The Supreme Court of Canada (the “SCC”) has released its highly anticipated decision on the appeal of Markowich v. Lundin Mining Corporation, 2023 ONCA 359, which we previously discussed in our 2023 blog post. In upholding the Ontario Court of Appeal’s (the “ONCA”) decision, Justice Jamal, writing for the majority of the SCC, addressed two issues of key importance to reporting issuers: (i) the framework for determining whether a “material change” has occurred (as compared to a “material fact”, which we discuss further below), and (ii) the test to obtain leave under section 138.8(1) of the Securities Act (Ontario) (“OSA”) to commence a statutory cause of action for breach of continuous disclosure obligations.
Key Takeaways
- The existence of a “material change” continues to require a two-part test. The SCC affirmed that a “material change” first requires there to be a “change” in the “business, operations or capital” of the issuer – in other words, a change that is internal to the issuer. Second, the change must be “material”, in that it “would reasonably be expected to have a significant effect on the market price or value of the securities.
- Non-restrictive, holistic and contextual approach to determining “material changes”. The term “change” should retain its ordinary meaning and not be narrowed by connotations of magnitude. Similarly, the term “business, operations or capital” should not be interpreted restrictively, but rather represent a holistic standard that must be interpreted flexibly as the context and circumstances require, in view of the policy background underlying securities legislation, including the need to address informational asymmetries between issuers and investors.
- Leave under section 138.8(1) of the OSA requires a plausible analysis of the legislation, not a “plausible interpretation”. Statutory interpretation must not be conducted “less stringently or in a more relaxed fashion” in considering an application for leave in this context. Rather, there must be a plausible application of the legislation to the facts based on the limited evidence available at the time leave is sought.
Background and Prior Decisions
As discussed in our 2023 blog post, this case involved an application by Mr. Markowich, a shareholder of Lundin Mining Corporation (“Lundin”), for leave to bring a statutory cause of action on the basis that Lundin failed to make timely disclosure of a material change. Specifically, Mr. Markowich’s position was that Lundin breached its continuous disclosure obligations by failing to disclose “forthwith” a pit wall instability that it detected on October 25, 2017 at its Candelaria copper mine in Chile, and a subsequent rockslide at the mine on October 31, 2017 which impacted its production forecasts. The day after Lundin first publicly disclosed these events on November 29, 2017, the price of Lundin’s shares dropped 16% on the Toronto Stock Exchange (amounting to over $1 billion of market capitalization).
In Mr. Markowich’s original application for leave, the motion judge declined to grant leave on the basis that there was no reasonable possibility that the events constituted a “material change”. In coming to this conclusion, the motion judge relied on ordinary, dictionary definitions in interpreting the meaning of “material change”. Specifically, the motion judge defined “change” as a different position, course or direction, “business” as what an issuer does to generate revenues, “operations” as how or where an issuer conducts business, and “capital” as an issuer’s share structure and rights of shareholders. Based on these definitions, the motion judge found that neither the pit wall instability nor the rockslide constituted a material change based on there being no evidence that these events compromised Lundin’s economic viability and on the basis that “at all times, Lundin was able to continue its business, operations and capital as a worldwide mining corporation”.
The ONCA allowed Mr. Markowich’s appeal, holding that the motion judge took an overly narrow approach to interpreting each of the terms “change”, “business”, “operations”, and “capital” and that a broader interpretation ought to have been applied in light of the circumstances and the legislative regime.
The SCC Decision
In the course of upholding the ONCA’s decision, the SCC found it useful to discuss in detail the distinction between “material facts” and “material changes” and their respective disclosure requirements. The SCC also considered the appropriate test in considering whether to grant leave for a statutory cause of action for breaches of continuous disclosure requirements.
(a) Material Facts vs. Material Changes
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”. These facts can be internal or external to an issuer, a distinction which is discussed further below. Under Canadian securities legislation, material facts are only required to be disclosed periodically.
On the other hand, a material change is narrower than a material fact. It is defined in the legislation 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.” Material changes are required to be disclosed immediately, in order to address the “asymmetry of information that exists between issuers’ managers and current and prospective investors in these issuers,” which the SCC cited as a core concern of securities laws.
In determining the existence of a material change, the SCC affirmed that the first step requires a qualitative assessment of whether there has been a “change”, applying that word’s ordinary meaning, without implied restrictions for magnitude or significance, and the nature of that change. Specifically, the change must be internal to the issuer (i.e., a change in the business, operations or capital of the issuer). Given that the legislature intentionally left these terms undefined, the SCC emphasized that this initial analysis requires them to be read on a holistic standard and given a broad and flexible interpretation, depending on the context. The SCC confirmed that external political, economic and social developments would not satisfy this part of the test unless those developments were to also result in an internal “change in the business, operations or capital of the issuer.” The SCC also confirmed that “negotiations and internal deliberations, without more, will not usually amount to [such a change].”
If there has been such a change, the second step of the analysis requires determining whether the change would reasonably be expected to have a significant effect on the market price or value of the securities. In other words, the magnitude or significance of the change only becomes relevant at this second stage, where materiality is the sole consideration, and must be considered from the perspective of a reasonable investor and in strictly economic terms.
(b) Test for Leave to Bring Action for Failure to Disclose Material Changes
The SCC also considered the test for leave to bring a statutory cause of action under section 138.8(1) of the OSA for a failure to comply with timely disclosure requirements. Specifically, the SCC confirmed that, in order to obtain leave, there must be “a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim”.
This exercise does not involve considering a “plausible interpretation” of the relevant statute, and as such, the court is not entitled to interpret the legislation “less stringently or in a more relaxed fashion” simply because the application is for leave to bring a statutory cause of action. Rather, the test requires a plausible application of the legislation to the evidence available, taking into account the fact that leave is generally sought at an early stage, prior to documentary production or oral discovery.
Broader Implications for Issuers?
While it remains to be seen whether the SCC’s decision will have a material impact on disclosure standards across Canadian capital markets, particularly since the courts have not yet determined whether Lundin’s pit wall instability or rockslide constituted a material change, reporting issuers should assess their disclosure practices in light of the contextual and flexible framework affirmed by the SCC.
If you have any questions about material changes or about disclosure requirements more generally, please contact any member of our Corporate Finance and Securities Group.
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