Introduction
With the Supreme Court of Canada granting leave to appeal in Markowich v. Lundin Mining Corporation (Markowich) and several interveners filing, Markowich is sure to appear on the showbills of those watching the operation of Canada’s capital markets. Markowich was one of two recent companion decisions from the Ontario Court of Appeal that attempted to bring clarity to secondary market misrepresentation legislation (the other case being Peters v. SNC-Lavalin Group Inc. (Peters)). These companion cases provide guidance on what constitutes a “material change” under securities legislation.
The Importance of Securities Legislation in the Secondary Market
All Canadian provinces have securities statutes that create liability for secondary market misrepresentation. These misrepresentations relate to public disclosure documents such as Annual Information Forms, information circulars, press releases, or public oral statements. Historically, wronged secondary market investors would pursue common law claims for negligent misrepresentation. It was challenging to pursue these claims at common law.
These common law claims were challenging as they required proof that the investor relied on the misrepresentation in trading the security. Given that this raises individual rather than common issues, it was difficult for a group of investors to proceed through a class action. The tool of mass litigation to deter issuers from breaching continuous disclosure obligations and recover damages to compensate wronged investors remained elusive in the secondary market sphere.[1]
In addressing these liability difficulties, legislatures[2] provided a statutory regime allowing secondary market investors to claim damages for misrepresentations in an issuer’s continuous disclosure documents or public statements without requiring proof of a duty of care or reliance. Investors purchasing an issuer’s securities on the secondary market could now bring a statutory claim, after obtaining leave of the court to bring that claim, for the failure to make timely disclosure of a “material change” as required by securities legislation. The obligation to disclose immediately depends on the interpretation of “material change”.
Both Ontario and British Columbia securities legislation defines “material change” as one that must involve “a change in the business, operations or capital” of the issuer. This begs at least one question, if not two: what is a material change, and what is a change?
Ontario’s recent Two-Part Test
The ONCA sanctioned a two-step analysis to determine whether a material change has occurred. First, a court must consider whether the issuer has experienced a “change”. ‘Change’ was held to be broadly defined and includes a change in risk to an organization’s business, operations or capital. However, an assessment of the magnitude of the change does not belong in stage one.
The second part of the test involves considering whether the change would reasonably be expected to significantly affect the market price of the issuer’s securities. The second stage is what considers the magnitude of the change—determining the change’s materiality.
Justification for a Two-Part Test
Under the companion cases the ONCA reasoned that a two-stage test brings guidance to securities legislation by reducing hindsight reasoning risks, increasing what could be a ‘change’, and providing for the possibility that a change in risk is a change.
First, Peters makes it clear that “it is not appropriate to reason backwards from the market reaction in determining whether an event constitutes a material change.”[3] Instead, as set out in Markowich, parties are to first utilize a broad, fact-specific interpretation of “change”, emphasizing that “a change is a change and it should be defined broadly, especially in the context of a leave motion”. The meaning of “change” is fact-specific and there is no “bright-line test”.[4]
Second, the ONCA endorsed “an expansive and generous approach” to the terms change and material change.[5] It held that such a view was “[c]onsistent with Kerr” and consistent with the “deliberate and policy-based legislative decision to relieve reporting issuers of the obligation to continually interpret external political, economic, and social developments as they affect the affairs of the issuer”[6].
The ONCA also makes it clear though the endorsement of the motion judge’s reasoning that “a change could include a change in risk.”[7] The court is clear that it would be an error to consider the magnitude of the change as part of the determination of whether there is a change. As such, the only restriction on “change” endorsed by the ONCA is that “external circumstances that may affect share prices but that do not effect a change in an issuer’s Business, operations or capital do not qualify as change within the meaning of material changes”.[8]
The emphasis on whether the change was purely external to the company as opposed to whether the change was in the company’s Business, operations or capital may help distinguish material facts from material changes. The obligations on disclosing material facts and material changes differs—as does the timing associated with their respective disclosure.
As such, based on these two decisions it seems that any predicate [such as losing the ability to physically operate] may now be just a circumstance amongst many other potential predicates that could constitute a change in operations. For example, a change in operations (the destruction of a conveyor belt), may not be expected to have a significant impact on the price of shares (i.e. a single belt in a large operation or with surplus product). Alternatively, that same exact predicate may be reasonably expected to have a significant impact on the market or value of the securities depending on a slight alteration in the contextual circumstances (no surplus product or smaller operation). In the latter case, the failure to discharge the reporting obligation on an issuer exposes that issuer to civil and regulatory liability.
A Two-Part Test will require reconsideration of past BC Cases
In legal reasoning, inductive arguments based on analogy feed on similarity. As the sphere of secondary market claims grows, whether a prior “material change” is similar to any other ‘change’ may receive an increased examination. In the ‘material change’ sphere in British Columbia, at least two cases require closer examination in light of an emphasis on the ONCA’s two stage analysis—one on the issue of whether a change in risk is a change.
