The court also clarified the test plaintiffs need to meet for permission to sue under securities law
In a move set to impact how companies decide to make securities disclosures, the Supreme Court of Canada has ruled in favour of a flexible interpretation of “material change,” a concept that triggers time-sensitive reporting obligations under Ontario securities law.
In its 8-1 decision on Friday, the high court also clarified the criteria plaintiffs need to meet to file a lawsuit alleging a company failed to comply with their timely disclosure obligations under Ontario’s Securities Act. Under the act, plaintiffs must obtain leave, or permission, from a court to bring such a lawsuit.
The high court stated that plaintiffs only need to demonstrate that a company is likely to have violated securities law and that there is evidence to support this claim, paving the way for a proposed class action lawsuit that investors brought against a mining company to proceed.
“This is the first time that the court has said – and in great detail – what a ‘material change’ is and how that satisfies the leave test,” Jay Strosberg, a managing partner at Strosberg Wingfield Sasso LLP, who represents the plaintiffs.
The decision “provides a framework for every single reporting issuer to go through when they think there’s been a change,” Strosberg adds. “That will dictate whether or not they have to go to the market early and tell people.”
Amanda McLachlan, a partner at Bennett Jones LLP who specializes in securities law but is not affiliated with the case, says Friday’s ruling is significant for companies that are reporting issuers.
“The court is being pretty clear in this decision that the broader disclosure standard that’s being proposed by their definition of ‘material change’ is, in their view, sound as a matter of public policy,” McLachlan says.
This is because the broader disclosure standard promotes what the high court “describes as the fundamental purposes of the Securities Act and is rooted in… the asymmetry of information that exists between the manager of an issuer and the investors,” she adds.
Justice Mahmud Jamal authored the decision for the majority. Justice Suzanne Côté wrote the dissent.
The case involves Lundin Mining Corporation, whose shares trade on the Toronto Stock Exchange. In 2017, the company discovered instability in the walls around one of its mines in Chile. A rockslide occurred a few days later, forcing the mine to slow down its operations and lower its production forecast.
Lundin did not immediately share this information with investors. Instead, the company shared the information a month later, during a regularly scheduled news release with operational updates. The company’s share price fell by 16 percent a day after the disclosure, prompting an investor, Dov Markowich, to file a proposed class action. Markowich had purchased shares in Lundin after the company discovered instability in the Chilean mine, but before the company disclosed the situation.
A judge at the Ontario Superior Court of Justice declined to give Markowich leave to sue under the Securities Act, reasoning that the Chilean mine’s instability and rockslide qualified as “material facts” rather than “material changes.”
Under the Securities Act, companies only need to periodically disclose a "material fact," which is defined as a fact “that would reasonably be expected to have a significant effect on the market price or value of the securities.” In contrast, companies must immediately report a “material change,” which is a change in the “business, operations, or capital” of a company that would reasonably be expected to significantly impact its market price or the value of its securities.
The Ontario Court of Appeal disagreed with the lower court. The appellate court said the lower court defined “material change” too narrowly. It permitted Markowich to pursue his lawsuit and ordered the lower court to review the plaintiff’s bid for class certification.
Lundin appealed the appellate court’s decision to the Supreme Court of Canada, but the high court dismissed the appeal on Friday.
Referencing the Ontario Superior Court of Justice’s interpretation of “material changes” in the Securities Act, Jamal wrote that in his view, the lower court “erred by relying on restrictive definitions of ‘change,’ ‘business,’ ‘operations,’ and ‘capital,’ and then erred by applying those definitions to determine whether there was a reasonable possibility that there had been a material change.”
Jamal said Ontario lawmakers “intentionally left these terms undefined to allow the legislation to be applied flexibly and contextually to a wide range of industries and corporate structures.” He added that the Securities Act’s disclosure standards should be used to promote the law’s purpose of evening the playing field between companies that are reporting issuers and investors.
“Adopting rigid definitions would ossify the Securities Act and would frustrate the statutory purpose,” the justice wrote.
The justice also clarified that under the Securities Act, the test courts should use to determine whether to give a plaintiff permission to sue requires “‘plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.’”
Jamal found that the instability of the Chilean mine and the resulting rockslide affected Lundin’s operations, influencing its planning and production forecast, which supports Markowich’s claim that a change had occurred. He concluded that Markowich met the leave test under the Securities Act and should have been given permission to proceed with his lawsuit.
In her dissent, Côté said she would have allowed Lundin’s appeal and restored the Ontario Superior Court of Justice’s dismissal of Markowich’s case.
According to the justice, “material change” refers to changes in high-level aspects of a company’s business, operations, or capital. With this definition, Markowich would not be able to establish that he had a reasonable possibility of successfully proving at trial that the mine’s instability or the rock slide qualified as a “change” requiring immediate disclosure under securities law.
Still, Côté agreed with the majority that the term “material change” needed to remain flexible.
“To decipher whether a ‘material change’ has occurred, the inquiry will always be fact‑specific,” the justice wrote. “By rejecting overly stringent parameters, we preserve the flexibility that courts require to consider the unique facts of each case.
“But, flexibility need not devolve into ambiguity, uncertainty, or disregard for legislative choices – this benefits neither courts and tribunals nor issuers, investors, officers, or directors.”
Moving forward after Friday’s decision, McLachlan says she could see instances where a company’s board “feels like they may be driven to issue disclosure more quickly than they might like, because [the high court’s broader definition] does seem to capture a broader net of things as potentially material changes which need to be disclosed within a shorter time frame.
“It’s pretty significant from the issuer's perspective,” she adds.
Counsel for Lundin did not immediately respond to a request for comment.
