Is it possible that, after over a century of modern securities regulation, there continues to be significant developments on concepts as fundamental as what constitutes a “material change” in Canada?
The Supreme Court of Canada (SCC) is expected to answer this question when it opines on Lundin Mining Corporation v. Dov Markowich[1] (“Lundin Mining”), a case we have previously discussed[2] wherein legal experts and corporate stakeholders alike anticipate a potential reshaping in the way companies handle public disclosures. Depending on the decision, the impact could be particularly felt in industries like mining and oil & gas, where operational risks and environmental concerns are often paramount, ongoing and unavoidable.
Case Overview
Dov Markowich, a minority shareholder in Lundin Mining Corporation (the “Company” or “Lundin”), filed a suit accusing the Company of delaying disclosure of a significant event: a pit wall instability and subsequent rockslide at its copper mine in Chile that was responsible for 55-60% of Lundin’s revenue during 2016-2017. A month after the incident, Lundin press released news of the rockslide, leading to a 16% drop in its stock price—amounting to over $1 billion in market value. Moreover, the pit wall instability eventually resulted in a 5% reduction in Lundin’s copper production in 2018. Markowich argued that the instability and rockslide constituted a “material change” under Canadian securities law, and that Lundin had failed to disclose this in a timely manner. [3]
The trial court ruled in favor of the Company, finding that the plaintiff had not sufficiently proven that the events amounted to a “material change,” citing that such occurrences are common in the mining industry. However, the Ontario Court of Appeal (ONCA) reversed this decision, favoring the shareholders and employing a two-step analysis: first, determining if a change has occurred, and second, assessing whether that change could reasonably impact the company’s stock price.[4] This broader interpretation of “material change” led to Lundin’s appeal to the SCC in March 2024. This is the matter now before the Supreme Court of Canada.
Understanding “Material Change”
For context, a “Material change” is defined in both securities regulation such as National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”) as well as statutes such as the Securities Act (Ontario). Under NI 51-102, a material change is defined as 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 of the securities of the issuer.” Under the Securities Act, it is similarly defined as a “change in the business, operations, assets, or ownership of the company that could have a significant impact on the price or value of securities.”
Possible Consequences of the SCC’s Decision
The following is a list of potential developments arising from the SCC’s decision.
- Clearer Disclosure Guidelines: The SCC’s ruling could establish more precise standards on what constitutes a “material change.” A more detailed interpretation might compel companies to disclose material events more frequently. It may also trigger more regulatory guidance either in the form of the actual securities instruments (e.g., NI 51-102) or in companion policies codifying the principles established by the SCC in Lundin.
- Different Threshold for “Bad News”: If the SCC sides with the original trial court’s decision, it could create a higher bar for what qualifies as “material change,” particularly when it comes to negative news. This could mean that adverse events would only be disclosed if they threaten the company’s operational financial stability (as opposed to, for example, that of its stock price).
- Greater Scrutiny in High-Risk Sectors: Given the inherent risks in industries like mining and oil & gas, an SCC decision affirming the ONCA’s ruling could lead to heightened scrutiny. Companies might need to be more proactive in identifying and communicating risk factors such that adverse events including rockslides that have a higher probability of occurring are not deemed “material changes” because the company has already transparently disclaimed such as a major risk factor up front.
- Precedent for Future Cases: The ruling could set a lasting precedent, potentially leading to more shareholder lawsuits concerning disclosure obligations. This could influence corporate behavior and investor relations, as companies might adopt more cautious and transparent disclosure practices.
Conclusion
The upcoming SCC decision in Lundin Mining could significantly impact how companies communicate with shareholders, particularly in sectors where transparency around operations is vital. Regardless of the outcome, the ruling will have long-lasting effects on corporate governance and investor relations in Canada. If you have questions about this matter or any concerns about the application of securities laws to you, a member of our business law group would be more than happy to discuss at your convenience.
[1] Markowich v. Lundin Mining Corporation, 2023 ONCA 359 (CanLII)(“Lundin Mining”)
[2]https://www.pallettvalo.com/whats-trending/court-issues-guidance-about-what-constitutes-a-material-change-under-the-securities-act/
[3] The Securities Act (Ontario) requires that where a “material change” has occurred, the reporting issuer shall “forthwith issue and file a news release….disclosing the nature and substance of the change” under section 75(1).
[4] Lundin Mining, paragraph 81.