We previously wrote about a decision of the Court of Appeal that concerned the meaning of the phrase “material change” as found in the Securities Act. The case involved a plaintiff’s claim that the defendant company had failed to satisfy its statutory obligation to disclose “forthwith” a “material change” in its affairs. The case was appealed to the Supreme Court of Canada, which recently released its decision in Lundin Mining Corp. v. Markowich. That decision is the subject of this blog post.
In Markowich, the defendant mining company detected instability in a pit wall at its “premier mine.” Days later, the mine suffered a rockslide. As a result, the company had to shut down at least part of the mine for a while and decreased its production forecast for the following year by 20 percent. About a month after, the company disclosed these facts, and its share price dropped, resulting in “a loss of over $1 billion in market capitalization.”
In 2018, the plaintiff, Markowich, commenced a proposed class proceeding against the company and certain of its directors and officers. Among other things, the suit alleged that they had failed to make timely disclosure of the instability in the pit wall and the rockslide, in breach of Section 75(1) of the Securities Act.
The plaintiff sought leave to pursue a statutory cause of action under section 138.8(1) of the Securities Act and sought certification of the proposed class proceeding. The motions judge dismissed these motions, but the Court of Appeal granted an appeal. The matter later came before the Supreme Court of Canada.
The primary issue before the Supreme Court was whether leave should have been granted to the plaintiff to commence an action for the alleged failure of the defendants to disclose “material changes” in the company’s affairs “forthwith” (or immediately) pursuant to section 75(1). Under that section, where such a material change occurs, the company is required to “issue and file a news release … disclosing the nature and substance of the change.”
The phrase “material change” is defined in the statute as “a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer.” The word “change,” however, is not defined. The plaintiff argued that the phrase “material change” should be broadly defined and not limited to “fundamental shifts” in the company’s affairs. In contrast, the defendants argued for a narrower interpretation.
The Court began by noting that the “heart and soul” of securities regulation in Canada is the concept of “proper disclosure” of information, since disclosure is what brings about a “level playing field” of information between investors and issuers. Further, the Securities Act is remedial in nature “and is to be given a broad interpretation” (see also Kerr v. Danier Leather Inc.).
The Court discussed how the disclosure process is generally intended to operate under the statute. It noted that when an issuer first offers its securities for sale to investors (through an initial public offering, or IPO) in the primary market, it is required to prepare and file a prospectus and deliver it to the purchasers. The prospectus is required to provide a “full, true and plain disclosure of all material facts” relating to those securities (see section 56(1) of the statute). A “material fact” is one that “would reasonably be expected to have a significant effect on the market price or value of the securities.”
Subsequent trades in the “secondary market” are subject to two types of continuing disclosure obligations. The first is the obligation to disclose all “material facts” at regular intervals. The second is the obligation to make “forthwith” disclosure of “material changes” in the issuer’s affairs. As the Court explained, material facts are “static” because they provide a “snapshot of an issuer’s affairs at a particular point in time.” Material changes, however, are “dynamic” because they compare those affairs between two points in time. The distinction between them can be understood from the perspective of the issuer’s “disclosure record.” After the initial prospectus is filed, the issuer is required to update the disclosure it contains whenever there is a “material change” in its “business, operations or capital.”
The Court observed that the phrase “material fact” is defined more broadly than “material change.” A material fact may be unrelated to the “business, operations or capital” of the issuer, as long as it has a “significant effect on the market price or value of the securities being issued.” However, a “material change must be internal to the issuer.” In other words, external factors such as political and economic developments cannot, in and of themselves, give rise to a “material change”. Instead, they must result in a “change in the business, operations or capital of the issuer” (per the statutory definition of that phrase).
The Court then considered the reason for the different concepts in the legislation. First, it removes the burden from issuers of having to continuously interpret external developments (except as they may result in a change to the company’s business, operations, or capital). Second, there is an “informational asymmetry” between investors and issuers when it comes to internal developments as opposed to external ones. In other words, external developments are discoverable by investors, whereas internal ones are “usually not in the public domain.” It is therefore important that issuers make forthwith disclosure of certain internal developments.
In light of these principles, the Court concluded that a “change” should not be interpreted “restrictively”. Since the purpose of continuing disclosure obligations is to ensure a “level playing field” of information between investors and issuers, some flexibility must be afforded to the term, as it will apply to a wide variety of facts and situations. In determining whether there has been a “change,” the first step is to consider the nature of the change and the second its magnitude, as it must be material. This is to be considered from the perspective of a “reasonable investor”.
Likewise, the phrase “business, operations or capital” is not to be interpreted restrictively. As the Court noted, a change in business, operations, or capital is a “holistic standard for assessing corporate developments that may require disclosure.” It is a standard to be applied in light of the need to level the information playing field between investors and issuers.
The Supreme Court of Canada ultimately found there was a “reasonable possibility” that the plaintiff could establish that the instability of the pit wall and the rockslide resulted in a change in the company’s operations. There was also a reasonable possibility these events could be shown at trial to be material. Evidence also showed that the instability and rockslide had impacted the company’s operations. As such, there was a “reasonable possibility” the plaintiff could successfully establish at trial that there were material changes the company should have disclosed forthwith. It ultimately dismissed the appeal.
The SCC’s ruling in Markowich highlights the high stakes of “material change” disclosure and the evolving landscape of securities law. Whether you are navigating a shareholder dispute or a complex class proceeding, the legal team at Milosevic & Associates provides the sophisticated strategy required to protect your interests. Based in Toronto, we offer vigorous advocacy and practical advice tailored to the complexities of corporate commercial disputes. If you are facing a complex commercial dispute, contact us today online or by phone at (416) 916-1387 to discuss how we can help you achieve a successful resolution.
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