Supreme Court of Canada rejects narrow interpretation of disclosure standard for “material changes”

The Supreme Court of Canada has released its long-awaited decision on Lundin Mining Corp. v Markowich, dismissing the issuer’s appeal, and addressing the interpretation of “material change” under securities legislation and clarifying when public companies are required to disclose material information.

Why does the Lundin decision matter?

Timely disclosure is one of the key obligations of public companies under Canadian securities legislation. To foster fair, efficient and competitive markets and confidence in those markets, reporting issuers are required to disclose material changes “forthwith” and file a material change report within 10 days of the change. This is different than the requirement to disclose material facts, which is done periodically, typically in regular quarterly and annual filings as well as part of any prospectus offering.

What is a material change and how is it different from a material fact?

Securities legislation defines a “material change” as a change in the business, operations or capital of the company that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the company. By contrast, a “material fact” is a broader definition that does not require a “change,” but merely anything that would reasonably be expected to have a significant effect on the market price or value of the securities. The distinction between a material change and a material fact, and the corresponding required timing of their disclosure, is at the heart of this decision.

What was the focus of the SCC’s decision?

While “material fact” and “material change” are defined in securities legislation, “change” is not specifically defined. Nor has it previously been judicially considered by the Supreme Court of Canada in this context, other than to specify it cannot refer to a change external to the company without a resulting change in the business, operations or capital of the company. Lundin therefore represented an opportunity for the SCC to clarify the definition of “change” and provide a degree of certainty to issuers and investors regarding these critical requirements.

What was the disclosure issue in this instance?

The substantive question at issue is whether Lundin, a Canadian mining company whose shares are listed on the TSX, failed to make timely disclosure of two events at its Candelaria copper mine in Chile: (i) the detection of pit wall instability on October 25, 2017, which resulted in the evacuation of personnel from that area of the mine, and (ii) a subsequent rockslide on October 31, 2017, involving 600,000-700,000 tonnes of waste material that restricted access to the mine. The rockslide did not cause any fatalities, injuries or damage to equipment, and at the time it was estimated it would result in a delay of less than 5% of the company’s annual copper production.

Lundin disclosed these events as part of an operational update on November 29, 2017, advising that, because of the rockslide, copper production for the following year would be 20% less than previously forecast. The day after it issued the press release, Lundin’s share price fell by 16%, resulting in a loss of over $1 billion in market capitalization. 

The plaintiff (Markowich) is an investor who, having purchased 10,000 shares in Lundin in November 2017 prior to the issuance of the press release, sought leave to commence an action for breach of timely disclosure obligations and to bring a class proceeding on behalf of all persons who acquired shares of Lundin between October 25 and November 29, 2017, on the basis that the events were “material changes” to the Lundin’s business, operations or capital and should have been immediately disclosed.

What did the SCC determine?

An 8-1 majority of the SCC sided with the Court of Appeal for Ontario and determined that “change” should be construed broadly and not in a restrictive way as had been done by the motion judge who had initially declined to grant leave. The SCC also determined that the statutory test to be able to commence a claim of a breach of disclosure obligations is based on a plausible application of the legislation to the facts, not a plausible statutory interpretation. Accordingly, the SCC dismissed Lundin’s appeal, allowing Markowich to pursue his claim against Lundin and others for liability for failure to have made timely disclosure.

What is the impact of the decision?

It is important to keep in mind the SCC did not find that either the detection of pit wall instability or the subsequent rockslide constituted a material change in the business, operations or capital of Lundin – nor was the Court asked to. This decision results from a preliminary application to obtain leave of the court to commence an action for breach of timely disclosure obligations, as is required under securities legislation. What the SCC found is that the pit wall instability and rockslide impacted Lundin’s operations at its mine and therefore could have resulted in a “change,” and therefore could have been a material change.

What is a material change?

In its decision, the SCC held that “change” within the context of a potential material change should not be interpreted narrowly or restrictively, and it should not be constrained by dictionary definitions, as was done by the motion judge. Rather, whether something constitutes a “change” must be assessed within the particular context of the company. There is no bright-line test and the determination is “a matter of judgment and common sense applied to the unique circumstances of each case.”

Likewise, the terms “business,” “operations” and “capital” appearing in the definition of “material change” should be interpreted broadly.

The SCC reaffirmed that a material change must be internal to the company, while a material fact can be internal or external to the company. In addition, a material change would typically involve more than mere negotiations or internal deliberations – there must be a substantial likelihood of completion. 

In determining whether something constitutes a “material change,” the SCC has confirmed that a two-part analysis is required: first, a determination as to whether a development constitutes a “change in the business, operations or capital” of the company, and second, whether that change is “material.” As a result, the magnitude or significance of the development should not be considered in determining whether a change has occurred.

The implication of the SCC’s decision is that companies should err on the side of disclosing new developments sooner rather than later. Indeed, the SCC explicitly rejects the narrower “manager-friendly” disclosure standard that has developed in some case law, which requires that a development be “important and substantial” before it results in a change, stating the broader “investor-friendly” disclosure standard is the correct one. According to the SCC, “The narrower disclosure standard is inconsistent with the text of the legislation” and is “mistaken as a matter of doctrine and policy.”

Readers of the SCC’s decision in Lundin may find themselves wondering what the majority would define as a “change” in these circumstances, as little guidance in that regard is provided. Ultimately, the SCC determined that the motion judge erred in holding that the plaintiff would be unable to establish that the events of the case resulted in a change to Lundin’s operations: “Had the motion judge correctly interpreted a change in business, operations or capital, and applied that interpretation to the evidence on the motion, he would have concluded that there was a reasonable possibility that Mr. Markowich could show that the pit wall instability and rockslide resulted in a change in Lundin’s operations.” 

In other words, because of the limited assessment of evidence to be performed at the leave stage, the question of whether these events were a “material change” will have to wait for another day.

What is the impact on the test for leave to bring an action for breach of timely disclosure obligations?

In terms of the requirements to bring a claim for breach of disclosure obligations, the SCC has reaffirmed that the test for leave is just a preliminary merits test and does not require proof on a balance of probabilities that the claim will succeed at trial. 

However, it is a more stringent test than the one for authorization of a class action. A plaintiff is required to establish a “reasonable or realistic chance, and not merely a possibility, that the action will succeed at trial, based on a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim.” The SCC has clarified, however, that the plausible analysis does not mean a plausible interpretation of the statutory provisions. Rather, it is a plausible application of the legislation to the limited facts available given the preliminary stage of the proceedings.

What should we take away from Lundin?

For now, the definition of “material change” remains relatively broad, open-ended and context- and industry-specific. Issuers considering whether internal events affecting their businesses could constitute “material changes” and thus affect the timing of their disclosure obligations should know that there remains no precise definition of what a “material change” is, and so a cautious approach may be advisable to avoid creating secondary market liability risk. Hopefully, the courts hearing these matters or similar matters on the merits can offer more precision in the interpretation of these issues so as to provide a greater degree of clarity than the SCC has opted for.

The authors would like to thank Fayha Najeeb, articling student, for her contribution to preparing this legal update.