The Ontario Court of Appeal (the ONCA) recently released two decisions that discuss the meaning of "material change" (and other terminology) in the context of the Securities Act (the Act).1 In both cases, the plaintiffs were seeking leave (i.e. permission) to advance a statutory cause of action in court (with leave being the first hurdle a plaintiff needs to clear before an action can proceed under the relevant sections of the Act).
While factually diverse, each case dealt with a plaintiff shareholder challenging a corporation's decision not to publicly disclose forthwith certain events that had transpired, arguing that those events constituted material change in the business and thus triggered a disclosure requirement.2 In Markowich v. Lundin Mining Corporation (Markowich),3 the ONCA overturned the ruling of the Ontario Superior Court (the lower court or the motion judge), granting leave for the action to proceed, whereas in Peters v. SNC-Lavalin Group Inc. (Peters),4 the ONCA upheld the lower court's ruling, denying leave for the action to proceed.
The Law5
The Act defines a "material change" as "a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer".6 A "material fact" is "a fact that would reasonably be expected to have a significant effect on the market price or value of the securities".7 Material changes must be disclosed "forthwith" (i.e. immediately) whereas material facts do not have the same requirement but rather are to be disclosed in the regular course of (periodic) disclosure.8
The two-part test to determine whether there has been a material change is as follows:
1) There must be a change in the business, operations or capital of the issuer; and
2) The change must be material (i.e. it would reasonably be expected to have a significant effect on the market price or value of the securities of the issuer).9
Markowich
Background
The plaintiff (Markowich) was a shareholder of the defendant company (Lundin), a Canadian TSX-listed mining company with operations around the world. One of Lundin's mines in Chile was responsible for 55-60% of its sales revenue for the relevant time frame.10
Lundin detected pit wall instability and evacuated personnel from the area. Six days later, the unstable wedge failed, causing a rockslide that shut down operations for a (contested) period of time. Lundin did not publicly disclose the pit wall instability nor the rockslide until a month later. The announcement caused a one-day drop of 16% in the price of its securities, totalling a $1 billion decline of the company's market capitalization.11
Markowich sought leave to bring a statutory cause of action against Lundin for failing to disclose "forthwith" a "material change" in the company's "business, operations or capital", as well as a class proceeding on behalf of shareholders who acquired stock in the company between the detection of the pit wall instability and the news release.12
Lower Court Decision
The lower court considered whether detection of the pit wall instability and the subsequent rockslide constituted a "change in the business, operations or capital". The lower court understood "change" to mean "a different position course, or direction".13 It suggested that "business" means "what the company does".14 It explained "operations" as referring to "where" or "how" a company conducts business.15 And it described that "capital" refers to "share structure and rights of shareholders".16
The combination of the lower court adopting the above-noted definitions and putting significant weight on the fact that Lundin was able to continue to carry on business after the rockslide, resulted in the lower court deciding that there was no reasonable possibility of Markowich succeeding at trial. The lower court dismissed the motion for leave accordingly.
Court of Appeal
Markowich appealed the decision, submitting that the lower court erred in its interpretation of "change" by interpreting it too narrowly. The ONCA agreed, holding that the lower court incorrectly interpreted "change" by considering it "in isolation and restrictively".17 The ONCA noted that "one of the only restrictions on the meaning of change is that it cannot be external to the company without a resulting change in the business, operations or capital of the company, or it cannot simply be an unexplained change in results; rather, it must be a change in the company's business, operations or capital".18
The ONCA reasoned that "had the motion judge adopted a less rigid interpretation of 'change in the business, operations or capital' in the context of a motion for leave, he should have found that there was a reasonable possibility that [Markowich] and the proposed class could succeed at trial..." and allowed the appeal.19
Peters
Background
The plaintiff (Peters) was a shareholder of the defendant company (SNC), a Canadian TSX-listed engineering and project management company with operations around the world. Certain activities of SNC took place in Libya and were the subject of a criminal prosecution for fraud and corruption under the Criminal Code.20
There had been discussions, however, of a possibility that the Department of Public Prosecutions Services of Canada (the PPSC) may agree to negotiate a remediation agreement with SNC to resolve the matter.21 Ultimately, SNC learned on a phone call with the PPSC (the phone call) that a negotiated agreement would not be possible and that it would be going ahead with a prosecution against SNC. For nearly a month, however, the PPSC continued to accept further submissions from SNC regarding its request for a remediation agreement. Finally, the PPSC advised that it would no longer accept further submissions from SNC and the following day, the company publicly disclosed the failure of its remediation efforts and temporarily suspended trading of its securities. The announcement caused a one-day drop of 13% in the price of SNC's securities, totalling a $600 million decline of the company's market capitalization.22
Peters sought leave to bring a statutory cause of action against SNC for failing to disclose "forthwith" a "material change" in the company's "business, operations or capital", as well as a class proceeding on behalf of shareholders who acquired stock in the company between the phone call and the trading halt following the news release.
