Canada: Materiality In Securities Legislation: Guidance From The Supreme Court Of Canada Imposes Burdens On Both Plaintiffs And Issuers

Management in public companies often struggles to determine how much or how little to disclose in connection with offerings of securities. Until now, other than market practice there has been little judicial guidance to assist management in making decisions. In Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23, the Supreme Court of Canada has recently provided such guidance by examining the test of what constitutes a "material false statement" under securities statutes.

The facts of Sharbern are sadly familiar: market optimism leads to a crash, which leads to litigation as disappointed investors seek to recoup their losses. In the mid-1990s, investors were tripping over themselves to invest in hotels near the Vancouver airport. There was much enthusiasm, with rosy projections of future profits. At the height of the boom, a developer built two interconnected hotels — one a Marriott, the other a Hilton — and sold each of the hotels to public investors through strata lots. The developer remained as manager of both hotels once they were constructed.

However, by 2001 the bubble had burst, and the Richmond, B.C. hotel market was one of the weakest in Canada. Unhappy investors in the Hilton property brought a class action against the developer, alleging non-disclosure under securities law, specifically whether the developer was liable for making material false statements in the offering memorandum and disclosure statement used to sell the Hilton strata lots. (They also alleged common law negligent misrepresentation and breach of fiduciary duty, but those allegations are not considered in this article.)

At trial, the plaintiffs succeeded. They convinced the trial judge that the developer had a conflict of interest because it had guaranteed a return to the Marriott investors but not to the Hilton investors, and because the developer had charged a lower management fee to the Hilton hotel than it did to the Marriott (the concern being that the developer would have an incentive to favour the Marriott in order to earn the higher fee). This conflict of interest had not been included in the disclosure statement provided to the Hilton investors under the applicable legislation. On appeal, the B.C. Court of Appeal reversed. A further appeal was heard by a full nine-member panel of the Supreme Court of Canada. In a unanimous decision authored by Justice Rothstein, the Supreme Court affirmed the B.C. Court of Appeal's decision and dismissed the class action claim.

Although the provisions considered by the Supreme Court were under the British Columbia Real Estate Act (now repealed), which imposed liability for a "material false statement," the court's description of the test of materiality in disclosure documents is relevant under securities legislation generally. Specifically, the court emphasized five points.

The "Reasonable Investor Standard"

First, materiality is to be determined objectively, from the perspective of a reasonable investor.

The Two-Part "Substantial Likelihood" Test

Second, a fact omitted from a disclosure document is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making an investment decision. It is not sufficient that the fact merely might have been considered important. In this regard, the Supreme Court adopted the test set out by the Supreme Court of the United States in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 428 (1976), and noted that the materiality standard is a balance between too much and too little disclosure. Too little disclosure is obviously problematic, but so is too much: it is not in the interests of investors to be buried in an avalanche of trivial information.

Third, the issue is not whether the fact would have changed the investment decision of the reasonable investor, but whether there is a substantial likelihood that the fact would have assumed actual significance in a reasonable investor's deliberations.

Fact Specific

Fourth, materiality depends on the specific facts, determined in light of all relevant considerations and the surrounding circumstances forming the total mix of information made available to investors. The approach adopted by the Canadian Securities Administrators in National Policy 51-201 Disclosure Standards (July 12, 2002) and by the United States Securities and Exchange Commission in SEC Staff Accounting Bulletin: No. 99 — "Materiality" (August 12, 1999) — a fact-driven and contextual approach — was endorsed.

Burden is on the Plaintiff

Fifth, a plaintiff alleging non-disclosure has the onus of proving materiality and must lead evidence on the point, except where common sense inferences are sufficient.

Applying these principles, the Supreme Court held that the trial judge had made three legal errors in finding the developer's alleged conflict of interest to be material. First, she erroneously concluded that the conflict of which the plaintiffs complained was inherently material. This conclusion implied that issuers have an obligation to disclose all facts in order to permit investors to sort out what is material and what is not — an approach that would result in excessive disclosure by overwhelming investors with information. In turn, this outcome would impair, rather than enhance, investors' ability to make decisions. Second, the trial judge reversed the onus of proof, requiring the developer to show that the conflict of interest was not material rather than requiring the plaintiffs to show that it was. Third, she failed to consider all the evidence available to her on the issue of materiality.

The Supreme Court was not only critical of the trial judge but also critical of the plaintiffs, noting that they had failed to adduce sufficient evidence, including expert evidence, to support their allegations of material non-disclosure. The Supreme Court set out evidence which, had it been adduced, might have led to a conclusion of materiality. The plaintiffs could have shown that potential investors who knew of the alleged conflict of interest declined to invest or expressed concern. The plaintiffs could have shown that potential investors declined to invest because they found that there was insufficient disclosure. The plaintiffs could have shown that once the Hilton investors learned of the alleged conflict of interest they had expressed concerns about it. The plaintiffs could have shown that the developer did not act diligently and in good faith in managing the Hilton hotel, or that the developer actually acted on the conflict of interest to the detriment of the Hilton investors. The absence of evidence of this type was fatal to the plaintiffs' claims of materiality.

Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. makes it more difficult for plaintiffs to recover damages under securities legislation. The concept of materiality has been interpreted robustly, the onus of proving materiality has clearly been placed on the shoulders of plaintiffs, and subject to a limited exception plaintiffs are required adduce evidence (including expert evidence) in support of an allegation of materiality. Yet while making life more difficult for plaintiffs, the decision does not necessarily make life easier for issuers. While Sharbern makes clear that it is not necessary for issuers to disclose every imaginable fact that might be considered in an investment decision, it also makes clear that issuers have an obligation not to defeat the purpose of disclosure by bombarding potential investors with a blizzard of non-material information.

McCarthy Tétrault Notes

Sharbern is important for two reasons. First, it provides guidance to issuers on how to approach disclosure. Second, it clarifies that plaintiffs need to prove whether a fact is material. Sharbern imposes burdens on plaintiffs and issuers alike — on plaintiffs to prove that an undisclosed fact really mattered, and on issuers to get the balance right by disclosing everything that is material but without inundating potential investors with non-material information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.