Reporting issuers are subject to numerous continuous disclosure
obligations under securities law in Canada. Some of the most
challenging concepts to grapple with involve the ongoing
requirement to disclose material changes and dealing with material
facts and material changes in connection with the insider trading
The Alberta Securities Commission's Kapusta decision and the
Ontario Securities Commission's Coventree decision, both of
which were released in 2011, illustrate these issues. This bulletin
explores some of the guidance collectively given by these
The decisions confirm that the concepts of material fact and
material change are distinct. A material fact is one that would
reasonably be expected to have a significant effect on the market
price or value of an issuer's shares and a material change
occurs when there is a change in the business, operations or
capital of an issuer which would reasonably be expected to have a
significant effect on the market price or value of the relevant
securities. The definition of a material fact is broader than that
of a material change, as not all material facts are a result of a
change in the business, operations or capital of the issuer.
The concept of material fact is important in relation to
prospectus disclosure, as a prospectus must contain full, true and
plain disclosure of all material facts related to the securities
issued or proposed to be distributed. Full disclosure
allows investors to make an informed investment decision,
true disclosure is accurate and not misleading and does
not omit a fact that is either material or necessary to understand
the facts already disclosed and plain disclosure must be
understandable to investors and in plain language.
Although material fact and material change are distinct
concepts, the materiality threshold is the same. The commissions
emphasized that materiality is about whether the fact or change
would reasonably be expected to have a significant effect on the
market price or value of securities.
The decisions also indicate that a material change can be
triggered by a change in the value of an issuer's securities
without that change necessarily being reflected in the
market price of its securities. There are many reasons why the
market price would not be affected by an external announcement.
Adherence to the form of disclosure rules is also important.
Material changes must be disclosed by issuing a news release and
filing a material change report, rather than describing the
material change in a separate disclosure document.
External events beyond an issuer's control can trigger a
material change in the issuer's business, that is then required
to be disclosed in accordance with applicable securities law.
Although as a general principle it is assumed that investors will
be aware of external economic developments and their general
effects on issuers, this principle may not always apply. External
events which result in a material change in an issuer's
business will trigger disclosure obligations for the issuer, where
they have a direct effect on its principal business that is
uncharacteristic of what is being generally experienced by other
issuers in the same business.
Disclosure of a material risk in a prospectus does not insulate
a reporting issuer from its obligation to disclose a material
change in its business that later results from the actual risk
occurring. This is the case even when the event that occurs and
results in the material change is widely reported in the media.
Finally, the commissions discussed that more is expected from
inside directors and those officers and directors with superior
qualifications. Inside directors are more involved in decision
making and have greater access to information. Therefore, they are
expected to be more attentive to securities laws.
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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