Overview:

The Ontario Court of Appeal recently released a pair of decisions1 considering whether events give rise to a "material change" in the "business, operations or capital" of publicly traded companies, triggering immediate reporting obligations under the Securities Act.

In SNC, the question was whether a material change had occurred when it received a telephone call from the Public Prosecution Service of Canada ("PPSC") sufficiently informed SNC-Lavalin Group Inc. ("SNC-Lavalin") that it would be the subject of prosecution in relation to its activities in Libya. In LMC, the question was whether Lundin Mining Corporation ("Lundin") was required to disclose forthwith a report of an unstable pit wall and subsequent rockslide at its open-pit mine.

In both cases, the Court of Appeal confirmed that whether an event constitutes a "material change" broadly depends on whether the event gives rise to a qualitative "change" to the "business, operations, and capital", and if so, whether the change is material, such that it would reasonably be expected to have a significant effect on the value of the issuer's market capitalization.

Peters v SNC-Lavalin: "material change" includes the risk of change

Background:

In 2015, the Royal Canadian Mounted Police charged SNC-Lavalin with one count of fraud and corruption under the Criminal Code2 and the Corruption of Foreign Public Officials Act.3 The evidence indicated that a conviction concerning either of these charges would have a devastating impact on SNC-Lavalin's business.

By telephone call on September 4, 2018, the PPSC informed SNC-Lavalin that it would not be invited to negotiate a remediation agreement which, if granted, would have resolved the pending prosecution; however, the PPSC agreed to receive further submissions on the issue.

On October 9, 2018, the PPSC informed SNC-Lavalin that the decision to refuse a remediation agreement was final. SNC-Lavalin issued a press release the next day, and its share value plummeted by 13%, resulting in a loss of over $600 million in market capitalization.4

The Decision Below:

The plaintiff sought leave under s. 138.8, Part XXIII.1, of the Securities Act5 to bring a statutory cause of action against SNC-Lavalin for its alleged failure to forthwith disclose its call on September 4, 2018 with the PPSC as a "material change" to its "business, operations or capital".6

The motion judge disagreed with the plaintiff,7 because:

  • the prospect of achieving a remediation agreement before September 4, 2018 was uncertain, which did not change following the call;
  • the call could not have signaled finality to the possibility of achieving a remediation agreement, as the PPSC agreed to consider additional submissions on the issue; and
  • in a dynamic process like a negotiation, determining whether a change has occurred also depends on what the audience for a notice of a material change already knows. Here, it was already known that there was a risk of conviction, which remained unchanged following the call.

The motion judge concluded that because there was no material change in the risk of a conviction following the call on September 4, 2018,8 there could be no failure to disclose forthwith (and no feasible statutory cause of action), and dismissed the plaintiff's motion.9

The Court of Appeal's Decision:

Writing for the Court, Favreau J.A. upheld the decision below, confirming that the two-step analysis to determine whether an event is a material change requires the Court to consider whether the event gives rise to a qualitative "change" to the "business, operations, and capital", and if so, whether the change is material, such that it would reasonably be expected to have a significant effect on the issuer's market capitalization.10

Notably, the Court held that a change in the risk of an event can give rise to a qualitative change to the business, operations and capital of an issuer.11 However, as there was no such change in risk arising out of the call between SNC-Lavalin and the PPSC, the motion judge made no legal error in his decision below.

Markowich v Lundin Mining Corporation: "material change" is defined broadly

Background:

On October 25, 2017, Lundin received a report that a pit wall in one of its open-pit mines was unstable, and evacuated personnel.12 Six days later, a rockslide occurred that impacted its 2018 and 2019 production forecasts. Lundin did not disclose the report or rockslide until it issued a press release on November 29, 2017.13 The following day, Lundin's share price fell by 16%, resulting in a single-day loss of more than $1 billion to its market capitalization.

The Decision Below:

The motion judge held that a material change as contemplated by the Securities Act does not arise unless the event at issue results in a "different position, course, or direction to a company's business, operations, or capital".14

Because the wall instability and rockslide were inherent risks in the industry and did not prevent Lundin from further use of the mine, the motion judge dismissed the motion,15 reasoning that these events could not give rise to a material change to Lundin's business, operations, or capital.

The Court of Appeal's Decision:

Unlike in SNC, Favreau J.A. overturned the decision below, finding that the motion judge erred in his overly narrow interpretation of "change", "business", "operations", and "capital".16

The Court of Appeal explained that while there is a distinction between a "material fact" (an event external to the business, operations, and capital, such as in Danier Leather17), and a "material change", the Securities Act is remedial legislation intended to protect investors by imposing broad disclosure obligations on reporting issuers.18 Therefore, in considering whether the report and rockslide broadly qualified as a "qualitative change" under the first prong of the two-step analysis, the Court held that the plaintiff had shown a "reasonable possibility" that these events were material changes that ought to have been disclosed forthwith.19

Takeaways:

The Court of Appeal's decisions in SNC and LMC are significant because:

  • SNC and LMC confirm the distinction between a material fact and a material change. Unlike a material change, a material fact is to the reporting issuer. A publicly traded company's obligation to forthwith issue and file a news release under the Securities Act is limited to a material change.
  • SNC and LMC confirm the two-step analysis for determining whether a material change has occurred as prescribed by the Securities Act:
  • The Court must first consider whether the issuer has experienced a qualitative "change" to its "business, operations and capital." Changes external to an issuer that may affect share price but do not result in a change to the business, operations, or capital do not qualify as a material change.
  • Once the Court has established that a "change" has occurred, the Court must determine whether the change is "material" such that it would reasonably be expected to have a significant effect on the market price of the issuer's securities.
  • Determining whether an event is a material change must be considered broadly, and includes a change in risk to an organization's business, operations or capital. While SNC refers exclusively to the risk of an adverse event, presumably the Court's analysis would apply equally to increased chances of a beneficial event, although this remains to be decided.

Footnotes

1. Peters v SNC-Lavalin Group Inc, 2023 ONCA 360 [SNC]; Markowich v Lundin Mining Corporation, 2023 ONCA 359[LMC].

2. RSC 1985, c C-46, s 38.

3. SC 1998, c 34, s 3(1)(b).

4. Peters v SNC-Lavalin Group Inc, 2021 ONSC 5021 at paras 4,86 [SNC ONSC Decision].

5. RSO 1990, c S 5, s 138.

6. SNC ONSC Decision, supra note 4 at para 16.

7. Ibid,at para 160.

8. SNC, supra note 1 at paras 93-95.

9. Ibid,at para 127.

10. Ibid,at paras 73; Theratechnologies Inc v 121851 Canada Inc, 2015 SCC 18 at para 40.

11. SNC, supra note 1 at para 173.

12. Markowich v Lundin Mining Corporation, 2022 ONSC 81 at para 2.

14. Ibid, at para 151.

15. Ibid, at para 278, 52.

16. LMC, supra note 1 at para 7.

17. Kerr v Danier Leather, 2007 SCC 44 at para 32.

18. LMC, supra note 1 at para 45.

19. Ibid, at paras 87-89.

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