Reporting issuers in Ontario may need to be more vigilant in deciding when to issue a press release to comply with their continuous disclosure obligations under the Ontario Securities Act. This is the conclusion we draw from last month's decision of the Court of Appeal for Ontario in Markowich v. Lundin Mining Corporation, 2023 ONCA 359. (The Court released a companion decision the same day, Peters v. SNC-Lavalin Group Inc., 2023 ONCA 360, that follows the reasoning in Lundin.)
Section 75(1) of the Securities Act requires a reporting issuer to issue and file a news release forthwith "where a material change occurs in [the issuer's] affairs".
According to the Supreme Court of Canada's decision in Kerr v. Danier Leather Inc., 2007 SCC 44, whether there has been a material change requires a two-step analysis:
- first, has been a change in the business, operations, or capital of the issuer, and
- second, if there was a change, was it material, i.e., it would be expected to have a significant impact on the value of the issuer's shares.
The Court of Appeal in Lundin expands on the first step of the analysis, the meaning of "change".
The Facts
In October 2017, Lundin Mining Corporation (LMC) received a report that a pit wall in an open pit mine in Chile was unstable. LMC evacuated its personnel from the mine. Six days later, the pit wall gave way, leading to a rockslide.
LMC only disclosed the events one month later. The rockslide led to revisions in its production guidance, resulting in deferred copper production equating to less than a 5% change for the year. However, the day after the announcement, LMC's share price on the TSX fell from $8.96 to $7.52, a decline of 16% and over $1 billion of market capitalization.
The appellant Dov Markowich brought a motion under s. 138.8 of the Securities Act for leave to bring a statutory cause of action against LMC for failing to disclose forthwith a material change in its business, operations or capital.
Mr. Markowich was unsuccessful on his original motion, but prevailed on appeal.
Motion Judge
Justice Glustein dismissed Mr. Markowich's motion for leave on the grounds that there was no reasonable possibility of showing at trial that the pit wall instability and the rockslide were "material changes". Justice Glustein interpreted "change" in "material change" to mean that Mr. Markowich had to prove that:
the pit wall instability or rockslide led [LMC] to change its lines of business, or to stop operating the mine, or to change its capital structure.
Relying on evidence that such events were common occurrences in mining, and that they did not affect LMC's viability as a business, Justice Glustein found that there had been no material change.
Court of Appeal for Ontario
The Court of Appeal disagreed with Justice Glustein's interpretation of "change in the business, operations or capital" and overturned his decision. The Court of Appeal ruled that Justice Glustein had erred by adopting a definitive and overly restrictive interpretation of the terms, that was inconsistent with prior court decisions.
The Court of Appeal ruled that a "change" must be looked at more broadly in reference to the terms "business, operations or capital", and in the fact-specific context of each case.
Specifically, the Court of Appeal found that Justice Glustein had erred in finding that, because there was no evidence that the pit wall instability or rockslide led LMC to change its lines of business, stop operating the mine, or change its capital structure, Mr. Markowich could not establish that a 'change in the business, operations or capital,' had occurred.
The Court of Appeal concluded there was no rationale for the narrow definition Justice Glustein had adopted. The only restrictions on the meaning of "change", the Court held, is that it cannot consist of external factors outside of the company's control, or unexplained changes in results. Rather, it must be a change in the company's business, operations or capital in the context of the facts of each case.
Importantly, the Court ruled that Justice Glustein erred in finding that every change in "business, operations or capital" must rise to the level of affecting a company's "ability to conduct its business." In the first step of the two-step analysis explained above, "change" is qualitative only.
The significance of the change only comes into play in the second step, i.e., whether it was a material change. Step one concludes if the evidence supports a finding that there has been a change in business, operations or capital. That triggers step two. The question becomes whether that change would reasonably be expected to have a significant impact on the share price of the issuer as a result of the change.
In Lundin, the Court of Appeal stated, "a change is a change and it should be defined broadly, especially in the context of a leave motion under s. 138.8 of the Securities Act". The Court also held that the phrase "business, operations or capital" is broad. "Operations", for example, can refer to a broad range of changes within a company including, as was the case in Lundin, an interruption in production and a change in scheduling due to an accident or equipment failure.
Danier Revisited
Before Lundin, the leading authority on "material change" was the Supreme Court's decision in Kerr v. Danier Leather.
In Danier, the Supreme Court held that a change in forecasted "results" without a change in business, operations, or capital structure, is not a material change.
Danier Leather Inc. had issued a prospectus for an initial public offering with the projected results for the fourth quarter of the fiscal year. Before the public offering closing, the company became aware that fourth quarter results were lagging behind its forecast due to hot weather. Danier did not disclose this before closing.
In the Supreme Court, the claimants argued that the intra-quarterly results were a "material change" that should have been disclosed. The Supreme Court disagreed. Although there had been a change in forecasted results due to unusually hot weather, there was no evidence that Danier had made a change in its business, operations or capital during the period of distribution.
Like Justice Glustein in Lundin, the Supreme Court in Danier narrowed the definition of "operations". The Supreme Court ruled that the change in the "results" of Danier's operations did not amount to a material change because that would conflate "operations" with "results of operations". However, the Supreme Court noted that poor intra-quarterly results may reflect a material change in business operations, not by the results themselves, but if there has been a corresponding change in the business, operations, or capital.
The Takeaway
It is arguable that Lundin broadens the scope of "material change" as defined in Danier.
For reporting issuers, Lundin suggests that greater vigilance is required in deciding whether to issue a press release under the continuous disclosure obligations of the Securities Act.
Both Danier and Lundin concerned issuers who needed to amend their forecasted results. In Danier, the Supreme Court found that weather which was external to the company but impacted its results was not a change in its operations. By contrast, in Lundin, the Court of Appeal found that an unstable pit wall leading to a rockslide, which also impacted LMC's results, was a change in its operations.
Keeping these two decisions in mind, one might ask whether a cyber incident that impacted a reporting issuer's results would be a "change" under the Securities Act, or would it be an external event, and thus not a change in its operations. The question remains open.
Lundin teaches us that reporting issuers need to be constantly reassessing situations to determine when they become material changes. When an event first happens, it may not be readily apparent that it will have a material impact on an issuer's share price. Early disclosure may be the most prudent course, even before materiality is determined, as it can reduce the risk of liability down the road.
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