RicePoint Administration Inc. as the Administrator of the Notice Plan and the Opt Outs in accordance with the Notice Plan;

(m) an Order that by no later than 60 calendar days after the Opt Out Deadline, Rochon Genova LLP shall report to the Court the names of all persons who have opted out of the proceeding, and provide to the Defendants copies of the particulars set forth in subparagraph (k) above supplied by persons who have opted out of the proceeding;

(n) an Order that all costs in relation to the dissemination of the Notice and the cost of the Administrator associated with the Notice and the receipt of opt outs shall be paid by the Plaintiff;

(o) an Order that there shall be no order as to the costs of this motion; and

(p) Such further and relief as counsel may request and this Honourable Court may deem just.

8For the reasons that follow, the motion is granted.

B. Factual Background

9This securities class action was commenced on February 7, 2019.

10There was a rival class action, and on June 19, 2019, Rochon Genova was granted carriage of this action.⁶

11The action involves allegations that the Defendants misrepresented to the market from January 29, 2018 to December 3, 2018 three key transactions: (a) the Nuuvera Transaction, (b) the June 2018 Prospectus Offering, and (c) the LATAM Transaction, which resulted in the substantial artificial inflation of the value of Aphria’s shares throughout the Class Period.

12The Nuuvera and LATAM transactions are alleged to have both involved undisclosed Aphria insider interests in the target companies; and Aphria paying excessive and unjustified consideration of hundreds of millions of dollars for assets which had next to no value or only nominal value. Upon public corrective disclosure being made on December 3 and 4, 2018, the class members and proposed class members are alleged to have suffered losses of several hundred million dollars.

13As noted above, there was a leave and certification motion, and in the Initial Leave and Certification Order, leave was granted pursuant to section 138.8 of the Ontario Securities Act to proceed with the Secondary Market Claim, and that claim was certified pursuant to s. 5 (1) of the Class Proceedings Act, 1992 with Vecchio approved as the representative plaintiff of those Class Members who acquired their Aphria shares in the secondary market during the Class Period.

14The Prospectus Claim was conditionally certified, as follows:

a. each Underwriter deliver within thirty days an affidavit listing their respective purchasers of shares in the $258 million Prospectus Offering made by Aphria that closed on June 28, 2018.

b. the misrepresentation claim in the primary market (s. 130 Part XXIII Ontario Securities Act) is certified as a class action against the Aphria Defendants (except Mr. Merton) and the Underwriters, conditional upon Class Counsel bringing a motion within one hundred days for the appointment of a Representative Plaintiff for a class of Class Members that purchased Aphria shares in the primary market during the Class Period.

15The reason for the conditional certification of the Prospectus Claim was that pursuant to the rule from Ragoonanan Estate v. Imperial Tobacco Canada Ltd.⁷ while Vecchio had a cause of action against the Aphria Defendants for misrepresentations in the primary and the secondary market, it did not have a Part XXIII prospectus misrepresentation cause of action against the Underwriters because Vecchio did not acquire Aphria shares pursuant to the June 2018 Prospectus Offering. In conditionally certifying the Prospectus Claim, I stated: “But for the matter of whether there is a Representative Plaintiff to assert the statutory cause of action [against the Underwriters], I conclude that all of the certification criteria are satisfied in the action pursuant to s. 130 Part XXIII of the Ontario Securities Act as against the Aphria Defendants and against the Underwriters.”

16In short, the problem for Vecchio was that additional representative plaintiffs were needed for the actions against each of the Underwriters. To assist Class Counsel in solving this problem, I ordered the Underwriters to produce to the Plaintiff a list of Prospectus Purchasers who could then be contacted by Class Counsel. Once a Prospectus Purchaser was recruited to stand as representative plaintiff, a motion could then be brought for the unconditional certification of the Prospectus Claim against all the defendants.

17The Underwriters moved for leave to appeal to the Divisional Court of the disclosure Order and on September 8, 2021, the disclosure Order was stayed pending appeal.⁸ On April 8, 2022, the Divisional Court granted leave to appeal.⁹

18It is anticipated that the appeal of the disclosure Order will be returnable in December 2022 or January 2023. It is anticipated that there will be a further period of two to three months before the Divisional Court determines the appeal and that regardless of the outcome, a further appeal would be sought by the unsuccessful party. The action has been stalled for more than one year because of the appeal of the Disclosure Order and is likely to be stalled for several more years.

