In recent decisions in Markowich v. Lundin Mining Corporation[1] and Peters v. SNC-Lavalin Group Inc,[2] the Court of Appeal for Ontario provided guidance on the requirement to disclose a “material change” under Canadian securities legislation in the context of motions for leave to proceed with proposed securities class actions.
BACKGROUND
Markowich v. Lundin Mining Corporation
Lundin Mining Corporation (Lundin) operated an open-pit copper mine in Chile. On October 25, 2017, a pit wall instability was detected, resulting in a redesign of the affected area while mining operations continued. On October 31, 2017, the pit wall instability failed, causing a rockslide which restricted access to parts of the mine.
Lundin did not immediately publicly disclose the pit wall instability or rockslide at the time the events occurred. Lundin’s first disclosure occurred in its news release on November 29, 2017. The news release reported that the events impacted the 2018 and 2019 production forecast, with expected copper production to be 20% less than the previous outlook for 2018. Following disclosure, on November 30, 2017, the price of Lundin’s securities on the TSX fell from $8.69 to $7.52, representing a 16% decline, or a reduction of over $1 billion in market capitalization. Lundin’s second disclosure also occurred on November 30, 2017, where it included detailed information regarding the pit wall instability and rockslide and the impact on the mine’s operations.
Peters v. SNC-Lavalin Group Inc
SNC-Lavalin Group Inc (SNC) provides global engineering and project management services. In February 2015, SNC and two of its subsidiaries were charged with fraud under the Criminal Code and corruption under the Corruption of Foreign Public Officials Act in connection with their operations in Libya. SNC issued a press release on March 5, 2015, acknowledging that the charges could have a significant negative impact on its reputation and ability to do business. SNC’s regular filings consistently disclosed the uncertainty caused by its pending prosecutions.
From April to August 2018, SNC met with prosecutors to discuss the possibility of being invited to negotiate a remediation agreement, which would have stayed the prosecutions and allowed it to operate under certain conditions. On September 4, 2018, prosecutors advised SNC by telephone that they did not intend to invite SNC to negotiate a remediation agreement, but they would continue accepting submissions until they had completed their review. SNC did not immediately disclose this conversation. Discussions continued until October 9, 2018, when SNC was finally advised that it would not be invited to negotiations.
The following day, SNC issued a press release disclosing that it would not be invited to negotiate a remediation agreement. Following disclosure, the price of SNC’s shares on the TSX dropped from $51.88 to $44.96, representing over a 13% decline and a loss of over $600 million in market capitalization.
THE CLAIMS
In Markowich, the plaintiff was a Lundin shareholder who commenced an action against Lundin and its directors on behalf of all persons who acquired Lundin securities between the date the pit wall instability was detected (October 25, 2017) and the date it and the rockslide were disclosed (November 29, 2017). The plaintiff alleged that the defendants failed to make timely disclosure, contrary to the requirements of section 75 of the Securities Act and equivalent legislation in other provinces.
In Peters, the plaintiff was a SNC shareholder who commenced an action again SNC and its former executives on behalf of all persons who acquired SNC securities between the date SNC was informed by phone call that it would not be invited to negotiate a remediation agreement (September 4, 2018) and the date that it disclosed that information (October 10, 2018). As in Markowich, the plaintiff alleged that the defendants failed to make timely disclosure, contrary to the requirements of section 75 of the Securities Act.
DECISIONS ON MOTIONS FOR LEAVE TO PROCEED WITH CLAIM
In both Markowich and Peters, the respective motion judges dismissed both the motion for leave under section 138.8 of the Securities Act and the motion for certification under the Class Proceedings Act, 1992.
