Supreme Court to determine what constitutes a “material change” under Canadian securities law

[Republished in the July 2024 edition of Canadian Securities Law News (Number 366), LexixNexis Canada Inc.]

 

Reporting issuers across Canada should be aware of a more expansive interpretation of the term “material change” which will be considered by the Supreme Court of Canada (the “Supreme Court”).

On March 28, 2024, in Lundin Mining Corporation, et al. v. Markowich (“Lundin”), the Supreme Court granted Lundin Mining Corporation (“LMC”), a Canadian mining company, leave to appeal a decision of the Ontario Court of Appeal that overturned the dismissal of a proposed class action in respect of LMC’s alleged failure to make timely disclosure of a material change. In a unanimous decision, the Court of Appeal held that the motion judge interpreted LMC’s disclosure obligation too narrowly. The case involves the interpretation of Section 75(1) of the Securities Act (Ontario) (the “Securities Act”), which requires reporting issuers to “forthwith issue and file a news release” in circumstances “where a material change occurs in the affairs of [the] reporting issuer”.

Background

In October of 2017, LMC received reports that a pit wall instability was detected at its largest mine in Chile. As a result, LMC personnel were evacuated from the mine. The pit wall eventually collapsed, leading to a rockslide. The overall impact of the rockslide was a 5 percent reduction in the global production of copper by LMC in 2018.

Rather than disclosing these events when they occurred, LMC announced them one month later in a November news release. The day following the release, the price of LMC’s securities fell by 16 percent on the Toronto Stock Exchange. This one-day drop amounted to over $1 billion of LMC’s market capitalization.

The plaintiff, a shareholder of LMC, brought a proposed class action seeking leave to commence a secondary market securities class action against LMC under Section 138.8 of the Securities Act for failing to make a timely disclosure of the pit wall instability and the subsequent rockslide. The plaintiff also sought certification of a class action under the Class Proceedings Act, 1992 on behalf of certain LMC shareholders.

The plaintiff’s motions were dismissed at first instance as the motion judge was not satisfied that there was a reasonable possibility of showing that the pit wall instability and rock slide were “material changes” in the business of LMC. The motion judge was convinced by evidence showing that pit wall instabilities and rockslides are common occurrences in open pit mining and therefore could not constitute a “change” in the business, operations or capital of LMC.

The Court of Appeal for Ontario

The Court of Appeal unanimously overturned the motion judge’s decision, finding that what constitutes a “material change” was interpreted too narrowly and that leave should have been granted for the plaintiff’s motions.

According to the Court of Appeal, the motion judge erred in the interpretation of “change in the business, operations or capital” and, as a consequence of this error, erred in finding that the evidence available on the motion did not support granting leave. The Court of Appeal determined a generous approach to the interpretation was warranted and that the motion judge focussed too heavily on the magnitude of the change, rather than determining whether the change was external to LMC.

In making this determination, the Court of Appeal analyzed the legal test for determining when a material change has occurred originating from the Supreme Court’s decision in Kerr v Danier Leather Inc., 2007 SCC 44 (“Danier”). Danier introduced a two-step analysis in which the court must determine:

• whether a change in the business, operations or capital of the issuer has occurred; and
• if there was a change, whether it could reasonably be expected to have a significant impact on the market price for the issuer’s shares.

In Danier, the Supreme Court noted the deliberate and policy-based distinction under securities laws between material changes, which require disclosure “forthwith”, and material facts, which must be disclosed in the course of the issuer’s periodic disclosure.

In Danier, warmer than normal weather had led to poorer than expected intra-quarterly results. The Supreme Court found that the warm weather was an external factor and therefore did not amount to a change in the issuer’s business. The Supreme Court further distinguished between the change itself and the results of that change, the latter of which should only be used to determine the materiality of the change to the issuer’s business, operations or capital. The poorer intra-quarterly results therefore were not a change themselves but were the result of an external factor, the warmer weather.

According to the motion judge, because pit wall instabilities and rockslides are common occurrences in open pit mining, the fact they occurred in this instance did not constitute a change in the business, operations or capital of LMC. The Court of Appeal disagreed with this narrow interpretation of “change”, concluding the only constraint on the definition of “change” is that it cannot be external to the corporation.

The Court of Appeal further asserted that a change does not need to rise to the level of affecting a company’s ability to conduct its business, but losing the ability to physically operate is one consideration among many that may constitute a change in the operations of the issuer. The Court of Appeal found the determination of a change to be purely qualitative, and considerations of the significance of the change should be left to the second step of the Danier test when determining if the change could reasonably be expected to impact the market price of the issuer’s securities. The Court of Appeal also found that a change in the “operations” of a company is a very broad concept and should not be limited to a change in the location or what a business produces, but can also refer to an interruption or change in scheduling due to an accident or equipment failure. Last, the Court of Appeal gave credence to a broad definition of “change” which states that a change does not need to happen instantly, but can sometimes occur progressively and imperceptibly until it is perceived by some benchmark of difference.

Key takeaways for reporting issuers

Reporting issuers should be cautious when deciding whether to disclose a material change and contextually evaluate each possible change on an ongoing basis. The decision of the Supreme Court to grant leave to appeal the Court of Appeal’s decision highlights the importance of material changes in the context of Canadian capital markets and the need for clarity on when disclosure is warranted. 

Lundin is a case of two competing interpretations of the word “change”. It remains to be seen whether the Supreme Court will adopt the narrow interpretation of the motion judge or the Court of Appeal’s “more generous” interpretation.

Using the Court of Appeal’s view, so long as the change is not external to the business, operations or capital of the issuer, it is very likely to pass the first stage of the Danier test.

The question then arises as to what constitutes an external change. The Court of Appeal in Lundin appears to distinguish Danier by saying the unstable pit wall and subsequent rockslide were internal to the operations of LMC, while the unusually warm weather in Danier was wholly external. Both events could be seen as natural phenomena, but in Lundin, the unstable pit wall and subsequent rockslide were the impetus for further changes in LMC’s operations, including shutting down the open pit mining operation for a period of time and modifications to LMC’s schedule for the phasing of the mining project, all of which together led to reductions in the production of copper. In Danier, the warmer weather did not incite changes to the business, operations or capital of the company, only a reduction in its expected results.

The more expansive interpretation of “change” outlined by the Court of Appeal has the potential to increase liability for a failure to disclose “material changes” and may have the effect of resulting in more class actions in respect of material changes meeting the test under the Securities Act.

Lundin was a motion for leave to bring the asserted claim by the plaintiff and, as such, the Court of Appeal was not deciding whether the plaintiff’s claim would be successful at trial, only whether there was a reasonable possibility that it could be successful. The question still remains then as to whether the change proposed by the Court of Appeal was material.