"A Change Is A Change" – The Supreme Court Rejects A Narrow Interpretation Of "Material Change"

The Supreme Court of Canada (SCC) has issued its much-anticipated ruling in Lundin Mining on the meaning of "material change" under the Ontario Securities Act (OSA).

Overview and Key Takeaways

Our key practical takeaways for public issuers in Canada are:

• A majority of the SCC rejected a narrow interpretation of "material change" in favour of a broader, more flexible and "investor-friendly" standard.
  • According to the majority, a "change is a change" and a material change is not limited to the core aspects of an issuer's business, operations or capital.
• It is arguable the ruling maintains the status quo set by earlier SCC rulings. However, per the dissenting opinion, it is also arguable the majority's approach:
  • Blurs the line between a material fact and a material change; and
  • prioritizes encouraging disclosure over ensuring public issuers are not over-burdened in their continuous disclosure obligations.
• Canadian public issuers should consider whether any modifications to their continuous disclosure protocols are warranted post-Lundin.
  • The ruling may also impact the cost, scope and/or availability of Directors and Officers (D&O) insurance.

• The SCC majority and minority agreed that the same standard of "material change" applies at the leave stage of a claim against an issuer under the OSA for failing to disclose a material change as applies at the merits stage.

Our detailed analysis follows. For more Fasken capital markets thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe.

Material Facts vs Material Changes

The distinction between material facts and material changes is central to a public company's disclosure obligations. "Material Facts" are disclosed periodically, typically in the company's quarterly and annual filings.^[1] A "material change" must be disclosed "forthwith", with a material change report filed within ten days of the event.

Securities legislation defines a "material fact" more broadly than it defines a "material change". The former captures any fact that "would reasonably be expected to have a significant effect on the market price or value" of the company's securities. The latter is limited to a "change" in the "business, operations or capital" of the company that would reasonably be expected to have such an effect on the company's securities.

At issue in Lundin was the definition of "material change" and the meaning to be given to its constituent parts of "change", "business", "operations" and "capital". The motions judge adopted a narrow approach. The Ontario Court of Appeal (ONCA) adopted a broader approach. The key question was whether the SCC would adopt one or the other, or devise its own standard.

The Rockslide and Market Price Impact

The principal events at issue in Lundin were twofold. First, the company detected wall instability at its open pit copper mine in Chile that led to the evacuation of personnel from that area of the mine. Second, a rockslide occurred six days later where an estimated 600,000 tonnes of dislodged material restricted access to part of the mine. When these developments were disclosed one month later,^[2] and the company revised the mine's production forecast downward by 20% for the next year, the price of the company's securities on the TSX fell by 16%, a drop amounting to over $1 billion of the company's market capitalization.^[3]

The Motion Judge's Narrow Interpretation of Change

When the plaintiff sought leave under the OSA to pursue a statutory cause of action, the motion judge held that the plaintiff had not demonstrated a reasonable chance of establishing at trial that the events constituted a "material change".

The judge held that a "change" occurs when an event "results in a different position, course, or direction to a company's business, operations, or capital". He defined "business" as "what the company does". He defined "operations" as the "activities conducted by the company to engage in its lines of 'business'". He defined "capital" as referring to the company's "share structure and rights of shareholders".

The motions judge held that the facts did not meet this test. While the rockslide impeded part of the company's operations at the mine, the company continued to engage in copper mining and there had been no "different position, course, or direction" in the company's business, operations or capital.

The ONCA's Broad Interpretation of Change

The Ontario Court of Appeal (ONCA) applied the "two step" material change analysis set by the SCC in Theratechnologies. First, there must be a change in the business, operations or capital of the issuer. Second, the change must be material in that it would reasonably be expected to have a significant effect on the market price of the issuer's securities.

The ONCA applied this framework to reverse the motion judge's decision, holding that the motion judge had approached the meaning of change "too narrowly" and had effectively conducted a magnitude analysis during the first step when the question of materiality is reserved for the second step. It stated that "a change is a change" and "should be defined broadly".