Markowich v. Lundin Mining Corporation
With respect to the motion for leave, although the motion judge found that the action was brought in good faith, he was not satisfied that there was a reasonable possibility that the plaintiff could succeed at trial by establishing that the pit wall instability and rockslide were “material changes” within the meaning of the Securities Act, as these events did not constitute a “change in the business, operations or capital” as required by the definition of “material change” under section 1(1) of the Securities Act. Relying on expert evidence that pit wall instability and rockslides were common occurrences in open-pit mining, he found that the events did not affect Lundin’s ability to continue its mining operations, did not affect Lundin’s line of business, and did not cause any changes in Lundin’s capital. Nevertheless, the motion judge accepted that if the events constituted a “change,” there was a reasonable possibility that the plaintiff could show that they were “material” because they would reasonably be expected to have a significant impact on the market value of Lundin’s securities.
Peters v. SNC-Lavalin Group Inc
Similarly, the motion judge in Peters found that the action was brought in good faith, but was not satisfied that there was a reasonable possibility that the plaintiff could succeed at trial by establishing that the September 4, 2018, call with prosecutors was a “material change” within the meaning of section 1(1) of the Securities Act. The motion judge found that there was no change to SNC’s risk before and after the phone call because it faced the prospect of prosecution at all times, the call did not foreclose any possibility that SNC could be invited for negotiations at a later time because it was a “dynamic ongoing situation,” and that any information SNC could have disclosed was already publicly available, including the risks associated with conviction.
ISSUES ON APPEAL
Markowich v. Lundin Mining Corporation
The Court of Appeal identified two main issues on appeal:
A. Whether the motion judge erred in adopting an overly narrow interpretation of “change in the business, operations or capital,” especially in the context of a motion for leave; and
B. Whether the motion judge’s narrow interpretation of these terms led him to resolve conflicts and gaps in the evidence that should be left for trial.
The Court of Appeal held that the motion judge should have taken a more generous approach to the interpretation of “change in the business, operations or capital” which would have resulted in leave to proceed being granted for the statutory cause of action. This is especially the case since, on a motion for leave, the court was only to consider whether the plaintiff put forth a “plausible” interpretation of the statute.
Peters v. SNC-Lavalin Group Inc
The Court of Appeal identified three main issues on appeal:
A. Whether the motion judge erred in finding that the September 4, 2018, call was not a “change” within the meaning of “material change” because he adopted an overly narrow interpretation of “change” and did not consider that a “change” could include the risk of a change in SNC’s business, operations or capital;
B. Whether the motion judge erred in failing to find that the September 4, 2018, call was “material” within the meaning of “material change”; and
C. Whether the motion judge misapplied the test for leave by making findings of fact that should be left for trial.
In contrast to Markowich, the Court of Appeal held that the motion judge adopted an expansive and generous approach to the term “change” in finding that the September 4, 2018, call did not constitute a “change” in SNC’s business, operations or capital. The motion judge relied on largely uncontested evidence in making his decision and he correctly recognized that although a change in risk can constitute a “change” within the meaning of the Securities Act, the phone call was neither a change in risk, nor a change in SNC’s business, operations, or capital.
INTERPRETATION OF “MATERIAL CHANGE”
Under section 1(1) of the Securities Act, a “material change” is “a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any securities of the issuer.” In contrast, a “material fact” is “a fact that would reasonably be expected to have a significant effect on the market price or value of the securities.” Pursuant to section 75 of the Securities Act, a material change must be disclosed as soon as practicable, but a material fact does not need to be disclosed “forthwith.”
The Court of Appeal explained that the distinction between “material fact” and “material change” does not relate to the magnitude of the change but, rather, depends on whether the change was external to the company as opposed to whether the change was in the business, operations or capital of the company. The Court of Appeal held that “changes” in the business, operations or capital of a company do not include external factors outside of the company’s control or changes in quarterly results on their own.
Further, a “material change” does not need to rise to the level of effecting a company’s ability to conduct its business, as the motion judge erroneously held.[3] Rather, losing the ability to conduct operations is a circumstance, amongst other potential circumstances, that constitutes a “change” in the “operations” of an issuer.
