Court File and Parties

COURT FILE NO.: CV-19-00617136-00CP DATE: 20230118 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Kevin Gowanlock, Plaintiff - AND - Auxly Cannabis Group Inc., Defendant

BEFORE: E.M. Morgan J.

COUNSEL: Andrew Morganti and Albert Pelletier, for the Plaintiff Christopher Horkins, for the Defendant

HEARD: January 18, 2023

Consent Certification, Notice Approval, and Pleading Amendment

[1] This is a proposed class action in which the Plaintiff is a shareholder who has already been granted leave to proceed with a claim for secondary market liability pursuant to s. 138.3 of the Ontario Securities Act, RSO 1990, c. S 5 (“OSA”): Gowanlock v. Auxly Cannabis Group Inc., 2021 ONSC 4205 (“Auxly I”), leave to appeal denied Nov. 12, 2021 (Div Ct).

[2] The parties have reached a tentative agreement and here move to have the action certified on consent. The Plaintiff also moves to amend his pleading in order to narrow the issues in the action. The amendment, in essence, removes any common law claims and restricts the claim to the statutory claim alone. The amendment also replaces the original Plaintiff with a new representative Plaintiff who bought shares at the relevant time and who is apparently more motivated to pursue the action than the original Plaintiff has become given the now well-known financial hardships facing the Defendant.

[3] The full background of the dispute is fully set out in my reasons for judgment in Auxly I. For now, the following basic facts suffices to describe the claim:

• On May 15, 2018 and July 3, 2018, the Defendant reported that the first phase of the buildout of a joint venture facility with FSD Pharma Inc. (“FSD”), and that Health Canada regulatory approval would be completed by December 2018 and that it would be in a position to plant the first harvest of cannabis at the facility by the end of January 2019.
• On August 30, 2018, FSD released its Q2 interim continuous disclosure documents for the period ending June 30, 2018. The MD&A reported that FSD and the Defendant had approved an updated construction and development budget. It also indicated that commencing July 2018, FSD started the buildout joint venture facility, and that the Defendant would contribute a total of $55 million to the joint venture project which, according to the MD&A, was on track to be completed and ready for Health Canada approval by the end of December 2018.
• On September 20, 2018, the Defendant released a statement by its president and director that, “[w]e are incredibly pleased with the progress we have jointly made on the construction of the first phase of the facility…”
• On November 12, 2018, the Defendant released its Q3 interim financial statements and MD&A for the period ending September 30, 2018. This reported that build-out of joint venture facility was “underway” and that, in return, the Defendant was entitled to earn a 49.9% streaming interest of the cannabis cultivation yield produced at the facility.
• On February 7, 2019, prior to the stock-market opening, the Defendant released a statement announcing that the agreement with FSD was being terminated because after making its $7.5 million investment on September 20, 2018), the Defendant had identified contractual breaches by FSD and had developed significant concerns relating to the facility’s infrastructure.
• On February 6, 2019, the Defendant’s securities on the TSXV closed at $0.90 per share. After the release of the public corrective statement on February 7, 2019, the Defendant’s securities price on the TSXV dropped to $0.75 per share.
• By February 12, 2019, the Defendant’s securities price on the TSXV had dropped to $0.71 per share, representing a decrease of over 21% from its closing price of February 6, 2019.

[4] I see no reason not to certify this claim as presented in the motion record before me. The criteria set out in s. 5(1) of the Class Proceedings Act, 1992, SO 1992, c. 6 (“CPA”) all are met.

[5] More specifically, and as described in Auxly I, the proposed amended claim contains a statutory cause of action under s. 138.3 of the OSA. It also has an identifiable class, defined as:

All persons, other than Excluded Persons, who acquired Auxly's securities between November 12, 2018 and February 6, 2019, and held some or all of those securities after February 6, 2019, where Excluded Person means any executive level employee of FSD Pharma Inc. or Auxly Cannabis Group Inc. and their immediate families.

[6] Class counsel have presented a viable litigation plan. Further, the newly proposed Plaintiff – Daniel Relvas – is by all appearances an appropriate representative Plaintiff capable of instructing counsel and having no conflict of interest with the rest of the class. In addition, as a shareholders’ action, the principles of access to justice, judicial economy make a class action the preferable – indeed, the only manageable, form of proceeding.

[7] The parties propose certifying a number of common issues, all of which meet the commonality criterion for certification:

(i) Did the Defendant release its Management’s Discussion and Analysis and corresponding financial statement for the Three and Nine Months Ended September 30, 2018 on November 12, 2018, containing one or more misrepresentation by omitting material facts about the status of the build-out of the JV Facility which, if disclosed, would have indicated: (a) that the project was then significantly behind schedule, (b) that FSD was in breach of the Definitive Agreement, and (c) that there was substantial risk that the entire build-out project would be terminated or not completed within the time period or within the budget as represented within the impugned documents? (ii) If the answer to common issue (i) is ‘yes’, were one or more of the alleged misrepresentations publicly corrected on February 7, 2019, in a news release published by the Defendant entitled, “Auxly announces termination of FSD Pharma Joint Venture”? (iii) If the answer to common issues (i) and (ii) are ‘yes’, is the Defendant relieved of liability pursuant to any of the defenses provided for under section 138.4 of the OSA? (iv) If the answers to common issues (i) and (ii) are ‘yes’ and the answer to common issue (iii) is ‘no’ or ‘partially’, then: (a) What are the aggregate assessed damages for the Class pursuant to sections 138.5(1) and (2) of the OSA? (b) What portion of the assessed damages, if any, has the Defendant proven is attributable to a change in the market price of the Defendant’s securities that is unrelated to the alleged misrepresentations, pursuant to section 138.5(3) of the OSA? and (c) What are the damages per share?

[8] Class counsel have proposed a Short Form Notice of Certification, a Long Form Notice of Certification, and a Notice Plan (contained at Article 4 of the Litigation Plan) for disseminating the Notices class members. The notifications will be by way of business wire publication, which has in recent times proven to be an effective form of wide communication in these types of cases. The Notices will also be published on Plaintiff’s counsel’s website, which is available in multiple languages. The documentation provides that class members may opt-out of the class by completing the Opt-out form and sending it to class counsel within 60 days from the date of the Order that accompanies these reasons. After the opt-out deadline class members may opt out of the class only with leave of the Court.

[9] I agree that the class is to be given notice of the certification of this action as a class as set out in the Notice Plan. I approve the Notice Plan as adequate notice to all class members as required by s. 17 of the CPA. Further, as provided in s. 22 of the CPA, the cost of giving notice is to be paid by the Defendant.

[10] In light of all of this, the motion for certification, approval of the Notices and Notice Plan, amendment of the Plaintiff’s pleading, and substitution of a new Plaintiff, is granted. There shall be an Order to go as submitted by counsel.

Morgan J. Date: January 18, 2023