The SCC's Majority Ruling: Change is a Flexible and Highly Contextual Concept

The SCC affirmed the decision of the ONCA and dismissed the appeal in an 8 to 1 majority ruling. In doing so, the SCC majority made three key rulings:

• A "change" should not be interpreted restrictively.
• A development need not be "important and substantial" to constitute a "change".
• The phrase "business, operations or capital" should not be interpreted restrictively.

A "Change" Should Not be Interpreted Restrictively

The motion judge had relied on a dictionary definition to hold that a "change" means a "different position, course or direction". The SCC agreed with the ONCA that this approach was an error.

The SCC stressed that the OSA left the term "change" undefined. This meant that the legislative intent was to avoid a "rigid or technical" standard that could limit the effectiveness of the OSA "across a broad range of industries or corporate structures." It also meant that the term "change" takes meaning "from the facts of each case" and the "relevant industry norms". It was therefore important that "flexibility" be maintained that that the word change "retain its ordinary meaning." The SCC affirmed that the ONCA was correct in saying that "a change is a change".

A Development Need Not be "Important and Substantial" to Constitute a "Change"

The SCC agreed with the ONCA that the motion judge had effectively incorporated a materiality calculation into its change analysis such that two different tests had been collapsed into one. The SCC agreed with the ONCA that the first test should be qualitative and focus only on the nature of the change, while the second test measures materiality "objectively" and applies a standard defined "strictly in economic terms".

The SCC acknowledged that "two rival standards" had developed in the caselaw regarding the meaning of "change". One is an "investor-friendly" standard whereby "any development representing a change in the business, operations or capital of the issuer is a change". The other is a "manager-friendly" standard whereby "a change does not need to be disclosed immediately unless it is not only material but also 'important and substantial,' involving 'significant disruption or interference' to the company's business".

The SCC held that the narrower, "manager-friendly" standard was inconsistent with the OSA and a mistake as a "matter of doctrine and policy". The broader, "investor-friendly" standard, on the other hand, aligned with the SCC's earlier rulings in Pezim, Kerr and Theratechnologies.

The Phrase "Business, Operations or Capital" Should Not be Interpreted Restrictively

The SCC held that the motion judge erred in adopting "restrictive definitions" to the terms "business", "operations", and "capital".

As with the term "change", the SCC stressed that these terms had been left undefined by the OSA. This meant that the OSA "relies on the ordinary commercial meaning of these terms, rather than creating rigid statutory definitions." Leaving the terms undefined also "allows courts and regulators to apply the [OSA] broadly and flexibly as the context and circumstances require." By contrast, adopting fixed definitions of these terms would "ossify" the OSA and undermine its purpose. The result for the SCC is that the phrase "business, operations or capital" should be applied as a "holistic standard" rather than by "parsing each element separately."

The SCC Majority's Summary

The SCC majority summarized that whether a material change has occurred is "a highly contextual question of mixed fact and law", that there is "no bright line test", and that it is a "matter of judgment and common sense applied to the unique circumstances of each case". The SCC majority also repeatedly stressed that "identifying a material change is guided by the purpose of disclosure obligations to level informational asymmetry between issuers and investors..."

The SCC Minority Ruling: A Distinction Without a Difference?

The dissenting SCC justice viewed the appeal as an "an opportunity to bring much‑needed certainty and clarity" to Canada's capital markets regarding the distinction between material facts and material changes. In the dissent's view, the majority ruling accomplished the opposite.

She applied a different statutory interpretation analysis to hold that the motion judge had not erred in interpreting a "change" to mean a "different position, course, or direction" or in giving substance to the phrase "business, operations or capital". She held that requiring that changes to the issuer's business, operations or capital must occur "at a high level of generality" was necessary to give effect to the OSA's distinction between a material fact and a material change and to give meaningful guidance on whether a particular event must be considered for materiality and potential disclosure.

In her opinion, the meaning of "change" must be understood in relation to the terms it acts upon, namely, "business, operations or capital". As such, "material change" has two distinct components: whether a change in the business, operations, or capital of the issuer has occurred, and whether it is material. In her view, disclosure should be limited to developments that represent a change to the core aspects of the issuer's business, operations, or capital.

