Ontario Court of Appeal Clarifies the Framework for Determining Material Changes

The Ontario Court of Appeal has released two decisions that together provide useful guidance for reporting issuers across Canada on what constitutes a “material change” for the purposes of the Securities Act (Ontario) (the “Act”).

The disclosure of material changes, and the statutory cause of action for a failure to do so, are integral components of the securities law regime in Canada, aimed at ensuring the market is provided with prompt disclosure of a universe of important events, without imposing the burden of constantly disclosing every material fact. The distinction between a material change and a material fact, however, is highly contextual, and can be challenging to apply. Read together, the two new decisions confirm that in determining whether a material change has occurred, a court will undertake a two-stage analysis, first considering whether a change, broadly defined, has occurred in the issuer’s business, operations or capital, and second, assessing whether that change would reasonably be expected to have a significant effect on the market price or the value of the issuer’s securities. The decisions do not fundamentally alter the boundaries of what constitutes a material change; they do, however, clarify the process for assessing whether one has occurred.

Two Cases for a Two-Part Test

In Markowich v Lundin Mining Corporation[1], Mr. Markowich, a shareholder of Lundin, sought leave to bring a statutory cause of action alleging that Lundin failed to disclose a material change “forthwith,” as required by the Act. Under the Act, a plaintiff cannot bring a statutory action for failure to make timely disclosure without leave of the court.

The allegedly undisclosed “changes” related to pit wall instability detected on October 25, 2017 at Lundin’s Candelaria open pit copper mine in Chile, and a subsequent rockslide at the mine on October 31, 2017, which impacted Lundin’s production forecasts. Lundin first publicly disclosed these events in a news release almost one month later, on November 29, 2017. The following day, the price of Lundin’s shares fell about 16%.

The critical issue in the Lundin leave application was whether either the wall instability or the rockslide was a material change. 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.”

Overturning the decision of the lower court, which the Court found had interpreted the key terms too narrowly – especially in the context of a motion for leave – the Court held that the determination of whether a material change has occurred requires a two-step analysis. First, it must be determined whether there has been a “change” in the “business, operations or capital” of the issuer. If so, it must then be determined whether that change was material, meaning that it would reasonably be expected to significantly impact the market price or value of the issuer’s shares. The magnitude or impact of the change only becomes relevant at the second stage of the analysis.

Step 1: The Scope of “Change”

The focus of the first step is the qualitative nature of the change, with the concept of “change” construed expansively.

In the companion decision to Lundin, Peters v SNC Lavalin Group Inc.,[2] the Court endorsed the motion judge’s broad interpretation of what could constitute a “change” in the “business, operations or capital of an issuer.” In describing the scope of that definition, the motion judge provided a lengthy list of concepts encompassed within the concept of “change.”[3] The Court concluded that while the meaning of ‘change’ is highly contextual, with no viable bright-line test, “a change is a change and it should be defined broadly.”

In determining whether a change is to the “business, operations or capital” of the issuer, the Court in Lundin endorsed the analysis in Peters, which it found to be more consistent with the Supreme Court of Canada’s decision in Kerr v. Danier Leather Inc.[4] The Court held that the phrase should be read broadly. In particular, the Court noted that the term “operations” is very broad and a change in operations could include an interruption in production or a change in scheduling due to an accident or equipment failure. One of the only restrictions on the meaning of “change” established by existing case law is that it does not include changes resulting from external factors outside of the issuer’s control (such as a spate of unseasonably warm weather causing a decline in sales of cold-weather clothing) unless such external factors result in an internal change to the issuer’s business, operations or capital. 

Step 2: The Materiality Assessment

If a “change” to the business, operations or capital exists, the second step requires an assessment of the magnitude of the change to determine, from the standpoint of a reasonable investor, if it would be expected to have a significant effect on the price or value of the shares. Somewhat vaguely, though highlighting the contextual nature of the analysis, the Court distinguished between a change in operations resulting from “a minor accident or equipment failure” versus “a major accident or equipment failure.”

A Qualification for the Leave Motion

It remains to be seen if the wall instability or rockslide at Lundin’s mine were, in fact, material changes. The Court’s decision in Lundin was made at the “leave” stage, and was made on the basis only that the Court was satisfied that the plaintiff had a reasonable prospect of success at trial, as required by the Act. The Court noted, in fact, that “change” should be defined broadly “especially in the context of a leave motion,” and it is possible that a more narrow application could be appropriate at trial.

In any event, given the importance of the disclosure of material changes, issuers should be sure to take the two-stage test into account, including the broad meanings of “change” and “operations,” when making disclosure determinations.

If you have any questions about Lundin or Peters, about material changes or about disclosure requirements more generally, please contact any member of our Corporate Finance and Securities Group.

[1] Markowich v Lundin Mining Corp, 2023 ONCA 359 [Lundin].

[2] Peters v SNC-Lavalin Group Inc, 2023 ONCA 360 [Peters].

[3] See Peters at para 86.

[4] Kerr v Danier Leather Inc, 2007 SCC 44.


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