SCC Affirms Broad and Contextual Interpretation of “Material Change”

The Supreme Court of Canada (SCC) has provided further guidance on what may constitute a “material change” under Ontario securities law and the leave test for bringing a claim for failure to make timely disclosure.

In Lundin Mining Corp. v. Markowich, an 8-1 majority of the SCC endorsed the Ontario Court of Appeal’s flexible and contextual interpretation of what it means for there to be a “material change” in the “business, operations or capital” of an issuer. The SCC also clarified that to commence a claim for a breach of disclosure obligations under Ontario securities legislation, a plausible application of the legislation to the facts is required, together with credible evidence in support of the claim.

Background

Lundin Mining Corporation (“Lundin”) is a Vancouver-based, TSX-listed base metals producer. At the relevant time, Lundin’s Candelaria mine in Chile accounted for more than half of its revenue, with the open pit responsible for most of Lundin’s copper production.

In October 2017, Lundin identified localized pit wall instability at the Candelaria open pit. Days later, a substantial rockslide occurred that restricted access to a mining phase then in progress. Lundin revised its mine plan, focusing near-term efforts on removing waste material, relying more heavily on lower-grade stockpiles and reducing its 2018 overall copper production guidance by approximately 20%, with higher forecasted operating costs.

Lundin disclosed these developments to investors approximately one month later in a news release issued after market close on November 29, 2017 as part of a routine operational update. The following trading day, Lundin’s share price fell by approximately 16%, representing more than $1 billion in lost market capitalization. Management subsequently held an investor call to discuss the developments.

An investor who purchased 10,000 shares of Lundin following the October events and prior to the November 29 release commenced a proceeding for leave to bring a class action against the company and several of its officers and directors under Section 138.8(1) of the Securities Act (Ontario) (the “Act”), alleging the pit wall instability and rockslide each constituted a “material change” that should have been disclosed forthwith under Section 75(1) of the Act.

Lower Court Decisions

The motions judge denied the investor’s request for leave on the basis that neither the pit wall instability nor the rockslide amounted to a “change" because neither event led Lundin to change its line of business, stop operating the mine or alter its capital structure. The Ontario Court of Appeal allowed the appeal and granted leave, concluding that, based on a more generous interpretation of the words “change in the business, operations or capital”, there was a reasonable possibility that the events involved changes in the company’s operations.

Material Fact vs. Material Change

One of the key issues addressed by the SCC was the meaning of “material change” and how it differs from a “material fact”. The distinction is important because material changes trigger an immediate disclosure obligation whereas material facts are addressed through periodic disclosure.

The majority rejected the decisions in some cases preceding Lundin that would confine material changes to fundamental or structural developments before considering whether the change was material. It also rejected the narrow approach taken by the motions judge that considered whether the issuer’s business, operations or capital were in a “different position, course, or direction”.

The SCC explained that the Ontario legislature had intentionally left the terms “business, operations and capital” undefined “to allow the legislation to be applied flexibly and contextually to a wide range of industries and corporate structures”. The SCC also reiterated the previously established two-stage test for determining whether there has been a material change: first, there must be a change in business, operations or capital and second, the change must be material. The determination as to whether there was a “change” should not be informed by the magnitude or significance of the development in question (which is reserved for the second part of the test).

The SCC outlined certain indicia of a “material change” to help explain the distinction between a material change and a material fact, including:

• Must be an “Internal” Change – While a material fact can be internal or external to the company, a material change must relate to the issuer’s own business, operations or capital. An external development will not, in and of itself, constitute a change unless it gives rise to a change within the issuer.
• Changes are Dynamic – A material change compares an issuer’s affairs at two points in time whereas a material fact is static, providing a snapshot of an issuer’s affairs at one point in time.
• Usually Requires More than Mere Negotiations and Internal Deliberations – Without information that provides a “meaningful signal” about the outcome of negotiations or deliberations, there is unlikely to be a change.

The majority disagreed with the notion that a broad interpretative approach will necessarily increase the regulatory burden on issuers by requiring them to evaluate whether every minor internal event within a company constitutes a “material change” because issuers are well-positioned to assess whether a change is material, given their “industry knowledge and intimate familiarity with their business, operations and capital”.

Impact on the Test for Leave to Bring an Action for Breach of Timely Disclosure Obligations

The SCC reaffirmed that the test for leave is a preliminary merits test that does not require proof on a balance of probabilities that the claim will succeed at trial. It does, however, require the plaintiff to establish a reasonable or realistic chance, and not merely a possibility, of the action’s success at trial. The plaintiff must show a plausible application (and not merely a plausible interpretation) of the relevant legislative provisions, based on the limited evidence available at the early stage of the proceedings.

Takeaways

This is a notable decision in that it provides guidance from the SCC on disclosure decisions frequently addressed by publicly traded issuers. The SCC’s adoption of a flexible and contextual interpretative approach to the concept of a “material change”, and its commentary as to how the change must be in the “business, operations or capital” of the issuer and how an external event may have that effect, are instructive.

Issuers must also be mindful that class action claims will only have to demonstrate a reasonable or realistic chance of success to be permitted to proceed through discovery and to trial.

For further information, please contact any member of our Capital Markets Group.