B.C. Securities Commission Decision Provides Guidance on When Exploration Results Constitute a Material Change

A recent B.C. Securities Commission decision provides important guidance on when exploration results constitute a material change requiring disclosure under Canadian securities laws.

Background

The decision relates to an enforcement action commenced against Canaco Resources Inc., a company listed on the TSX Venture Exchange, (the “Exchange”).  In December 2010, the company’s President and CEO revealed the results of eight drill holes on its Magambazi deposit to Canaco’s board of directors.  These were infill holes covering a mineralized zone in which Canaco had previously drilled and reported 82 holes.  In email discussions between the CEO and the board, the directors referred to the results of the new drilling as “just beautiful,” “spectacular,” and “fantastic news.”  However, the board decided to stagger release of the information over a period of several weeks.

The board also decided to immediately issue new stock options to the directors, management and employees, even though the exploration results were not yet made public.
The Exchange learned of the option grants and staggered disclosure.  The Exchange forced Canaco to re-price the options and issue a news release disclosing the remaining information.

In April 2012, the Executive Director of the B.C. Securities Commission issued a notice of hearing against Canaco, its CEO, and three of its independent directors for allegedly contravening the disclosure requirements in section 85 of the B.C. Securities Act by failing to (i) immediately disclose the results from the eight new drill holes, and (ii) act in Canaco’s best interests when voting to issue stock options before that information was disseminated.

In August 2013, a panel of Commissioners of the B.C. Securities Commission dismissed the allegations against all parties.  At the heart of the decision was the materiality of the drill results.  That is, whether the drill results were a change in the business, operations, or capital of the company reasonably expected to have a significant effect on the market price or value of the company’s securities.  The panel decided that the exploration results did not constitute a material change.

The panel relied heavily on two separate expert geologists’ reports tendered by Canaco.  The reports found that the drilling did not alter or expand on the boundaries of the Magambazi deposit but it simply added to the understanding of the continuity to the deposit, which would not significantly affect Canaco’s value.

Key Points for Canadian Reporting Issuers

The panel’s decision provides important guidance for determining whether there has been a “material change,” particularly for junior resource companies.  The core question for management is whether the fact or event could reasonably be expected to significantly affect the market price of the securities.

For junior mining companies, information from drill results will often continue to be material.  However, the decision highlights how important it is to consider the context in which drill results are released.  In Canaco’s case, the panel found that the company’s drilling program was “well advanced,” having released results from 82 drill holes over the previous year.  Information from the eight new infill holes “merely confirmed what management and the market already knew about the property.”

The panel further echoed previous case law stating that the materiality test must be viewed from the perspective of the buying, selling, or holding of securities.  The panel stated:

• The materiality test is objective, relating to the likely impact of the change on market price.  Subjective opinions of an issuer’s directors and executives are not determinative of an assessment of materiality, even when they are expressed in very positive terms such as “fantastic news” or “spectacular.”  Likewise, a determination by the Exchange that information must be disclosed does not affect the objective test under securities law.
• Change in market price is not necessarily caused by disclosure.  A “host of factors can cause price changes and a combination of even minor factors can combine to move the price.”
• The materiality test is based on the assumption that the market in the company’s shares is generally efficient.  Otherwise, companies could argue that no information was material because their stock does not trade efficiently, “an absurd interpretation.”
• Materiality is assessed in the context of the issuer’s industry and the market.