19To break the impasse, the parties have agreed, subject to the Court’s approval, to a consent Order that would dismiss the Prospectus Claim against the Underwriters, without costs, and allow for the certification of the Prospectus Claim against the Aphria Defendants. The Consent Order provides, among other things, that:

a. The Underwriters will provide documentary production and will make available a knowledgeable individual to be examined for discovery.

b. The Aphria Defendants will immediately produce certain initial relevant productions by September 15, 2022 and will comply with a discovery schedule that will be completed by June 1, 2023;

c. A Notice Plan including the Administration of Opt-outs will commence immediately.

d. a detailed Discovery Plan will be agreed to within 30 days of the Consent Order.

20In Class Counsel’s assessment having regard to the circumstances of this case, the Consent Order is in the best interest of the Class because:

a. The Consent Order ensures that the action can be prosecuted expeditiously and avoids what will be considerable delays associated with the appeal process.

b. The Consent Order recognizes the risk that Class Counsel will not be able to recruit a representative plaintiff against the Underwriters because the Underwriters may be successful on the appeal or even if the Underwriters are unsuccessful and they are ordered to produce the names of the Prospectus Purchasers, Class Counsel may be unable to recruit a qualified person or company to step forward as representative plaintiff. Without a qualified Prospectus Purchaser representative plaintiff, pursuant to the Ragoonanan line of cases, the case against the Underwriters will be dismissed, likely with costs against the Plaintiff.

c. The Consent Order eliminates the uncertainty regarding the ultimate certification of the Prospectus Claim as against the Aphria Defendants, without compromising potential recovery to the Class. It ensures that the Prospectus Claim is unconditionally certified as against the Aphria Defendants in both the primary and the secondary market.

d. The withdrawal of the claim against the Underwriters will not adversely affect the prosecution of the claim against the Aphria Defendants regarding the Nuuvera Assets which is among the pleaded misrepresentations in both the Secondary Market Claim and the Prospectus Claim.

e. Liability pursuant to s. 130 of the Ontario Securities Act is on a joint and several basis, therefore any established damages for Prospectus misrepresentation will become the responsibility of the Aphria Defendants.

f. To defeat joint liability to the Prospectus Purchasers, the Aphria Defendants would have to prove that any actionable misrepresentations in the Prospectus were solely the responsibility of the Underwriters. In Class Counsel’s opinion, this is unlikely given that the Underwriters’ Prospectus Certificate is qualified based on “the best of our knowledge information and belief…”, and at least some of that knowledge would be based on information provided to the Underwriters by the issuer, which in this case was Aphria.

g. The presence of the Underwriters is no longer necessary to maximize recovery for the Class and it appears that the Aphria Defendants are in a financial position to satisfy whatever trial judgment could reasonably be anticipated against them.¹⁰

21Pursuant to the proposed Notice Plan, notice of certification and opt out rights will be disseminated as follows:

(a) English and French language versions of the Short Form Notice will be issued (with necessary formatting modifications) across PRNewswire’s North American Disclosure Bilingual distribution;

(b) English and French language notice will be placed on Yahoo! Finance (English and French) for a period of 30 calendar days;

(c) English language advertisements will be placed on Bloomberg.com for a period of 30 calendar days;

(d) English language notice, ¼ page in size, will be placed in the business sections of the following publication, weekday national editions: National Post, Globe and Mail, Investor’s Business Daily and Wall Street Journal;

(e) French language notice, ¼ page in size, will be placed, once, in the business sections of La Presse;

(f) Class Counsel will mail or email the Long Form Notice to those persons that have contacted them as of the publication date regarding this litigation and have provided them with their contact information; and

(g) Electronic publication of the Long Form Notice will occur in English and French on Class Counsel’s website.

C. Discussion and Analysis

22Section 29 of the Class Proceedings Act, 1992 requires court approval for the discontinuance, abandonment, dismissal, or settlement of a proceeding commenced under the Act. Section 29 states:

Discontinuance, abandonment and settlement

29. (1) A proceeding commenced under this Act and a proceeding certified as a class proceeding under this Act may be discontinued or abandoned only with the approval of the court, on such terms as the court considers appropriate.

Settlement without court approval not binding

(2) A settlement of a class proceeding is not binding unless approved by the court.

Effect of settlement

(3) A settlement of a class proceeding that is approved by the court binds all class members.

Notice: dismissal, discontinuance, abandonment or settlement

(4) In dismissing a proceeding for delay or in approving a discontinuance, abandonment or settlement, the court shall consider whether notice should be given under section 19 and whether any notice should include,

(a) an account of the conduct of the proceeding;

(b) a statement of the result of the proceeding; and

(c) a description of any plan for distributing settlement funds.

