Supreme Court of Canada Affirms Broad Definition of “Material Change”

With its much anticipated decision in Lundin Mining Corp. v Markowich, the Supreme Court of Canada (SCC) has weighed in on the distinction between “material fact” and “material change” under Canadian securities laws, offering a broad interpretation of the latter that preserves judicial flexibility but eschews concrete guidance for public companies. For now, it is an open question whether Lundin will impose upon Canadian public companies a new level of regulatory burden both in terms of compliance and the threat of unmeritorious litigation. In this respect, intervention by the legislature may prove critical for the Canadian capital markets.

Key Takeaways 

• The determination whether a development constitutes a material change requires a two-step analysis. First, an issuer must assess whether there has been a change in its business, operations or capital. Second, the issuer must assess whether that change is material – that is, whether the change would reasonably be expected to have a significant effect on the price or value of its securities. The two steps are analytically and practically distinct; the assessment at the first step must be done without regard to materiality.
• A “change in the business, operations or capital” of an issuer is a broad construct. This construct should be construed broadly as a holistic standard for assessing corporate developments. A development need not be important or substantial in order to constitute a change for the purposes of the first step of the analysis, nor is the scope of the concept of change limited to whether the issuer has embarked on a different position, course or direction in respect of its business or its operations. A change is a change, broadly construed.
• A material change is internal to the issuer. A material change refers to developments that are internal to the issuer. In so concluding, the SCC has confirmed the well-established principle that external political, economic and social developments cannot give rise to a material change, unless the development results in a change in the business, operations or capital of the issuer, and unless the change is material.
• A material change generally requires more than mere negotiations or internal deliberations. The SCC has confirmed the established understanding, supported by earlier decisions, that negotiations and internal deliberations, without more, will not usually amount to a change in the business, operations or capital of the issuer, even if they are material. Helpfully, the SCC refers to the Ontario Securities Commission’s (OSC) often-cited decision in AiT Advanced Information Technologies Corporation et al, in which the OSC ruled that a proposed merger transaction was not a material change unless there is “a sufficient commitment from the parties to proceed and a substantial likelihood that the transaction would be completed.”
• Materiality remains a contextual determination. Whether a change is “material” is invariably fact specific and requires the issuer to exercise its judgment, having regard to a variety of factors, including the nature of the information itself, the volatility of the issuer’s securities and general market conditions. The Canadian Securities Administrators’ (CSA) National Policy 51-201 – Disclosure Standards includes materiality assessment considerations for issuers, including examples of potentially material information. The Toronto Stock Exchange (TSX) has offered similar guidance in its Guide to TSX Timely Disclosure Requirements.
• Issuers should review their internal reporting procedures. In light of Lundin, issuers are encouraged to revisit their internal reporting procedures to ensure that internal developments are appropriately elevated to the individuals within the organization who are responsible for assessing the issuer’s disclosure obligations. Issuers may wish to consult the continuous disclosure guidelines of the CSA in National Policy 51-201 – Disclosure Standards, which encourage issuers to establish a committee of personnel or assign a senior officer to be responsible for overseeing and coordinating disclosure, including developing and implementing the issuer’s disclosure policy, monitoring the effectiveness of and compliance with the policy and educating directors, officers and employees about the policy and disclosure issues more generally.
• Statutory interpretation is not relaxed at the leave stage. A plaintiff must seek leave from the court to bring a statutory cause of action against an issuer for failing to disclose a material change. The SCC confirmed that statutory interpretation is not conducted less stringently on a motion for leave to bring a statutory cause of action for secondary market disclosure under the Ontario Securities Act (Act). The interpretation of the provisions at issue must still be correct. For leave to be granted, there must be a plausible analysis, being a plausible application, of the relevant statutory provisions, based on the limited evidence available at the hearing.
• The threat of litigation at the leave stage may push issuers to err on the side of disclosure regardless of their assessment of materiality. Time will tell whether the SCC’s broad interpretation of “material change” may place issuers at greater risk of being subject to unmeritorious litigation, in which would-be plaintiffs may combine price movements and internal developments not disclosed in real time to make out a prima facie case against an issuer. Although timely disclosure decisions are not to be judged against the standard of perfection or with the benefit of hindsight, they are subject to review by expert tribunals and judges who will not defer to the business judgment of senior management. It is thus no surprise that the SCC reiterated the past guidance of the OSC that “in borderline cases, an issuer should err on the side of disclosure.”

