Proceed with caution: Supreme Court confirms framework for assessing “Material Changes” requiring timely disclosure in Lundin Mining Corp. v Markowich

By Andrew V. Burke, Jason W.J. Woycheshyn, David F. Slipp, and Noah Archibald

Take note all public companies – not all operational surprises can be quietly managed. The Supreme Court in Lundin Mining Corp. v. Markowich provided rare guidance on the scope and timing of corporate disclosure obligations by confirming the test for “material changes” requiring timely disclosure under the Ontario Securities Act (the “Act”) and equivalent provincial and territorial legislation in Canada. The decision also addresses the leave standard that investors must meet to bring an action for a breach of an issuer’s disclosure obligations.

Background

In October 2017, Lundin Mining Corporation (“Lundin“) experienced pit wall instability and a rockslide at one of their mines, which led to a decrease in the mine’s production forecast by 20 percent. The mine accounted for 55-60 percent of Lundin’s total sales revenue in 2016 and 2017. Lundin chose not to promptly disclose the pit wall instability or the rockslide, instead waiting about a month to disclose the incident as part of Lundin’s periodic updates to investors.

After disclosing the rockslide, Lundin’s share price fell 16 percent, which resulted in a loss of over $1 billion in market capitalization. Soon after, Dov Markowich, an investor who bought shares in Lundin after the rockslide, but before its disclosure, applied for leave to commence an action for breach of Lundin’s timely disclosure obligations and for certification of a class proceeding. The investor argued that the pit wall instability and rockslide constituted “material changes” in the business, operations, or capital of the corporation. Importantly, under the Act, “material changes” must be reported to shareholders immediately, but “material facts” must only be disclosed periodically.

Lower court rulings

A motion judge at the Ontario Superior Court of Justice denied leave for Markowich to bring the action, finding that there was no reasonable possibility that the investor could show that either the pit wall instability or rockslide constituted a material change. He found that since Lundin continued its business and operations as a mining company, there was no reasonable possibility that the pit wall instability or rockslide resulted in a change in Lundin’s “business, operations, or capital’ since it did not change its line of business, stop operating the mine, or change its capital structure. The motion judge noted that pit instability and rockslides are inherent risks of open pit mining, and Lundin conducted business under those risks. Since there was no “change”, Lundin was not required to disclose the developments in a timely manner.  

The Court of Appeal for Ontario allowed Markowich’s appeal, finding that the motion judge adopted an overly restrictive interpretation of a material change. Based on a broader interpretation of what constitutes a “change”, the Court of Appeal held that there was a reasonable possibility the investor could prove that there were material changes to Lundin’s operations resulting from the pit wall instability and rockslide, considering that there were changes to Lundin’s mining schedule and reductions in its next annual production forecast.

The Supreme Court’s decision

The Supreme Court dismissed Lundin’s appeal, agreeing with the Court of Appeal that the motion judge erred by adopting an overly restrictive view of what constitutes a material change. The Court held that the Act was broadly drafted to protect investors such that what constitutes a material change should be flexible depending on the circumstances.

The Court confirmed the test for a material change, being where:

1.         there is a change in the business, operations, or capital of an issuer; and

2.         that change is material, meaning that it would reasonably be expected to have a significant effect on the market price or value of the securities.

In assessing the first test of “change”, the Court rejected the lower court’s interpretation that required a change to be “important and substantial” into the definition of change itself. A change is a change. If there is a change, it then gets assessed for materiality. Where both components are present, a public company is required to make timely disclosure of the event.

The Court’s guidance differentiating material facts, which must be disclosed in a public company’s periodic disclosure, from material changes, which necessitate timely disclosure to the public, is largely consistent with long-running guidance from securities regulators in National Policy: NP-51-201 – Disclosure Standards:

• Internal versus External Events: External events, including political, economic, and social developments, will not constitute material changes unless they result in a change to an issuer’s business, operations, or capital. This distinction provides some relief to issuers from needing to continually assess and disclose how external political, economic, and social developments impact their business.
• Negotiations or Internal Deliberations: Mere negotiations or internal deliberations will usually not constitute material changes requiring timely disclosure. For example, negotiations would generally not be a material change unless there is a substantial likelihood for the transaction to be completed with commitment from both parties.
• Material Changes are Contextual: The Court also emphasized that the meanings of “change”, “business”, “operations”, and “capital” were left intentionally open-ended, but that what constitutes a material change will be a matter of judgment and common sense depending on the context. What constitutes a material change for one issuer may not constitute a material change for another.

The Court also provided some guidance on the test for leave to bring an action under s 138.8(1) of the Act, which requires that (i) the action be brought in good faith; and (ii) there be a reasonable possibility that the action will be resolved at trial in favour of the Plaintiff. The Court confirmed that this test does not require that a Plaintiff prove that the action will succeed on a balance of probabilities, but that they show “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”. This plausibility analysis is not based on a plausible interpretation of the legislation, but rather a plausible application of the legislation to the evidence.

Here, the Supreme Court held there was a reasonable possibility that the investor could succeed at trial by showing that there were material changes arising from the pit wall instability and rockslide.

Business implications

The Supreme Court has confirmed a contextual approach that is largely consistent with longstanding guidance from securities regulators and rejects a restrictive interpretation of what constitutes a “change”. Commentary relating to external events and mere negotiations are not new.

In light of the Supreme Court’s latest guidance, public issuers should strive to ensure that disclosure to investors remains balanced and factual to limit potential liability, and in so doing err on the side of disclosure when in doubt.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact the authors, or a member of our Securities Group.

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