ARTICLE
11 September 2017

You Get It Right And It's Still A Misrepresentation: The Paradox In Pretium

NR
Norton Rose Fulbright Canada LLP

Contributor

Norton Rose Fulbright Canada LLP logo
Norton Rose Fulbright is a global law firm providing the world’s preeminent corporations and financial institutions with a full business law service. The firm has more than 4,000 lawyers and other legal staff based in Europe, the United States, Canada, Latin America, Asia, Australia, Africa and the Middle East.
A gold mining company chooses not to disclose preliminary mineral sampling results that it viewed as unreliable.
Canada Corporate/Commercial Law

A gold mining company chooses not to disclose preliminary mineral sampling results that it viewed as unreliable. Further testing eventually proves the preliminary sample to be inaccurate. In Wong v Pretium Resources, 2017 ONSC 3361 the Ontario Superior Court of Justice granted leave for a plaintiff to proceed with a securities class action under s. 138.3 of the Ontario Securities Act (the OSA) alleging secondary market misrepresentation for failing to disclose the preliminary results. What gives?

Is there gold in the hills?

Pretium Resources (Pretium) is a mineral exploration company listed on the TSX and NYSE that operated a gold mine in northern B.C. The mine's feasibility was predicated on a mineral resource estimate. Pretium agreed to extract a large bulk sample to validate the estimate to be carried out by a well-known mining consulting firm. First, however, Pretium decided to conduct a much smaller, and less reliable, "tower" sample as the bulk sample would be delayed.

The tower sample failed to substantiate the resource estimate and the consultant urged Pretium to disclose the results to the market. Pretium disagreed that the results of the tower sample were material. The consulting firm would later resign over the disagreement. Pretium disclosed the consultant's resignation along with the reasons for the resignation to the market, and its shares dropped by over 50%.

As it turns out, Pretium was correct all along. The bulk sample confirmed the validity of the mineral resource estimate. Nevertheless, the company was hit with a class action for an alleged misrepresentation by not disclosing the tower sample results and the consultant's findings and concerns.

Subjectivity and materiality

In order to obtain leave, the plaintiff needed to prove that its case was not so weak and not so successfully rebutted that there was no reasonable possibility of success. Pretium argued that there was no misrepresentation and relied on the reasonable investigation defence under s. 138.4(6) of the OSA.

The Court emphasized that the materiality standard that calls for the disclosure of information is focused on information that a reasonable investor objectively would consider important in making an investment decision, not information that the issuer subjectively believed or did not believe to be true. The Court reasoned that the findings of an expert mining consulting firm going to the heart of Pretium's business model was information that was important to investors in deciding whether to invest and at what price. The Court noted that Pretium had every right to qualify such information with its own opinions regarding the accuracy of the testing and the true mineral content of the mine in their disclosure, but failing to disclose the information in the first place was potentially a misrepresentation.

The Court's decision may be surprising and suggest that the leave test is a low bar, but there are some important facts which may help explain the result. In particular: Pretium publicly announced the involvement and reputation of the consulting firm, previous disclosure referenced the tower sample as an integral part of the testing procedure, and the consultant genuinely believed in the integrity and reliability of the tower testing method. Once Pretium built up the credibility of the testing process and the consultant's involvement to gain leverage in the market, it was tricky to argue that the outcome of the testing and the consultant's advice were immaterial.

Curiously, just a month before the Ontario decision, a parallel securities class action in the U.S. was dismissed. It remains to be seen whether the Ontario Superior Court of Justice's decision in Pretium will be subject to an appeal.

The author would like to thank Alexandre Kokach, Articling Student, for his assistance in preparing this post.


About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

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.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More