Background

Lundin Mining Corp. (Lundin) is an established Canadian mining issuer whose shares trade on the TSX. On October 25, 2017, Lundin detected localized pit wall instability at Candelaria, its open pit copper mine in Chile. A few days later, on October 31, the instability had precipitated a rockslide, causing 600,000 to 700,000 tonnes of waste material to restrict access to one of the operating phases of the mine. The Candelaria mine accounted for between 55 and 60% of Lundin’s total revenue in 2016 and 2017, and the rockslide material represented about 0.8% of the mine’s annual production (roughly equivalent to three days of mining). 

Lundin did not immediately disclose either the instability or the rockslide, electing instead to provide details of the incidents to investors about a month later, after the close of trading on November 29, as part of the company’s regular operational updates news release. 

On November 30, 2017, the day after the news release, Lundin’s share price dropped 16% from the previous day’s closing price, a decline that represented a loss of more than $1 billion in market capitalization.

Lundin Shareholder Alleges Failure to Disclose Material Change

In January 2018, Dov Markowich commenced a proceeding for leave to bring a class action before the Ontario Superior Court against the company and several of its officers and directors. Mr. Markowich alleged that the pit wall instability and rockslide each represented a “material change” in Lundin’s “business operations or capital” and should therefore have been disclosed “forthwith” under the timely disclosure requirement of section 75(1) of the Act. The Act defines a material change, in relevant part, 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.” The terms “change”, “business”, “operations” and “capital” are not defined in the Act and, prior to Lundin, there was little judicial or regulatory guidance as to their meaning.

Lower Court Decisions

The Ontario Superior Court dismissed Mr. Markowich’s motion for leave to commence the action against Lundin. The motion judge held that “change” was intended to capture a “different position, course, or direction”, and that the “business” of an issuer consists of the “lines or activities in which the issuer engages to generate revenue” (“what the company does”) and that an issuer’s “operations” refer to the “activities conducted by the company to engage in its lines of business.” The motion judge concluded that there was no evidence of any change to Lundin's business, operations, or capital arising from the events. 

The Ontario Court of Appeal concluded that the motion judge erred in his interpretation of the meaning of “material change”, holding that the latter interpreted the words change, business, operations and capital “too narrowly.” For the Court of Appeal, “a change is a change and it should be defined broadly.” The Court adopted the “expansive” definition of “change” offered by Perell J. in Peters v SNC-Lavalin Group Inc., in which the latter held that “[c]hange encompasses”, among other things, “alteration, amendment, conversion … development, difference, discovery … [or] modification …”

“A Change Is a Change”: The Supreme Court of Canada Agrees with the Court of Appeal 

“Change” Should Not be Interpreted Restrictively

Writing for a majority of the SCC bench (with Côté J. in dissent), Jamal J. agreed with the Court of Appeal that “a change is a change” and should not be interpreted “restrictively”. By not defining “change,” “the legislature has maintained flexibility for the [Act] to apply to widely varying factual scenarios.” 

“Business, Operations or Capital” Should Not Be Interpreted Restrictively

The majority similarly read into the legislature’s decision not to define “business”, “operations” and “capital” a legislative entreaty to refrain from providing any judicial restriction or qualification on the meaning of those words. These words are undefined, Jamal J. reasoned, to allow “courts and regulators to apply the legislation broadly and flexibly” to a “wide range of industries and financial structures” “as the context and circumstances require.” The majority anchored its decision not to define or otherwise give shape to these constructs in part to the fact that they “are widely understood commercial concepts. The [Act] relies on the ordinary commercial meaning of these terms, rather than creating rigid statutory definitions.”

The SCC Concludes That Mr. Markowich Should Be Granted Leave to Commence Timely Disclosure Action Against Lundin

The Court affirmed the Ontario Court of Appeal’s decision, holding that the motion judge erred in law in his interpretation of “material change” and that, on the basis of his “restrictive” interpretation, he wrongly concluded that there was no reasonable possibility that Mr. Markowich could show that the pit wall instability and rockslide resulted in a change in Lundin’s operations. As a result, Mr. Markowich was granted leave under section 138.8(1) of the Act to commence an action for the alleged breach of Lundin’s timely disclosure obligations.

Justice Côté’s Dissenting Reasons

With its inclusive construction of the meaning of “change in the business, affairs or capital” of an issuer, the majority of the SCC pre-emptively offered a defense to the claim that, in practice, its interpretation elides almost any practical distinction between a “material fact” and a “material change”. Whether or not the Court succeeded in this regard is likely to be a topic of future debate, and one only need read Côté J.’s dissenting judgement to understand why.

Confidential Material Change Reports

In light of this decision, issuers faced with a disclosure dilemma in a challenging fact scenario may consider availing themselves of the often-ignored safe harbour in the Act that permits issuers to file a material change report confidentially. To date, such filings have rarely been used since they merely defer public disclosure for a brief period and are effectively unavailable to Canadian issuers with a US listing.