Lower Court
The lower court considered whether the phone call was a "change in the business, operations or capital" of SNC. The lower court determined that the phone call could not be considered a "change" for three reasons: first, because it did not change SNC's risk of prosecution; second, because it did not "close the door" to further negotiations; and third, because the company did not actually learn anything new on the phone call.23
In considering what might have been a change in the "business, operations or capital" of the company, the lower court emphasized that "there was no conviction, no debarment, no change to [SNC's] efforts to obtain an invitation to negotiate, and most pertinently there was no change to [SNC's] business, operations or capital".24
Based on the determination that there was no "change" (and even if it had been a change, it would not have been a change to the company's business, operations or capital), the motion judge determined that there was not a reasonable possibility of the plaintiff succeeding at trial and dismissed the motion for leave accordingly.
Court of Appeal
Peters argued that the lower court erred in its interpretation of "change" in that it interpreted it too narrowly. The ONCA disagreed, holding that the motion judge correctly used a broad interpretation of "change", conducting an in-depth analysis in reaching a conclusion. The ONCA noted importantly that "external circumstances that may affect share prices but that do not effect a change in an issuer's business, operations or capital do not qualify as change within the meaning of material changes".25
The ONCA further disagreed with the appellant's argument that the motion judge failed to consider a change in risk as being a material change in the business, operations or capital,26 noting that "change can include a change in risk".27 Based upon the facts in this case, however, the lower court rejected the characterization of the phone call as having changed the company's risk, noting that the risk of criminal conviction existed both before and after the phone call.28
The ONCA ultimately dismissed the appeal.
Key Takeaways
There are several key takeaways that issuers should keep in mind when contemplating whether public disclosure of a particular event is required:
- "Material fact" and "material change" are distinct legal concepts with different disclosure requirements under the Act;29
- The analysis of "material change in the business, operations or capital" of a company is highly fact-specific;
- "Material change" should be interpreted broadly; and
- A "change in risk" could, in certain circumstances, quality as a "material change".30
Footnotes
1. Securities Act, R.S.O. 1990, c. S.5.
2. In both cases, the Ontario Superior Court also dismissed the plaintiffs' claims of negligent misrepresentation at common law and neither sought to pursue those claims on appeal.
3. Markowich v. Lundin Mining Corporation, 2023 ONCA 359.
4. Peters v. SNC-Lavalin Group Inc., 2023 ONCA 360.
5. In both lower court decisions (Markowich v. Lundin Mining Corporation, 2022 ONSC 81 and Peters v. SNC-Lavalin Group Inc., 2021 ONSC 5021), the Ontario Superior Court was satisfied that the claims were made in good faith, which is the first requirement for a court granting leave to proceed with an action under the Act.
6. Act, s 1(1). (emphasis added)
7. Act, s 1(1). (emphasis added)
8. Act, s 75(1). See also section 147(1) of the Act which establishes that if a person has knowledge of a material change or a material fact, a "special relationship" with the issuer is created, thereby limiting what that person is allowed to do, including trading their securities, until the information has been disclosed.
9. Markowich at para 46 and Peters, para 73, citing Theratechnologies Inc. v 121851 Canada Inc., 2015 SCC 18 at para 40 and Cornish v OSC, 2013 ONSC 1310 at para 46.
10 Markowich at para 13.
11. Markowich at para 24.
12. Markowich at para 28.
13. Markowich at para 58 (citing the lower court decision).
14. Markowich at para 61 (citing the lower court decision).
15. Markowich at para 62 (citing the lower court decision).
16. Markowich at para 64 (citing the lower court decision).
17. Markowich at para 82.
18. Markowich at para 82, citing Kerr v. Danier Leather, 2007 SCC 44 at para 47. (emphasis added)
19. Markowich at para 89.
20. Criminal Code, R.S.C. 1985, c. C-46.
21. Peters, para 33.
22. Peters, para 45.
23. Peters, para 58.
24. Peters, para 59.
25. Peters, para 87.
26. Peters, para 80.
27. Peters, para 94. (emphasis added)
28. Peters, para 95.
29. Stock exchanges also impose their own disclosure requirements, for example the Toronto Stock Exchange requires listed issuers to immediately disclose "material information" which, according to its definition, includes both "material facts and material changes relating to the business and affairs of a listed company". See: TSX Company Manual, Part IV, B. Timely Disclosure.
30. See Rex Diamond Mining Corporation et al., 2008 ONSEC 18, for a more in-depth analysis of when a "change in risk" may qualify as a "material change". In that case, a diamond mining company risked having some of its leases cancelled, which would have shut down certain of its mining operations. The court found that the change in risk in that case was a material change.
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