Overview and Key Takeaways
In a momentous development for reporting issuers countrywide, the Supreme Court of Canada (SCC) will tackle the meaning of "material change" under securities law. Specifically, the SCC granted leave to appeal the decision of the Ontario Court of Appeal (ONCA) in Markowich v. Lundin Mining Corporation1, a disclosure dispute arising from pit wall instability and a subsequent rockslide at a mining project.
The motion judge dismissed the plaintiff's motions seeking to commence a secondary market action and to certify the action as a class proceeding, seeing no reasonable possibility the plaintiff could establish the wall instability and rockslide were "material changes" under the Ontario Securities Act (Act). The ONCA unanimously overturned the lower court's decision, holding "material change" had been applied too narrowly and should instead be given a "generous" and "expansive" interpretation.
The key takeaways for reporting issuers in Canada are:
- Markowich involves competing interpretations of "change". At stake is whether the SCC will adopt the narrower approach endorsed by the motion judge, the broader approach endorsed by the ONCA, or some other formulation.
- The SCC may also find cause to elaborate on which events are "external" to the issuer and which events are "internal" to the issuer, the ONCA having emphasized the "primary constraint" on the definition of "change" is that it cannot be "external" to the issuer.
- Should the SCC tend toward the reasoning of the ONCA, the result may be a low bar for meeting the first limb of the SCC's two step material change analysis, i.e., that a change has occurred. This could considerably shift the weight of the analysis to the second limb, being whether the change would reasonably be expected to have a significant impact on the issuer's share price.
- Depending on the SCC's approach, the consequence for reporting issuers may be substantial and could necessitate reevaluating the issuer's internal continuous disclosure review processes and analysis. In the interim, the ONCA's broad understanding of "change" remains binding on applicable issuers.
For our insights on the ONCA ruling, see our bulletin Public Companies Beware: Court of Appeal Clarifies Two-Step Test for "Material Change". For Fasken's other capital markets thought leadership, visit our Capital Markets and Mergers & Acquisitions Knowledge Centre.
The Facts and Motion Decision
At issue in Markowich was an alleged unlawful delay in the miner's disclosure of a rockslide at its open pit copper mine in Chile where an estimated 600,000 tonnes of waste material fell down a slope restricting access to part of the mine. When the events were disclosed one month later 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. The ultimate impact of the events on the company's operations was a 5% drop in its copper production for 2018.
The motion judge held the plaintiff had not demonstrated a reasonable chance of establishing at trial that the events constituted a "material change". While the rockslide impeded part of the company's operations at the mine, the judge highlighted that pit instabilities and rockslides were common occurrences in open pit mining. Nor had this particular rockslide caused the company to change its line of business, stop using the mine, or change its capital structure.
The ONCA's Broad Interpretation of "Change"
In granting the plaintiff's appeal the ONCA applied the "two step" material change analysis set by the SCC in Theratechnologies Inc. v. 121851 Canada Inc.2 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 elaborated on the two step analysis 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 "change" where it results in 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 should it be determined that a "change" has in fact occurred.
Applying this framework the ONCA reversed the motion judge's decision, holding the lower court had approached the meaning of change "too narrowly" and had effectively conducted a magnitude analysis during the first step when materiality is reserved for the second step. It held that change "should be defined broadly" and that one of its "only restrictions" is that a change "cannot be external to the company without a resulting change in the business, operations or capital of the company..." The ONCA added that the word "operations" is also "very broad" and captures "a broad range of changes within a company, including, as here, an interruption in production and a change in scheduling due to an accident or equipment failure."
Looking Forward – Practical Considerations and Challenges
The ONCA noted the definition of "material change" under securities law reflects a reasonable balancing of investors' interests and issuers' interests. While investors should receive timely disclosure of important events as they occur, it is overly burdensome to require an issuer to continually report every development impacting its business. Excessive disclosure can also be counterproductive by overwhelming investors with information.
Clarity regarding what constitutes a "material change" is therefore fundamental to efficient capital markets. Nonetheless, deciding what qualifies as a "material change" is a question issuers wrestle with regularly.
For example, the divide between "external" events and "internal" events can be unclear. Similarly, determining whether and when a change has occurred in an issuer's business, operations or capital can be challenging, e.g., saying 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 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 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 expedient disclosure.
We are confident the SCC can use this opportunity to provide clarity and guidance to issuers in a manner consistent with current best practices in the Canadian market.
Footnotes
1. 2023 ONCA 359 (CanLII). Leave to appeal granted Lundin Mining Corporation, et al. v. Dov Markowich, 2024 CanLII 25743 (SCC).
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