Two recent decisions of the Ontario Court of Appeal offer helpful guidance on what constitutes a "material change" in a way that triggers timely disclosure requirements for publicly-traded companies (or, "issuers") under the (Ontario) Securities Act (the "Act").
While we had previously discussed how a lack of reliability can support a position that something is not material, these recent decisions, Peters v. SNC-Lavalin Group Inc. ("SNC") and Markowich v. Lundin Mining Corporation ("Lundin"), shed further light on what types of changes will be considered "material". While the court reiterated that materiality is always a question of fact to be determined on a case-by-case basis, for issuers, any decision – let alone two! – that helps flesh out the statutory threshold for "materiality" and "material change", in these ever-evolving commercial and market conditions, is always helpful.
Broad Definition for "Change"
In SNC the Court broadly defined "change" to include a change in risk regarding an organization's business, capital or operations – before determining that there still had to be an actual departure from the status quo. In Lundin, the Court considered both the concept of change and its materiality based on an analysis of whether it reasonably expected to significantly affect the market price of securities in question, but ultimately reiterated that the definition is always to be interpreted broadly, subject to exceptions.
In SNC, the plaintiff filed the action based on the issuer's failure to disclose a phone call in which the Department of Public Prosecutions Services of Canada had advised that the issuer would not be invited to a remediation negotiation that could have resolved a pending prosecution for fraud and corruption.
Although this phone call could have potentially affected the issuer's share price, the Court held that it did not constitute a change in the issuer's business, operations, or capital because it did not change the issuer's risk. The issuer faced the risk of prosecution before the call, and continued to face the same after it – even if "change" was to be interpreted broadly. In other words, the Court found that while the test for change had to be generously applied, there still had to be an actual departure from before the event (as opposed to a continuation of the same circumstances as it relates to the issuer's business, operation or capital).
Lundin involved failure to publicly disclose instability and a rockslide in mining operations until significantly after the events took place. In contrast to SNC, the motion judge subject to appeal had adopted a narrow and literal interpretation of whether the event was technically a "change in the business, operations, or capital requiring disclosure", noting that, among other things, events like this were common in the industry. However, the Court of Appeal intervened that the definition under the Act was intended to be broad (as noted in SNC), and that improper application of this definition then caused errors in the motion judge's interpretation.
Providing further colour, the Court noted that there may be cases where otherwise material changes arise from entirely external factors and are, therefore, not disclosable – as in Kerr vs. Danier Leather where there was a change in results arising from 'unseasonably warm weather'. However, generally, the test of whether a change relates to the "business, operations, or capital" of an issuer should be broadly construed, given that the Act is "remedial" legislation and has been very purposefully enacted.
Two-Pronged Analysis and Material Fact vs. Material Change
In determining whether a change was, in fact, a "material change", the Court of Appeal reaffirmed the same two-part analysis in both cases. The first stage considers the concept of what constitutes a change for purposes of the Act, and the second stage considers the magnitude of the change to assess whether that change is material. But the analysis must be done in that order. In other words, it is only after a finding that a change in operations has been established that the analysis should then shift to assessing magnitude (under the second step of the test), as opposed to the other way around.
In addition, SNC and Lundin also highlighted the difference between material facts and material changes. While certain documents must disclose all material facts, such as merger negotiations, these same negotiations would not constitute a change and would therefore not trigger a timely disclosure obligation (unless an exchange or other self-regulatory entity requires such). These are all subtle nuances that issuers should consult seasoned counsel to navigate.
Understanding Disclosure Obligations
As a general rule, it is always the safest and best practice to err on the side of disclosure. As noted in earlier articles, even where courts have after-the-fact vindicated a board/management's decision to not consider something a material change, this can come after years of litigation, market destruction and even OSC inquiry and/or proceedings – all of which do not bode well for an issuer's business. However, when necessary, being armed with a robust, well-articulated position will always be an important and persuasive ally in any proceeding or in any dialogue with a regulator.
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