The never-ending debate about material changes in securities law

Even the greatest contemporary philosophers can sometimes fail to shed light on life’s vexing challenges. As you likely anticipate, I'm speaking of Rocky Balboa, the known fictional pugilist and visionary, who said at the end of Rocky IV, “If I can change…you can change…everybody can change!” What that wise theorist neglected to tackle are the obvious questions for even casual fans of securities law, namely, when is a change a change, and in what circumstances is it so material that it warrants disclosure?

Fortunately, the Ontario Court of Appeal released two companion decisions earlier this year about the meaning of “material change,” a critical concept that triggers disclosure obligations for reporting issuers in Canada and one that I’ve addressed previously (I need new material for a change).

Each of the two cases involved a complaint by a shareholder about an issuer’s failure to make timely disclosure. In Peters v SNC-Lavalin, the shareholder argued that SNC-Lavalin should have disclosed that federal prosecutors communicated to the company that it would not be invited to negotiate a remediation agreement to settle its then ongoing corruption-related charges. The relevant development in Markowich v Lundin Mining was a rockslide at the company’s open-pit copper mine in Chile. In both cases, the motion judge had determined that the plaintiff had not demonstrated a reasonable possibility of proving that a “material change” had occurred.

Issuers are continually seeking guidance as to disclosure decisions. It is often unclear when something has crystalized to a point warranting disclosure. There is a delicate balance where premature disclosure might be considered misleading, but delayed disclosure may appear disingenuous. Interpreting how the market will react to disclosure is an elusive art. Compounding the challenge is the daunting knowledge that disclosure decisions are evaluated with the benefit of hindsight.

The two ONCA decisions used a two-step analysis to assess whether a “material change” has occurred: whether there has been a change, and if so, whether that change is material. This approach seems reasonably tautological, and my malignant immaturity cannot resist observing that if there were three words, there might have been three steps. Inane comments aside, the guidance is helpful.

In the realm of tautologies, the truism that every case is fact-specific ranks up there. Still, it is instructive to understand the outcomes. In Peters, the ONCA agreed with the motions judge that the plaintiff had no reasonable chance of successfully proving that a material change had occurred because the risk of conviction (and debarment) had been previously fully disclosed, the chance of entering into a remediation agreement had always been uncertain, and the phone call was just one communication in a series of negotiations that began before and continued after the call.

The ONCA came to the opposite conclusion in Markowich. The motions judge had determined that, to find a “material change,” the court must be satisfied that the event resulted in a different position, course or direction to the company’s business, operations or capital and because the rockslide had not changed, Lundin’s business (wall instability and rockslides being not uncommon) or affected its viability there was no material change. The ONCA determined that this approach conflated the change and materiality aspects of the trigger and reversed the motion judge’s decision. The court noted that the concept of change should be given broad meaning, though it must be said that the two decisions focused on the test for leave where plaintiffs are provided generous scope.

I am left with two core lessons. First, the ONCA endorsed the approach where events that are external to (meaning they were not initiated by) the issuer only constitute material changes where they result in a change in the business, operations, or capital of the issuer. Notably, the change to the business, operations, or capital can mean a shift in risk, though generally, this conception of risk tends toward direct impact (for example, when the federal government ultimately conclusively determined not to offer a remediation agreement SNC-Lavalin made disclosure). Second, these decisions will continue to be difficult, trying to put a pin at the point where disclosure must be made.

Here again, we can look to the wisdom from the Rocky movies, where Rocky’s vision was so blurred that he complained about seeing three of his opponents. Helpfully, the answer was the “hit the one in the middle.”