Change is in the Air: Considering What Constitutes a Material Change

New guidance from the Ontario Court of Appeal on what an issuer needs to consider

The Ontario Court of Appeal recently considered what constitutes a “material change” under Canadian securities disclosure requirements in two decisions released simultaneously: Peters v. SNC-Lavalin Group Inc. and Markowich v. Lundin Mining Corporation.

The decisions confirm the test an Ontario court will apply to determine if an event constitutes a material change under the Securities Act (Ontario).

Material Changes vs Material Facts

A “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 the issuer’s securities.

Under Canadian securities laws, reporting issuers in Canada are required to report “material changes” immediately by news release, followed by a material change report which must be filed as soon as practicable and in any event within 10 days from the day the change occurs.

A “material change” is distinct from a “material fact”, which the Securities Act (Ontario) is a fact that would reasonably be expected to have a significant effect on the market price or value of the securities. The Act imposes various disclosure obligations on issuers with respect to material facts, but, unlike material changes, does not require that issuers disclose material facts forthwith.

The Supreme Court of Canada has previously confirmed that the distinction between a “material fact” and a “material change” is deliberate and policy-based: it is meant to relieve reporting issuers of the obligation to continually interpret external developments as they affect the affairs of the issuer, unless the external change would result in a change in the business, operations or capital of the issuer.

If an issuer fails to make timely disclosure of a material change, the Act provides a statutory right of action to any person who acquires or disposes of the issuer’s securities between the time when the disclosure should have been made and the time when the disclosure is actually made, regardless of whether the person relied on the issuer having complied with its timely disclosure requirements.

To guard against frivolous litigation, the Act requires that a party obtain leave of the court before proceeding with a claim. To grant leave, a court must be satisfied that the action is being brought in good faith, and that there is a reasonable possibility that the plaintiff could succeed at trial.

Peters v SNC-Lavalin Group Inc.

In Peters v SNC-Lavalin Group Inc., the appellant, John Peters, alleged that the SNC defendants failed to disclose the content of a phone call on September 4, 2018. During this phone call the Department of Public Prosecutions Services advised SNC that SNC would not be invited to negotiate a remediation agreement to resolve a pending prosecution for fraud and corruption.

The motion judge declined to grant leave. In particular, the motions judge determined that the September 4 call did not change any risk to SNC’s business, operations, or capital, because SNC’s risk of prosecution was the same both before and after the call.

Justice Favreau concluded that the motion judge made no errors in Peters, and dismissed the appeal. The motion judge had correctly adopted a broad and fact-specific definition of “change”, but had also properly excluded external circumstances, no matter how significant, which did not result in a change in the issuer’s business, operations, or capital (even if they may affect the issuer’s share price).

Markowich v Lundin Mining

In Markowich v Lundin Mining, the appellant Mr. Markowich alleged that pit wall instability and a subsequent rockslide in late 2017 at a Lundin copper mine was a material change that should have been disclosed forthwith by Lundin and was not.

As a result of the rockslide, Lundin had to shut down some of its operations at the mine, modify its schedule for the phased mining of the open pit, and reduce the expected production for 2019.

The rockslide was not disclosed by Lundin at the time it occurred. When it was first disclosed in a news release approximately a month later, the price of Lundin’s securities fell, and in a subsequent conference call, a majority of analysts emphasized the negative production revisions.

Initially, the motion judge dismissed Markowich’s motions. While he found that the rockslide events were “material”, the motion judge concluded that they did not represent changes to the business, operations or capital of Lundin, as pit wall failure was a known risk of open pit mining, and the events did not affect Lundin’s viability or ability to continue to conduct its business.

The Court of Appeal disagreed and granted Mr. Markowich leave to proceed with his statutory cause of action. The court found that it was plausible that at trial, Mr. Markowich could demonstrate that the pit wall instability and rockslide constituted a change in Lundin’s operations which could reasonably be expected to affect its stock price, meeting the definition of a “material change” which should have been forthwith disclosed.

Material Change Analysis

A court will apply the following two-part analysis in considering whether a “material change” has occurred:

• Change: whether there has been a change in the business, operations or capital of the issuer; and
• Materiality: whether the change was material in the sense that it would be expected to have a significant impact on the value of the issuer’s shares.

First: Has there been a Change?

“Change” should be interpreted broadly, particularly when a court is determining whether to grant statutory leave to bring this kind of action. As noted in Peters, a material change can also include the risk of a change in the business, operations or capital of an issuer. However, determining if a change occurred is a fact-specific exercise rooted in the circumstances of the issuer, and there is no bright-line test.

Changes in a company’s business, operations, or capital do not include external events outside the company’s control, or quarterly results on their own, even if they are likely to significantly affect the company’s stock price or might otherwise qualify as a material fact. The material change reporting obligation is not an obligation to provide a running commentary on internal or external events that may impact a company’s performance.

Rather, while external events could prompt changes to an issuer’s operations, and financial results can be a reflection of changes that have been made, the disclosure requirement is triggered by the change in the issuer’s business, operations, or capital itself.

Moreover, a development need not rise to the level of affecting a company’s ability to conduct its business in order to constitute a “change”. In particular, the word “operations” is broad and is not limited to the location of a business or what it produces; it can also include changes to production and scheduling.

In their policies, some stock exchanges give examples of developments that might qualify as a change in an issuer’s business, operations, or capital. For example, the TSX in a policy statement suggests that updates which are likely to require disclosure include the development of new products, developments affecting the company’s resources, technology, products or market, significant litigation, and other developments that would reasonably be expected to have a significant influence on a reasonable investor’s investment decisions.

Second: Is it Material?

Having found a change, the next step is to determine if it is material, which means that it would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities.

Materiality is determined from the perspective of the reasonable investor, and is a strictly economic analysis. The impact on price must reasonably be expected to be significant in order to meet the threshold.

Key Take-Aways

A “material change” requires a news release to be filed “forthwith”, and a material change report to be filed within 10 days. Here’s what to keep in mind:

• Keep strong lines of communication and feedback open within your organization. As developments occur, consider what, if anything, may change about your company’s business, operations (including production and scheduling), or capital as a result.
• Keep in touch with the right people both on a regular basis and as significant updates happen. People may not always proactively speak up, especially if there has been a setback on their watch or if they foresee negative changes on the horizon.
• Know what your stock exchange considers to be developments which may be worthy of disclosure. Some exchanges, like the TSX, may require disclosure of information that may reasonably impact an investor’s decision, even if it may not necessarily impact the stock price. Most exchanges require continuous disclosure of material facts as well.
• Consider the information to be presented on analyst calls in advance to see if anything material has not yet been disclosed, and review the transcripts after they occur for any material information that may have been included.
• Refer to Part VI of National Policy 51-201 – Disclosure Standards for some practical measures that companies can adopt to help ensure good disclosure practices. These can include establishing a corporate disclosure policy, establishing a committee of company personnel to oversee disclosure, and adopting a disclosure model for planned disclosure of material corporate information.