In a significant development for public companies, the Ontario Court of Appeal (ONCA) has issued two companion decisions addressing the meaning of a "material change" under the Ontario Securities Act (Act).

The judgements arise from proposed secondary market class actions alleging failures to comply with material change continuous disclosure requirements under the Act.

The decisions together provide valuable direction and clarification regarding the meaning of a "material change" under the Act.

Specifically, the ONCA endorsed a "two-step analysis" for issuers to follow in deciding whether a development impacting their business constitutes a "material change" requiring disclosure. The ONCA also stated that "change" should be given an "expansive" and "generous" interpretation.

That said, the rulings are not a complete or failproof roadmap, and thoughtful judgment and difficult decision-making may often still be required.

The Developments at Issue and Motions Judge Rulings

At issue in Peters v SNC-Lavalin 1 was an alleged failure to disclose the content of a phone call between the company and federal prosecutors during which the company was informed it would not be invited to negotiate a remediation agreement regarding an ongoing prosecution of the company. At issue in Markowich v Lundin Mining 2 was an alleged delay in Lundin's disclosure of a rockslide at the company's open pit copper mine in Chile where an estimated 600,000 to 700,000 tonnes of waste material fell down a slope restricting access to part of the mine.

In each case, the motion judge held at first instance that the plaintiff had not demonstrated a reasonable possibility of success of establishing at trial that the development at issue constituted a "material change". In Peters, the motions judge saw no change in risk faced by the company: the company was being prosecuted prior to the phone call and continued to be prosecuted after the phone call. In Markowich, while the rockslide impeded part of the company's operations at the mine, it had not caused the company to change its line of business, stop using the mine, or change its capital structure.

The ONCA's "Two-Step" Material Change Analysis

The ONCA denied the plaintiff's appeal in Peters and granted the plaintiff's appeal in Markowich. In doing so the Court outlined a "two-step" material change analysis.

First, a court must consider whether "there has been a change in the business, operations or capital of the issuer." This step does not involve an assessment of the magnitude of the change.Where this initial question is answered in the affirmative, a court then considers whether the "change was material, in the sense that it would be expected to have a significant impact on the value of the issuer's shares...".

Helpfully, the ONCA also elaborated on each of these two queries in several respects. First, the notion of "change" is fact-specific and is not a "bright-line test". Second, "change" should be given an "expansive" and "generous" interpretation. Third, an event external to the company can only qualify as a material change where it results a change in the business, operations or capital of the issuer. Fourth, questions of "magnitude" or "materiality" are reserved for the second step and are only raised after it has been determined that a "change" has in fact occurred.

Applying this framework to the disputes at hand, the ONCA upheld the ruling of the motion judge in Peters that no change had occurred. The Court agreed with the motion judge that the prosecution risk faced by the company after the call was no different than before the call. By contrast, the ONCA reversed the motion judge's decision in Markowich, finding that the motion judge had approached the meaning of change "too narrowly" and that the motion judge conducted the magnitude analysis as part of the first step when questions of materiality are properly left for the second step.

Practical Takeaways for Public Issuers

Issuers must consider the ONCA's clarified "two-step analysis" in deciding whether a development impacting their business constitutes a "material change" requiring disclosure.

The Court's companion decisions provide more detailed and authoritative guidance regarding the meaning of "material change" than any comparable decision to date.

That said, the rulings are not a complete or failproof roadmap, and thoughtful judgment and difficult decision-making may often still be required, including given the ONCA's emphasis that "change" is fact-specific and is not a "bright-line test".

For example, distinguishing between a material fact and a material change can frequently be difficult, including as there is not always a clear line between events external to a company and events internal to a company.

Similarly, deciding whether and when a change has occurred in an issuer's business, operations or capital can prove challenging. It may be difficult, for example, to say with certainty when a change has crystalized, as opposed to merely being anticipated or threatened. This may be particularly problematic where the potential material change is in the form of a change in risk to the issuer's business, operations or capital.

On the other hand, issuers often face a tension between pressure to publicly disclose an unexpected or negative development and the desire to refrain from disclosing until the situation and its potential consequences are fully understood, including to ensure disclosure is full and complete when made. Certain developments will also be more complicated than others, e.g. those of a highly technical nature or requiring specialized expert analysis, and thus inherently less susceptible to easy or quick digestion and/or disclosure.

Altogether, these challenges underscore the importance of the careful implementation of the ONCA's "two-step" material change analysis. So too do they underscore the importance of advice from experienced legal counsel, both amid dynamic and evolving events as well as to ensure full and complete disclosure where a material change is deemed to have occurred.

Footnotes

1. Peters v. SNC-Lavalin Group Inc., 2023 ONCA 360 (CanLII).

2. Markowich v. Lundin Mining Corporation, 2023 ONCA 359 (CanLII).

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.