One of the issues in securities law generally is what
constitutes "materiality". In a later post we will
discuss "material adverse change" clauses in M&A
agreements, but this post is about the fundamental question of what
is "material". A recent case of the Supreme Court of
Canada, Sharbern Holding Inc. v. Vancouver Airport Centre
Ltd. provides some guidance. In Sharbern, the
Supreme Court looked at the test of what constitutes a
"material false statement." While the Court was looking
at a real estate related statute, the principles are similar under
securities laws. 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.
Let's look at what the Court said:
The "Reasonable Investor Standard."
Materiality is to be determined objectively, from the perspective
of a reasonable investor.
The Two-Part "Substantial Likelihood"
Test. 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. The Court 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. 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. 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.
Burden is on the Plaintiff. 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.
To learn more, read
our article discussing the Sharbern decision.
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.
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