Canada: Is it Disclosable? The Material Fact vs. Material Change Debate

Last Updated: September 30 2008
Article by Gregory Hogan

The issue of whether something is a material change or a material fact has often been a thorny issue for public companies and their advisers. If it is a material change, the issuer has an immediate disclosure obligation. Material facts are not, generally, required to be publicly disclosed as they occur (although the TSX does, absent confidentiality concerns, require their immediate disclosure).

While it is often a relatively simple task to determine whether any particular thing is a material change or a material fact, certain events, occurrences and developments are not so easily characterized. The distinction is not without serious consequences for issuers and their counsel. Two recent decisions have helped to clarify when a material change can be said to have occurred, providing greater certainty to those operating in the public markets.

Kerr v. Danier Leather Inc. (Supreme Court Of Canada): Disclosure Obligations Of Reporting Issuers And Their Directors In The Context Of Changes In Results Of Operations From A Forecast Contained In A Prospectus

Danier Leather decided to go public and undertook the necessary steps and filings in 1998. In connection with its IPO, Danier filed a preliminary prospectus that contained a forecast. The forecast from the preliminary prospectus was included, unchanged, in the final prospectus, which received a final receipt May 1998. The forecast was accompanied by standard cautionary language advising investors that there was no guarantee that the forecast would be met. However, the directors received intra-quarterly financial results following the filing of the final prospectus, but before the closing of the IPO, that brought into question the reliability of the forecasts (i.e., unseasonably warm weather was adversely affecting sales), which results were not disclosed prior to closing of the IPO.

At trial, the judge found that section 130 of the Ontario Securities Act mandated that Danier and its directors update the forecasts prior to closing the IPO and the failure to do so amounted to a misrepresentation for which Danier and its directors were liable. Millions of dollars in damages were awarded to the plaintiff investors. The Ontario Court of Appeal later overturned the trial judge's decision, disagreeing with the trial judge's interpretation of the disclosure obligations under the Ontario Securities Act and on other grounds, and a unanimous Supreme Court of Canada dismissed the investors' appeal.

The investors had argued in the appeal that the trial judge should have found that a change in Danier's results of operations from that contained in the forecast constituted a material change. The Supreme Court disagreed, holding that a change in results of operations from a forecast would only constitute a material change if it was causally linked to a change in an issuer's "business, operations or capital". The Supreme Court's reasoning highlighted the fine distinction between material facts, which could adversely affect a forecast (such as the impact of weather on sales of leather clothing and for which the directors need not update a forecast contained in a prospectus prior to closing) and a material change (such as the catastrophic loss of a company's stores and for which the directors need update a forecast to avoid liability for misrepresentation). The Supreme Court also made clear that the business judgment rule could not be used to shield decisions regarding disclosure obligations under the law. If disclosure is required under securities laws, management does not have the discretion to determine when and in what manner it should be made.

Key Disclosure Point For Issuers:

Only changes in an issuer's business, operations or capital are changes that would, if also material, require disclosure. Events, occurrences or developments that are external to the issuer are not changes to the issuer's business, operations or capital, even if the issuer's results of operations are materially affected by such events, occurrences or developments. Changes in results of operations are not the same as changes in operations, the latter of which could result in a material change. Changes in result of operations are material changes only if they are material and are reflective a change in the issuer's business, operations or capital.

AiT Advanced Information Technologies Corporation, Bernard Jude Ashe And Deborah Weinstein (Ontario Securities Commission): Disclosure Obligations Of Reporting Issuers And Their Directors In The Context Of Merger Negotiations

AiT/Weinstein involved an allegation by the Ontario Securities Commission that AiT had breached its material change reporting obligations under the Ontario Securities Act and acted contrary to the public interest by failing to disclose a potential merger transaction with 3M Company (the Merger Transaction). The OSC further alleged that Ashe (an officer of AiT) and Weinstein (legal counsel to AiT) committed an offence under the Act and engaged in conduct contrary to the public interest by authorizing, permitting or acquiescing in AiT's failure to disclose the Merger Transaction as a material change. The OSC argued that AiT's obligation to disclose arose when the board of AiT, by resolution, approved a recommendation to shareholders of the acquisition by 3M at a price of $2.88, all subject to a fairness opinion and satisfaction with the final terms of the deal. This occurred on April 25, 2002. If the obligation did not arise then, the OSC argued that it arose during the period between then and the date a press release was issued, being May 9, 2002, indicating that a potential acquisition was being discussed. During that period, a non-binding letter of intent was executed on April 26, 2002 and a draft of a "pre-acquisition agreement" was delivered by AiT to 3M and between May 7 and May 9, 2002, 3M conducted more in-depth due diligence on AiT. The May 9th press release was in response to inquiries from Market Regulation Services Inc., which monitors trading activity, due to unusual volume and price movements in AiT shares.

The panel of the OSC easily determined that the negotiations were material as regarded AiT. It then turned to consider the distinction between material facts and material changes, noting the difference in disclosure obligations for each. It noted that merger negotiations may constitute material facts long before the negotiations reach a point of commitment at which they could be characterized as a change in the issuer's business, operations or capital. The OSC was thus faced with determining at what point this change occurred. It agreed with Staff of the OSC that the determination of when a material change occurs is not a "bright-line" test. The central discussion in the AiT/Weinstein decision related to when the change can be said to occur.

