A recent B.C. Securities Commission decision provides important
guidance on when exploration results constitute a material change
requiring disclosure under Canadian securities laws.
The decision relates to an enforcement action commenced against
Canaco Resources Inc., a company listed on the TSX Venture
Exchange, (the "Exchange"). In December
2010, the company's President and CEO revealed the results of
eight drill holes on its Magambazi deposit to Canaco's board of
directors. These were infill holes covering a mineralized zone in
which Canaco had previously drilled and reported 82 holes. In email
discussions between the CEO and the board, the directors referred
to the results of the new drilling as "just beautiful,"
"spectacular," and "fantastic news." However,
the board decided to stagger release of the information over a
period of several weeks. The board also decided to immediately
issue new stock options to the directors, management and employees,
even though the exploration results were not yet made public.
The Exchange learned of the option grants and staggered
disclosure. The Exchange forced Canaco to re-price the options and
issue a news release disclosing the remaining information.
In April 2012, the Executive Director of the B.C. Securities
Commission issued a notice of hearing against Canaco, its CEO, and
three of its independent directors for allegedly contravening the
disclosure requirements in section 85 of the B.C. Securities
Act by failing to (i) immediately disclose the results from
the eight new drill holes, and (ii) act in Canaco's best
interests when voting to issue stock options before that
information was disseminated.
In August 2013, a panel of Commissioners of the B.C. Securities
Commission dismissed the allegations against all parties. At the
heart of the decision was the materiality of the drill results.
That is, whether the drill results were a change in the business,
operations, or capital of the company reasonably expected to have a
significant effect on the market price or value of the
company's securities. The panel decided that the exploration
results did not constitute a material change.
The panel relied heavily on two separate expert geologists'
reports tendered by Canaco. The reports found that the drilling did
not alter or expand on the boundaries of the Magambazi deposit but
it simply added to the understanding of the continuity to the
deposit, which would not significantly affect Canaco's
Key Points for Canadian Reporting Issuers
The panel's decision provides important guidance for
determining whether there has been a "material change,"
particularly for junior resource companies. The core question for
management is whether the fact or event could reasonably be
expected to significantly affect the market price of the
For junior mining companies, information from drill results will
often continue to be material. However, the decision highlights how
important it is to consider the context in which drill results are
released. In Canaco's case, the panel found that the
company's drilling program was "well advanced,"
having released results from 82 drill holes over the previous year.
Information from the eight new infill holes "merely confirmed
what management and the market already knew about the
The panel further echoed previous case law stating that the
materiality test must be viewed from the perspective of the buying,
selling, or holding of securities. The panel stated:
The materiality test is objective, relating to the likely
impact of the change on market price. Subjective opinions of an
issuer's directors and executives are not determinative of an
assessment of materiality, even when they are expressed in very
positive terms such as "fantastic news" or
"spectacular." Likewise, a determination by the Exchange
that information must be disclosed does not affect the objective
test under securities law.
Change in market price is not necessarily caused by disclosure.
A "host of factors can cause price changes and a combination
of even minor factors can combine to move the price."
The materiality test is based on the assumption that the market
in the company's shares is generally efficient. Otherwise,
companies could argue that no information was material because
their stock does not trade efficiently, "an absurd
Materiality is assessed in the context of the issuer's
industry and the market.
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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