A recently released decision of the Court of Appeal has addressed the meaning of “material change” as it is used in the Ontario Securities Act. In Markowich v. Lundin Mining Corporation, the plaintiff sought to advance a claim against the defendant company in which he held shares, specifically the statutory cause of action set out in the Securities Act. The plaintiff argued the defendant company had failed to disclose “forthwith” a “material change” in its “business, operations or capital” as required under the statute. The plaintiff also sought certification of the claim as a class action.
Statute Requires Disclosure “Forthwith” of a “Material Change”
The Securities Act requires reporting issuers to “forthwith issue and file a news release” in situations “where a material change occurs in the affairs of [the] reporting issuer.” A reporting issuer must also “file a report of such material change in accordance with the regulations as soon as practicable and in any event within ten days of the date on which the change occurs.” The failure by a reporting issuer to meet these requirements exposes the issuer to potential liability pursuant to section 138.3(4), which creates a statutory right of action in such circumstances.
Statutory Right of Action May Be Available Where Disclosure is Not
As explained by the Court in Markowich, the Securities Act gives a right of action to those who acquire or dispose of an issuer’s security “between the time when the disclosure should have been made and the time when the disclosure is made,” regardless of whether there was reliance on compliance with the issuer’s “timely disclosure requirements.” Leave of the Court is required to proceed with such a claim and is only to be granted if a Court is satisfied that the action “is being brought in good faith” and “there is a reasonable possibility that the action will be resolved in favour of the plaintiff at trial.”
Two-Step Analysis Necessary to Determine Whether There May Have Been a “Material Change”
The Court in Markowich noted that a two-step analysis is needed to determine whether there may have been a “material change” that might have required disclosure “forthwith” under the statute. First, a Court must determine whether there may have been a “change in the issuer’s business, operations or capital.” Second, it has to determine “whether the change was material, in the sense that it would be expected to have a significant impact on the value of the issuer’s shares.” The Court observed that the first step was the primary issue before it.
Court References the Broad and Remedial Approach to the Securities Act
In interpreting the phrase “material change,” the Court referenced the earlier decision of the Supreme Court of Canada in Kerr v. Danier Leather Inc. The Kerr decision confirmed that the Securities Act should be broadly interpreted because it is “remedial legislation” intended to “protect investors by imposing disclosure requirements.”
Change in Issue Must Result in a Change in the Business
In interpreting the phrase “change in the business, operations or capital of the issuer,” the Court in Markowich noted that the kind of “material change” that may trigger the “forthwith” disclosure obligation cannot merely be “external to the corporation.” In other words, changes external to a reporting issuer that does not produce “a resulting change in the business, operations or capital of the company” do not qualify, even if the change might affect the share price. So long as these criteria are met, it is appropriate to define “change” broadly. In determining whether there has been a “change,” the focus should not be on its magnitude “but rather its qualitative nature.”
The Court further noted that, in determining whether there has been a “change” in the “operations” of a company, the word “operations” should be seen as very broad and as referring not only “to the location of a business or what the business produces.” Instead, a change in operations “may refer to a broad range of changes within a company.”
Once it is determined that a change has occurred “in the business, operations or capital of the issuer,” the second part of the two-step test requires consideration of whether that change may have been “material.” This is to be determined objectively “from the perspective of a reasonable investor.” In other words, “the issue becomes whether that change is such that it would be reasonable to expect that there will be a significant impact on share prices.”
As A Result Of A Rockslide, Defendant Modified Schedule For Phased Mining
The Court in Markowich had to determine whether to grant leave to the plaintiff for an action to proceed under section 138.3. The plaintiff argued that the defendant Lundin Mining Corporation had failed to make a disclosure “forthwith” as required by the statute in relation to events that had occurred in the course of the company’s mining operations. In October 2017, instability was detected in the pit wall of an open pit part of a mine partly owned by the defendant company, which required the evacuation of personnel from that area. Sometime later, a rockslide resulted in the company modifying its schedule “for the phased mining of the open pit.” Further, due to the rockslide, the company’s “expected production for 2019” was decreased, and the company “needed to make up for this reduced production with lower grade ore for 2019.” The company did not publicly disclose the pit wall instability or the rockslide when these occurred.
The Court ultimately concluded that “there was a reasonable possibility” that the plaintiff could prove at trial that the pit wall instability and rockslide were changes in the defendant company’s operations that should have been disclosed forthwith. Leave was thus granted for the action to proceed under the Securities Act.
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