(May 24, 2023) The Ontario Court of Appeal (Simmons, Benotto and Favreau JJ.A.) released a long waited decision in Markowich v. Lundin Mining Corporation concerning the interpretation and application of a “material change” within the Securities Act and when a responsible issuer must make disclosure of the material change. This Decision underscores the very important obligations-responsibilities responsible issuers have to their investors and market place. Many members of the legal industry also view this is a signal to corporate lawyers to advise their clients to error on disclosure with an explanation so to allow investors to have full-optics into their investment and decide to believe in management or liquidate their investment to a more conservative investment.
The general facts are the following: The investor purchased shares on October 15, 2017. The material change that should have been disclosed, as alleged by the investor, was that the corporation learned of structural instability on October 25, 2017. The company evacuated employees but did not make public disclosure. On October 31, 2017, the structural instability turned into a major adverse event effecting over 5% of the company’s gross income. However, the company did not disclose the facts until November 29 and 30, 2017. On November 30, 2017, the market’s reaction was harsh and immediate ~ a sell-off and sending the shares down 16% (e.g., because of the lost revenue, cost of fixing the structural problems, and reflection upon management’s poor decisions).
The motion (lower ~ first court) dismissed the investor’s claim on the basis that this news did not have to be disclosed until when the corporation related its 3Q 2017 Management Discussion & Analysis (“MD&A”).
Pausing for the reader. It is noteworthy that a large majority of all shareholder litigation caselaw ~ jurisprudence ~ has focused upon “material facts” opposed to “material changes” so it is understandable why this appeal was necessary. The important difference between “material fact” and “material change” is that a material change event triggers the responsible issuer to disseminate a news release no more than 10-days after the event. A material fact event only requires the responsible issuer to make disclosure the next time it decides to report on the substance of the event, e.g., the quarterly MD&A. In other words, a material change event triggers a news release whereas a material fact can be disclosed in the next MD&A.
The Court of Appeal, however, overturned and conveyed that:
The case law has established that the definition of “change” was not meant to include its magnitude, but rather its qualitative nature. Changes external to an issuer that may affect share prices but that do not result in a change in the business, operations or capital cannot qualify as a material change. However, changes in the business, operations or capital of an issuer can qualify as a material change as long as they are “material” in the sense that they “would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer”.
With the proper legal test, the available evidence should have led the motion judge to conclude that there was a reasonable possibility that [Investor] could demonstrate that the pit wall instability and rockslide constituted a change in [Company]’s operations. There was some evidence that the open pit mining operation was shut down for a period of time. There was competing evidence over the length and extent of the shutdown, but, as held in Rahimi, at para. 48, evidence not yet available is relevant on a motion for leave. In this case, [Company] provided no direct evidence on this issue on the motion, and such evidence will presumably be available at discoveries. More importantly, there was uncontested evidence that, as a result of the rockslide, [Company] had to modify its schedule for the phased mining of the open pit, its expected production for 2019 went down, and it needed to make up for this reduced production with lower grade ore for 2019.
At trial, with the benefit of better evidence on the immediate aftermath of the pit wall instability and rockslide, there is a reasonable possibility that [Investor] could establish that these were changes in [Company]’s operations. More importantly, given that the motion judge was satisfied that these events, even though he did not accept they were changes to [Company]s business, operations or capital, could reasonably be expected to affect stock prices, I am satisfied that there is a reasonable possibility that [Investor] could succeed at trial in demonstrating that these were material changes that [Company] should have disclosed forthwith.
This Court of Appeal decision seems insightful and correct, as well as intellectually honest. But for Ontario’s Draconian Adverse Cost Awards against Investors this type of Shareholder Litigation, Class Action, or individual Securities Act cause of action would have been advanced a decade ago.
Focusing on the law, here, a structural event that resulted in a modification of operations (structural and capital from delayed revenues). We are being watchful as to analogous situations with responsible issuers that encounter financial troubles (analogous to a pit wall cracking) that result in ad hoc Board Meetings and engagement of Investment Banks to raise capital at expensive terms or sell off assets (don’t disclose said event or meetings) but simply announce a bankruptcy type proceeding, e.g., iAnthus, Guestlogix, North American Palladium, and Wayland Group.
Markowich v. Lundin Mining Corporation, 2023 ONCA 359