Ontario’s top court defines “material change” in securities litigation
June 5th, 2023
In a pair of companion decisions released on May 24, 2023 (Markowich v. Lundin Mining and Peters v. SNC-Lavalin Group Inc.) the Court of Appeal for Ontario respectively overturned and upheld Superior Court of Justice decisions refusing leave to proceed with proposed class actions under Part XXIII.1 of the Securities Act. Both decisions turned on whether certain events met the definition of a “material change” that the companies should have publicly disclosed sooner.
In Lundin Mining, the events were pit wall instability and a rockslide at one of the defendant mining company’s Chilean open pit mines. In SNC-Lavalin, the event was a phone call where the Public Prosecution Service of Canada (PPSC) informed the company that it would not be invited to negotiate a remediation agreement under the Criminal Code for fraud and corruption charges.
In this case, a unanimous appeal panel found that the decision below refusing leave to proceed had been overly restrictive in how it defined what amounts to a material change sufficient to impose a positive duty on a public company to immediately disclose an event or risk being held liable for any resulting shareholder losses. In particular, the Court of Appeal panel found that Justice Glustein of the Superior Court had erred in law in being overly narrow in his interpretation of “change”, “business”, “operations” and “capital” in the context of the Securities Act definition of material change and, as such, that he erred in refusing leave to proceed under the Securities Act.
In overturning the decision below, the Court of Appeal outlined the regime under the Securities Act relating to material changes and disclosure obligations. In particular, Section 75(1) of the Securities Act requires a reporting issuer to “forthwith issue and file a news release” in circumstances “where a material change occurs in the affairs of [the] reporting issuer” (emphasis added). In addition, s. 75(2) requires the reporting issuer to “file a report of such material change in accordance with the regulations as soon as practicable and in any event within ten days of the date on which the change occurs”.
The Court of Appeal disagreed with the motions judge that the events at issue could not be something that affects the “business, operations or capital” of Lundin, found that he had been overly restrictive in his interpretation of those words and ordered that the plaintiffs should be permitted to proceed with their claim.
As such, leave to proceed was granted under Part XXIII.1 of the Securities Act and the Court of Appeal referred the matter back to the Superior Court for a decision on certification under the Class Proceedings Act, 1992 consistent with its decision on leave.
On the other hand, the Court of Appeal upheld the Superior Court’s decision to deny leave in the companion case. Here, Justice Perrell of the Superior Court had applied a much broader interpretation of the word “change,” essentially deciding that it could mean anything depending on the facts. Nevertheless, he ruled that the PPSC’s phone call with SNC-Lavalin had simply maintained the status quo, and as such could not be a “change.” Before the call, SNC faced a pending criminal prosecution that a remediation agreement could have avoided. During the call, the PPSC said they remained open to further input from SNC, so the agreement remained possible. It was only a month later when the PPSC advised SNC in writing that there would be no agreement and would not discuss the matter further. SNC issued a press release the next day, and SNC’s share price declined by over 13%.
In upholding Justice Perell’s decision, the Court of Appeal made an important distinction between the market’s reaction to an event and whether the event itself truly changed anything. As the Court wrote in its decision: “It is not appropriate to reason backwards from the market reaction in determining whether an event constitutes a material change.”
In other words, to the extent the market may have perceived a greater possibility of SNC avoiding prosecution than actually existed and was disclosed, there was no material change when the market came to terms with reality.
The significance of these decisions could extend beyond the specific facts of these cases and even beyond the issue of what amounts to a “material change” under the Securities Act. The trend over the past several years has been for courts to make it more difficult for plaintiffs to meet their onus under Part XXIII.1 of the Securities Act to show a reasonable possibility of success at trial. In these decisions, the Court of Appeal emphasized that the leave requirement does not require a “mini trial” and prescribed that the court should consider that leave motions are brought at an early stage and without access to documentary and oral discoveries that might uncover additional evidence needed to prove their case at trial.
It remains to be seen what impact, if any, these decisions might have on the willingness of future plaintiffs to pursue other claims under Part XXIII.1 of the Securities Act.
 The background to the Lundin Mining decision and the Superior Court decision denying leave to proceed is discussed in our previous article about the decision.
 Again for further background please see our previous article about the Superior Court decision in the SNC-Lavalin case.