The Court of Appeal, endorsing a more expansive interpretation of “change” in Peters v SNC-Lavalin Group Inc,[4] explained that the meaning of “change” is fact specific and there is no “bright-line test.” For example, a material change could include developments affecting the company’s resources, technology, products or market. Accordingly, the Court of Appeal drew a distinction between developments and differences that have occurred at a reporting issuer, compared to ongoing stability and a continuing state of affairs.
Thus, one of the only restrictions on the meaning of “change” is that changes external to an issuer that may affect share price but that do not result in a change in the business, operations or capital cannot qualify as a material change. An otherwise unexplained change in results would not qualify as a “material change” unless there was a change to the business, operations or capital of the company. A change in operations may refer to a broad range of changes within a company, including, as the Court of Appeal identified here, an interruption in production and a change in scheduling due to an accident or equipment failure.
Court of Appeal’s decisions
Markowich v. Lundin Mining Corporation
Under the expansive definition of “change,” and in the context of a leave motion under section 138.8 of the Securities Act, the Court of Appeal determined that it was an error for the motion judge to hold that the plaintiff could not establish that a change occurred in Lundin’s operations. Under the proper test, the Court of Appeal determined that the evidence should have led the motion judge to conclude that there was a reasonable possibility that the plaintiff could demonstrate that the pit wall instability and rockslide constituted a change in Lundin’s operations. Further evidence regarding the impact on Lundin’s operations was presumably available at discoveries and there was uncontested evidence that Lundin had to modify its scheduled operations, resulting in an expected decrease in production. Accordingly, there was a reasonable possibility that the plaintiff could succeed at trial in demonstrating that these were material changes that Lundin should have disclosed forthwith. The Court of Appeal granted leave for the action to proceed and remitted the issue of certification to the Superior Court for determination.
Peters v. SNC-Lavalin Group Inc
In contrast to Markowich, the Court of Appeal upheld the decision of the motion judge in finding that there was no reasonable possibility, based on a plausible interpretation of the Securities Act that the September 4, 2018, phone call represented a change in SNC’s business, operations or capital. Although a change in risk can constitute a change within the meaning of the Securities Act, there was no evidence that the phone call constituted a change in SNC’s risk because SNC had already disclosed the risks associated with conviction. SNC faced the possibility of a conviction and debarment from participating in Canadian projects before and after the phone call. Further, SNC’s prospects at achieving a remediation agreement were always problematic and uncertain, and there was never any assurance that SNC would be invited for negotiations or, if it was invited, whether it could achieve a remediation agreement. SNC’s investors were well informed of SNC’s risks given that SNC had consistently disclosed them in its regular filings. Accordingly, the Court of Appeal affirmed the decision of the motion judge and dismissed the appeal.
TAKEAWAYS
The expansive definition of “change” adopted by the Court of Appeal has the potential to increase liability for a failure to disclose “material changes” pursuant to the Securities Act. A change does not need to rise to the level of physical impairment of operations before it must be disclosed. Rather, reporting issuers should consider whether any change to a company’s business, operations or capital that is not external or outside of the company’s control should be disclosed immediately to protect against potential shareholder claims. Markowich illustrates that even if there is an external influence upon the company’s business, operations or capital, if it affects production and results in an internal decision to adjust operations, such a decision may fall within the definition of “change” and if material, the information must be disclosed. In contrast, Peters illustrates that while a change in risk may constitute a “change” within the meaning of the Securities Act, if a reporting issuer’s risk has not changed after an event has occurred, it may not fall within the definition of “change” and thus, will not need to be disclosed forthwith. Nonetheless, it is prudent to consider the expansive and generous approach to the meaning of “change” when considering whether to make disclosure.
For more information on this topic, please contact the authors, Matthew Fleming or Brandon Barnes Trickett.
The authors would like to thank Janson Fu for his assistance with this article.
[3] 2008 ONSEC 18, aff’d 2010 ONSC 3926 (Div. Ct.).