First, in AM Gold Inc. v. Kaizen Discovery Inc., 2022 BCCA 21 (CanLII), at para 66, the BCCA held that it could see no error in the following analysis:
“…Its claim fails on both aspects of the definition of “material change” in s.1.1 of the SA. First, none of the matters constitute a change in Kaizen’s Business, operations or capital: see Cornish at para. 105. A risk of future change is not a material change. The matters relied upon by AMG amount to, at most, risks to the potential development of one of Kaizen’s projects. While I accept that an external event can result in a change to the Business, operations, or capital of a company, in the present case, none of the above noted matters did have that effect. […].
[156] Second, as noted above, these matters were not material in the sense that they would reasonably be expected to have a significant effect on Kaizen’s share price.” [emphasis added]
However, after the ONCA companion cases, three aspects of AM Gold require examination:
First, whether it is true that purely external events could be a ‘change’.
Second, whether a development that might affect a company’s resources, technology, products or market, would not at least clear the first stage. That change may then not be material, and the decision AM Gold may well still be good law, but the developments in AM Gold may now be broad ‘changes’—albeit not material ones.
Lastly, following the two-part test, a risk of future change may be a change. An analysis is required to determine if a risk of future change effects business, operations, or capital. If so, a risk of future change is material.
The case of Re Canaco Resources Inc., a leading decision on identifying and characterizing material changes in front of the BC Securities Commission, may also be worthy of renewed analysis. In that decision, the Commission noted:
The definitions of…material change measure the materiality of a fact or event solely by the expected effect that fact or event would have on the market price or value of the issuer’s securities. A fact or event is material only if it would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities.
After the ONCA companion cases, analytical emphasis on materiality is refocused. A materiality emphasis, as suggested by Re Canaco would make it difficult to determine when an inherent risk rises to a “material change”. What is the benchmark of difference that will take a progressive and imperceptible series of events to qualify as having a significant effect, when the focus of the analytical test is materiality throughout?
Refocusing the magnitude to the second stage provides that progressive or initially imperceptibility events, which the ONCA endorses as ‘change’, move on to a second stage where the examination is whether those progressions would reasonably be expected to have a significant effect on the market price of the issuer’s securities. This is a different analytical process than that of Re Canaco—which appears not to be a step framework but rather an analysis of materiality as a component of material change.
Take Aways
The takeaways from the ONCA companion cases, from the perspective of an issuer’s Directors or Officers, is that there is a wide breadth of considerations when assessing what qualifies as “a change in the Business, operations or capital”. With the endorsement of the lower court’s reasoning in Markowich, Directors and Officers ought to increase vigilance with their continuous disclosure obligations by focusing on:
- the development of new products related to their Business and affairs;
- developments affecting their company’s resources, technology, products or market;
- entering into or losing a significant contract;
- significant litigation; and
- developments connected to the Business and affairs of the issuer that would reasonably be expected to significantly affect the market price or value of any securities; or
- developments connected to the Business and affairs that would reasonably be expected to have a significant influence on a reasonable investor’s investment decisions.
The companion cases endorse all of the above as ‘change’, which may then be material, depending on the magnitude. While this may seem like a lot to monitor, the companion cases emphasize the important distinction between continuous disclosure and periodic disclosure necessitated by the legislated difference between “material facts” versus “material changes”. Whether the Supreme Court of Canada will agree remains to be seen.
For more information regarding Securities Litigation, or your other Directors & Officers liability questions, please contact please contact Patrick J. Sullivan or Robert K. Fischer.
[1] In addition, it was difficult to establish a duty of care on defendants due to problems associated with indeterminate liability at the duty analysis stage.
[2] In Ontario, the Securities Act, RSO 1990, c. S.5, Part XXIII: Civil Liability (ss. 130-138) governs secondary market liability. In British Columbia, secondary market liability is established through the Securities Act, RSBC 1996, c. 418, Part 16: Civil Liability (ss. 131-140).
[3] Peters v. SNC-Lavalin Group Inc., 2023 ONCA 360 (CanLII), at para 100.
[4] The endorsed lower court decision is one that provides a very expansive definition of the word “change” itself:
“Change encompasses alteration, amendment, conversion, contraction, development, difference, discovery, detection, disruption, divergence, expansion, innovation, makeover, metamorphosis, modernization, modification, renewal, renovation, reversal, revelation, revolution, transition, or transformation. The opposite of change is constancy, continuance, endlessness, immutability, permanence, perpetuity, prolongation, stability, and the status quo. Common experience reveals that sometimes change in philosophy, physics, and law is incremental and sometimes change is paradigm shifting. Common experience reveals that sometimes change happens instantly and perceptibly and sometimes change happens progressively and imperceptibly until it is perceived by some benchmark of difference.”
[8] See Kerr v. Danier Leather Inc., 2007 SCC 44 (CanLII), [2007] 3 SCR 331, at paras. 46-47, and Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 (CanLII), [2015] 2 SCR 106, at paras. 50-51.