Her concern was that the "expansive interpretation" of material change adopted by the majority rendered the "material fact" versus "material change" dichotomy a "distinction without a difference". She argued that the majority's "overbroad" understanding of the "material change" definition would mean that "almost every 'event' that affects the affairs of an issuer will have to be reviewed for materiality and almost every analysis of 'material change' will become a question of materiality alone." Stated differently, adopting the approach that "a change is a change" effectively renders any event affecting an issuer's affairs a trigger for potential disclosure — leaving only materiality as the remaining threshold."

She stated that the majority ruling placed a "near singular focus on investor protection and the objective of remedying informational asymmetry" between investors and issuers. She stated that while investor protection is important this concern "does not override the other objectives" of the OSA, which includes balancing "the needs of the investor community against the burden imposed on issuers". Citing intervenor arguments made by the Mining Association of Canada, the Canadian Chamber of Commerce, and the Insurance Bureau of Canada, she summarized that "clear and predictable rules in securities law are needed to render Canada attractive for investors." She cautioned that the majority's approach would result in greater compliance costs, pert attention away from substantive governance, discourage participation in public markets, and ultimately impair market efficiency and investor confidence. She also worried the majority's approach would increase litigation risks such that the recruitment of skilled directors and officers would be undermined and that D&O insurance would be less available and more expensive.

"Material Change" – Key Practical Takeaways for Canadian Issuers

The SCC majority ruling acknowledged that the distinction between a "material fact" and a "material change" is "perhaps the most difficult area of securities law". Canadian public companies know this well: they often wrestle with determining which category a particular development falls into.

It is arguable that Lundin does not meaningfully change the state of play. The SCC majority indicated that its ruling reflects the status quo established by its earlier rulings in Pezim, Kerr, and Theratechnologies. The majority also noted that the Ontario Securities Commission has "repeatedly advised that... in borderline cases, an issuer should err on the side of disclosure". Indeed, some market watchers were surprised that the SCC granted leave to hear the appeal given that the ONCA's ruling was based squarely on Theratechnologies.

On the other hand, the majority ruling is noteworthy in several respects, particularly when compared to the dissenting ruling. While the majority affirmed the SCC's earlier rulings in Pezim, Kerr, and Theratechnologies, it also arguably went farther than those rulings in emphasizing the flexible and context-dependent nature of the "material change" definition, as well as in expressly choosing an "investor-friendly" standard over a "manager-friendly" standard and in prioritizing levelling information asymmetry over the other public policy goals of the OSA. It might also be observed that the SCC's statement that "a change is a change" is ultimately unhelpful and may be more likely to lower the bar of what qualifies as a material change than maintain it.

The aggregate result is that Canadian public issuers would be prudent to revisit their continuous disclosure protocols to consider whether any modifications are warranted post-Lundin. We would also generally expect Lundin to lead to a more cautious and pro-disclosure inclination among issuers than existed prior to the ruling. Whether this leads to the deleterious effects anticipated by the minority ruling remains to be seen.

The Test for Leave Under s.138.8(1) of the OSA

A second question before the SCC was the test for leave under s.138.8(1) of the OSA.

The SCC explained that both the motion judge and ONCA "read the requirement in Theratechnologies of a 'plausible analysis of the applicable legislative provisions' as requiring a 'plausible interpretation' of the legislative provisions". This reading "suggested that statutory interpretation is conducted less stringently or in a more relaxed fashion on a motion for leave than at a trial on the merits."

The SCC majority disagreed, and clarified as follows:

A plausible analysis of the applicable legislative provisions is not simply a plausible interpretation of those provisions. Statutory interpretation is not conducted less stringently on a leave motion than at trial. Instead, the plaintiff must show a plausible application of the relevant legislative provisions, based on the limited evidence available at this early stage of the proceedings.

The SCC majority further clarified that the resulting standard to be met is as follows:

The leave motion involves a preliminary merits test, but does not require proof on a balance of probabilities that the action will succeed at trial. The plaintiff must establish a reasonable or realistic chance, and not merely a possibility, that the action will succeed at trial, based on a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim.

The practical result is that, while the evidentiary burden is different, the same legal standard of "material change" applies at the leave stage of a claim against an issuer under the OSA for failing to disclose a material change as applies at the merits stage. The SCC minority agreed with the majority's approach.

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