The panel quoted favourably from a US text, The Regulation of Corporate Disclosure, to the effect that the materiality of negotiations is determined by facts known at the time that a disclosure obligation arose. They were of the opinion that only information at the time was relevant to determining whether a material change had occurred. The panel also took expert testimony from noted securities lawyers Philip Anisman and Peter Dey.

The panel then considered whether the directors' resolution or the letter of intent or any other event was a material change, looking at the events at the time.

The April 25 Board Resolution – A Decision To Implement? The definition of material change includes a decision of the board of an issuer to implement such a change (e.g., to implement the Merger Transaction), without the need for an actual change in an issuer's business, operations or capital. Staff of the OSC was of the view that on April 25, 2002 the board was signing off on the Merger Transaction and providing unqualified support. The panel disagreed on the basis of the evidence. They found that the meeting of the board was to obtain support for the price that 3M was proposing. Further, a number of key deal terms and conditions remained to be negotiated, AiT's shareholder rights plan had not been waived and AiT's financial adviser had not yet been retained. They further found that the AiT board believed there were numerous risks and uncertainties to completing the Merger Transaction. Finally, later statements by the panel indicated that they were of the opinion that a disclosure obligation would only arise on "a decision to implement" where the transaction is based on the board's appreciation of "sufficient commitment from the parties to proceed and substantial likelihood that the transaction will be completed". This commitment must come from both parties. For the panel, given the speculative and contingent nature of the proposed transaction and the many accompanying uncertainties, "a commitment from one party to proceed will not be sufficient to constitute a material change". The panel did not find this level of commitment from AiT and 3M at the time of the resolution.

The Letter Of Intent. While the panel agreed that a material change can occur prior to the signing of a definitive agreement, any such determination would "depend entirely on the facts of each case and the progress and uncertainties facing the parties during the negotiation process". In assessing a letter of intent or similar agreement prior to a definitive agreement, they were influenced by Anisman's suggestion to look at the nature of the commitment that the document embodies, whether what has been "agreed to" specifies all of the key terms (some matters may remain unaddressed). The more binding the key terms (those that move the parties closer to a definitive agreement), the more likely, in Anisman's view, that there is a change. Two key sets of considerations that were provided through the testimony of Anisman and Dey were also elaborated on:

  • Conditions To Transaction. For Anisman, an issuer needs to look at the conditions that remain and how central they are to the transaction and the objective and subjective likelihood of their being satisfied. For Dey, disclosure prior to the reasonable likelihood of conditions being satisfied would be premature.
  • Approvals. For an acquiree, the understanding of the internal approval processes of the acquiror, the status of such processes and the likelihood of obtaining approvals would be necessary in determining whether disclosure was required or whether it would be premature.

For the panel, the letter of intent did not trigger an obligation to disclose. The facts that led to this conclusion were that the price was not firm, but was subject to due diligence, several key terms had not been finalized and 3M was not yet committed to the Merger Transaction. In this analysis, the panel was influenced by the fact that AiT was a small issuer and 3M was, relative to AiT, very large. It was further influenced by the fact that 3M has a very lengthy and involved due diligence and approval process for completing acquisitions. They indicated that under a different set of facts, a level of commitment may be met at the singing of a letter of intent, notwithstanding that it is non-binding, to engage a disclosure obligation.

Key Disclosure Point For Issuers:

There is not a bright line test for deciding when negotiations regarding a material transaction move from being a material fact to being a material change.

A board's decision to approve a material transaction at an early stage would constitute a decision to implement a change, triggering a disclosure obligation, only if there is sufficient commitment from all parties to proceed and substantial likelihood that the transaction will be completed. This determination would be made based on the circumstances and facts at the relevant time.

A letter of intent or similar agreement would constitute a change, triggering disclosure obligations, only to the extent that there is a sufficient level of commitment from all parties, as embodied in the letter of intent. The more terms that are agreed upon (i.e., they are not "starting points" or proposals or to be negotiated, thus reducing the number of potential "deal-breakers") and the fewer key conditions are, the more likely there is a level of commitment that would be suggestive of the material facts becoming a material change. The remaining approvals and the process to get such approvals for all parties should also be considered, as the more complex and involved and uncertain the remaining steps are, the further the parties could be said from being committed to the transaction.

As such, the use of letters of intent should be carefully considered by reporting issuers when involved in potentially material transaction. In order to avoid disclosure obligations at a time that is earlier than desired, parties may want to limit themselves to using confidentiality agreements, possibly supplemented by exclusivity agreements, during the negotiation period. Term sheets that are not "agreed to" or "approved" can be used to focus discussions, while not committing the parties. Where more precision is necessary, documents should be clearly subject to necessary approvals and to due diligence, each of which could change terms significantly.

Whatever approach is taken, the parties need to be fully aware of the respective levels of commitment of the parties and the level of certainty of the transaction being consummated based on the remaining process and conditions. While there is now some additional clarity to when a disclosure obligation arises, this determination may still not be an entirely easy one.

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.

Gregory Hogan
In association with
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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

    By clicking Register you state you have read and agree to our Terms and Conditions