23A motion for discontinuance or abandonment should be carefully scrutinized, and the court should consider, among other things: whether the proceeding was commenced for an improper purpose; whether, if necessary, there is a viable replacement party so that putative class members are not prejudiced; or whether the defendant will be prejudiced.¹¹

24Vecchio’s motion has a long list of requested relief but the essence of it is: (a) to discontinue the action against the Underwriters and then (b) to regularize and perfect the already certified action against the Aphria Defendants and (c) to facilitate that action proceeding through its opt-out phase and then on to the discovery stage.

25The critical matter in this motion and the matter that has logjammed this certified securities class action is the absence of representative plaintiffs for the claim against the Underwriters. To break up the logjam, Class Counsel submits that the Underwriters should be let out of the action in return for evidentiary assistance and in circumstances where the Aphria Defendants appear to be a financial meaningful source of recovery should liability against them be established.

26Letting the Underwriters out of the action would resolve the issue about the Ragoonanan Principle. In Boulanger v. Johnson & Johnson Corp.,¹² Justice Nordheimer agreed with the Ragoonanan Principle, but he held that the principle did not apply to the factual situation of that case. In Boulanger v. Johnson & Johnson Corp., the plaintiff had a reasonable pharmaceutical products liability negligence claim against all of the defendants who manufactured the drug, but the putative class members had different claims for relief than the plaintiff. Justice Nordheimer concluded that a representative plaintiff who had a cause of action against a defendant(s) could act on behalf of Class Members who had different causes of action against the same defendant(s).

27In my opinion, the case at bar is an appropriate case to approve the discontinuance of the action as against the Underwriters. I agree with the views of Class Counsel expressed above that it is in the best interests and not prejudicial to the ultimate position of the Class Members to let the Underwriters out of the action at this juncture.

D. Conclusion

28For the above reasons, the motion is granted.

Perell, J.

Released: August 18, 2022

COURT FILE NO.: CV-19-00614086-00CP

DATE: 20220818

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

VECCHIO LONGO CONSULTING SERVICES INC.

Plaintiff

• and -

APHRIA INC., VICTOR NEUFELD, COLE CACCIAVILLANI, CLARUS SECURITIES INC., CANACCORD GENUITY CORP., CORMARK SECURITIES INC., HAYWOOD SECURITIES INC. and INFOR FINANCIAL GROUP INC.

Defendants

Footnotes

1. 1R.S.O. 1990, c. S.5.
2. 2S.O. 1992, c. 6.
3. 3Alberta Securities Act RSA 2000, c S-4; British Columbia Securities Act, RSBC 1996, c 418; Manitoba, Securities Act, CCSM c S50; New Brunswick Securities Act, SNB 2004, c. S-5.5; Newfoundland and Labrador Securities Act, RSNL 990, c S-13; North West Territories Securities Act, SNWT 2008, c. 10; Nova Scotia Securities Act, RSNS 1989, c 418; Nunavut Securities Act, S Nu 2008, c 12; Prince Edward Island Securities Act, RSPEI 1988, c S-3.1; Québec Securities Act, RSQ, c V-1.1; Saskatchewan Securities Act, 1988, SS 1988-89, c S-42.2, and Yukon Securities Act, SY 2007, c 16.
4. 4R.S.O. 1990, c. B.16.
5. 5Vecchio Longo Consulting Services Inc. v. Aphria Inc., 2021 ONSC 5405
6. 6Rogers v. Aphria Inc., 2019 ONSC 3698.
7. 7(2000), 2000 CanLII 22719 (ON SC), 51 OR (3d) 603 (S.C.J.).
8. 8Vecchio Longo Consulting Services inc. v. Aphria Ltd., 2021 ONSC 5953.
9. 9Vecchio Longo Consulting Services Inc. v. Aphria Inc., 2022 ONSC 1949.
10. 10Pursuant to the Underwriting Agreement between Aphria and the Underwriters, Aphria would be obliged to indemnify the Underwriters for their costs of defending this action and any award against them arising out of the June 2018 Prospectus Offering. See Clarus Securities Inc. v. Aphria Inc., 2021 ONSC 3720.
11. 11Logan v. Canada (Minister of Health), [2003] O.J. No. 418 (S.C.J.), aff’d (2004), 2004 CanLII 184 (ON CA), 71 O.R. (3d) 451 (C.A.).
12. 12[2002] O.J. No. 1075 (S.C.J.), aff’d 2003 CanLII 45096 (ON SCDC), [2003] O.J. No. 1374 (Div. Ct.)