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Superior Court refuses leave to securities class action based on the difference between “Material Facts” and “Material Changes”

In a recent decision declining to grant leave under Part XXIII.1 of the Securities Act to proceed with a proposed class action on behalf of purchasers of securities on the secondary market, the Ontario Superior Court clarified and highlighted the difference between “material change” and “material fact” under the Ontario Securities Act. Material facts and material changes both require similar effects on market price of a public company’s securities, but the reason for those effects must be internal for it to be a material change. The only exception is where external effects are so overwhelming that the company is no longer able to carry on its principal business, in which case it amounts to a material change.

The clarification comes from Markowich v. Lundin Mining Corporation, which centered around a rockslide in the defendant’s Chilean mine, which the defendant knew about in October, but only reported publicly in November. The plaintiff, a shareholder, argued that this rockslide constituted a material change, which required disclosure within 10 days (per s. 75(2) of the Securities Act) and sought to bring a class action on behalf of all the investors who lost money as a result of this failure to disclose. The defendant argued that the rockslide was a material fact, which needed only to be reported to shareholders in the ordinary course of periodic disclosure.

The Facts and Findings

On October 25, 2017, Lundin Mining Corporation (“Lundin”) detected a pit wall instability in its copper mine in Chile. This ultimately led to a rockslide in that mine on October 31, 2017, which reduced Lundin’s global annual mining operations by 5%. Lundin disclosed all this on November 29, 2017, during its regular news release. The next day Lundin’s shares dropped 16%, representing $1 billion of market capitalization.

The plaintiff sought leave to claim damages under a statutory cause of action under Part XXIII.1 of the Securities Act. Justice Glustein denied the plaintiff leave because there was no possibility for the plaintiff to succeed on the evidence, as this could not be established as a material change. It was not necessary to determine whether the events were a material fact, because if they were, Lundin met its disclosure obligations by reporting the events in its regular news release.


Section 1(1) of the Securities Act, defines a material fact as “a fact that would reasonably be expected to have a significant effect on the market price or value of the securities”; whereas 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 the securities of the issuer”.

The difference in these two terms is not one of degrees, as both require a “significant effect”, the language in either definition mirroring the other. The difference is rather that a material change must be “a change in the business, operations or capital”. It must be internal to the company, such as a restructuring decision.

For example, if a storm damages a vineyard’s harvest, it may be a material fact, but it will not usually be considered a material change. External circumstances may cause an issuer to make internal adjustments, and this would be a material change, but it is the internal change that triggers the 10-day disclosure obligation. The distinction between these terms was made deliberately and for policy reasons, aiming to relieve reporting issuers of the obligation to continually interpret external developments that may affect the issuer’s profitability.

That being said, very significant external developments may amount to material changes in exceptional circumstances. Justice Glustein cited Cornish v. Ontario (Securities Commission), in which external circumstances rendered a company unable to issue asset-backed commercial paper, which comprised 90% of its total revenue. The court held in that case that losing the ability to carry on a company’s principal business is a material change, despite it being an external circumstance.

Justice Glustein also clarified that parties could not “reason backwards” from a share price decline to assert that a circumstance must have been material. Market impact, like the 16% stock decline for Lundin, is relevant to the question of materiality but not determinative.

This case clarifies the exception to the rule for material change. A 90% revenue reduction will amount to a material change (despite being caused by external circumstances), but a 5% reduction will not. Otherwise, material changes and material facts relate to internal and external factors, respectively.

Jeremy Brodeur, Articling Student
Affleck Greene McMurtry LLP

Jeremy Brodeur, Articling Student

Jeremy joins AGM from the University of Ottawa Faculty of Law, where he was involved in the law student union and competitive mooting. During law school, Jeremy and his team reached the semi-final round of the Vis Moot, ranking near the top of 385 law schools in the global competition. Jeremy looks forward to putting his passion for advocacy into practice at AGM.

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