Supreme Court Of Canada Clarifies "Material Change": What Issuers Need To Know

Last Friday, the Supreme Court of Canada released its decision on Lundin Mining Corp v Markowich, dismissing the issuer's appeal and providing clarity on what an issuer should consider when determining whether to disclose a change to the public.

At the core of the SCC's judgement was a discussion of the distinction between "material change" and "material fact", each defined under section 1(1) of the Ontario Securities Act ("OSA"):

• "material change" is "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".
• "material fact" is "a fact that would reasonably be expected to have a significant effect on the market price or value of the securities".

Key here is that while both a "material change" and a "material fact" must be expected to have a significant effect on the market price or value of securities, only material changes must be disclosed immediately, whereas material facts may be disclosed periodically.

The issue on trial.

At issue in the case was whether Lundin, a Canadian mining company with 80% ownership in a Chilean mine, failed to timely disclose two events: (1) a detected pit wall instability at the mine on October 25, 2017; and (2) the resulting rockslide in the open pit on October 31, 2017.

Lundin, rather than reporting the October 2017 events immediately, only disclosed the events on November 29, 2017 as part of a regular news release series on operational updates. In this news release, Lundin described the recent events and lowered its copper production forecasts at the mine for 2018 by 20% from the previous forecast. The next day, Lundin's share price dropped 16%, representing a loss of more than $1 billion in market capitalization.

The plaintiff, an investor who purchased 10,000 shares in Lundin in mid- to late-November, before Lundin's disclosure, commenced a proposed national class proceeding before the Ontario Superior Court against Lundin, alleging that they had failed to make timely disclosure of the October events, each constituting a "material change" in Lundin's "business, operations or capital".

The SCC dismissed the appeal.

The SCC, with only one judge dissenting, dismissed the appeal, allowing the plaintiff to pursue his claim against Lundin for their failure to have timely disclosed the October events.

The resulting effect of this decision imposes on issuers a broad and context-specific analysis of whether an event is a "material change".

What is a "material change"?

The SCC, affirming its previous decisions, outlined that a "material change" has two components:

• There must be a "change in the business, operations or capital of the issuer"; and
• The change must be material, meaning it "would reasonably be expected to have a significant effect on the market price or value of the securities of the issuer."

If such test is met, the issuer has an obligation to disclose the material change immediately.

In determining whether a material change or a material fact occurred, and the accompanying disclosure obligations, the SCC affirmed a contextual analysis of mixed fact and law, as well as outlined the following guiding principles:

• A material fact is static, providing a snapshot in time, whereas a material change is dynamic, because a change necessitates two different points in time.
• Any fact can be material, but a material change can only be in relation to an issuer's business, operations or capital.
• A material change is internal to the issuer, meaning external political, economic and social developments cannot give rise to a material change, unless the relevant development results in a material change in the business, operations or capital of the issuer.
• A material change generally requires more than just internal negotiations and deliberations.

In light of the above, the SCC held that the motion judge erred in interpreting "material change" by defining "change" restrictively, requiring the change be "important and substantial" and imparting restrictive definitions on "business, operations or capital." Rather, the SCC reasoned that the Ontario legislature had intentionally left the word "change" undefined and flexible, with no requirement that the change be substantial or important. Likewise, the phrase "business, operations or capital" should be interpreted broadly.

The test to obtain leave to bring an action for untimely disclosure.

Under section 138.8(1) of the OSA, the legislature has outlined a two-part test for bringing an action for untimely disclosure. The plaintiff must show that (1) the action was instituted in good faith; and (2) there is a "reasonable possibility" that the plaintiff would succeed at trial.

The SCC described this test as a "preliminary merits test", where a plaintiff must establish that there is a reasonable or realistic chance that the action could succeed at trial by submitting a plausible analysis of the applicable legislation and some credible evidence in support of the claim.

In respect of the facts at hand, the SCC determined that the investor satisfied the test, having brought it in good faith and established a reasonable possibility that the October events resulted in a material change in Lundin's business, operations or capital

What should issuers take away from this decision?

The SCC's decision underscores that issuers should err on the side of timely disclosure and act proactively, disclosing changes as early as possible. This reflects the "investor-friendly" standard, affirmed by the SCC, which aligns with the legislature's intent and the core purpose of securities law: resolving the information asymmetry between issuers and investors.

Although there remains no precise definition of what is a "material change", the SCC decision appears to emphasize that the bar for obtaining leave for a secondary market liability action is relatively low, and "investor-friendly" disclosure would likely minimize the risk of issuers attracting such litigation action.

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.