A more generous approach to “material changes” under the Securities Act

The Court of Appeal’s recent decision in Markowich v. Lundin Mining Corporation, 2023 ONCA 359, provides a fresh analysis of what constitutes a material change under the Ontario Securities Act. In a unanimous decision in the context of a motion for leave under the Securities Act¹ and for certification under the Class Proceedings Act², the Court of Appeal rejected the lower court’s more narrow interpretation and instead adopted a broader and “more generous” approach that focuses on the context and facts of each case.

What you need to know

• The Court rejected a narrow interpretation of a “change” to the “business, operations or capital” of a company under the Securities Act. Instead, the Court adopted a “more generous approach” to these terms, which must be interpreted broadly and in the context of the facts of each case.
• A material “change” cannot be external to the company or simply an unexplained change in results absent a resulting change in the business, operations, or capital of the company.
• In the two-step analysis of whether a material change has occurred, the assessment of the magnitude of the change—its materiality—occurs at the second stage.
• The Court also reaffirmed that, at the leave stage of the proceedings, the plaintiff was only required to demonstrate that he had a reasonable possibility of success based on a plausible interpretation of the statute and the evidence. Here, the Court held that there was a reasonable chance that wall instability and a rockslide at an open pit mine constituted a material change to the issuer defendant company, despite there being no direct evidence regarding the immediate impact of the rockslide on the mine’s operations.

The lower court’s decision

The plaintiff brought a proposed class action seeking leave to commence a secondary market securities class action against Lundin Mining Corporation (Lundin) for its alleged failure to disclose “forthwith” a “material change” in its “business, operations or capital” as required under the Securities Act. The plaintiff also sought to certify a class action on behalf of certain shareholders of Lundin.

The alleged “material change” related to the discovery of pit wall instability and a subsequent rockslide at one of Lundin’s open pit mines. On October 25, 2017, the company detected pit wall instability at its mine and evacuated personnel. The instability led to a rockslide, which restricted access to a phase of the mine. Lundin did not disclose the pit wall instability or the rockslide at the time these events occurred. Instead, it waited a few weeks, to November 29, 2017, when it reported that the rockslide had impacted its 2018 and 2019 production forecasts. Lundin’s share price dropped following this disclosure.

The motion judge dismissed the plaintiff’s motions³. He concluded that there was no reasonable possibility of success. In the motion judge’s view, to find that a material change occurred, the court must be satisfied that the event results in a “different position, course, or direction to a company’s business, operations, or capital”⁴. Based on this definition, the motion judge concluded that the pit wall instability and rockslide did not change the “business, operations or capital” of Lundin as required by the definition of “material change” under the Securities Act⁵.

The motion judge found no evidence that these events raised a threat to Lundin’s viability. Although there was an interruption in production and a change in scheduling, there was no evidence that the pit wall instability or rockslide led Lundin to change its line of business, stop using the mine, or change its capital structure⁶. As a result, the motion judge dismissed both the motion for leave and the motion for certification. He did, however, conclude that had he found the matters constituted a “change”, he would also have found they were material⁷.

The Court of Appeal’s decision

The Court of Appeal unanimously overturned the motion judge’s decision⁸. The Court held that the motion judge erred in his application of the test for leave and in his interpretation of the terms “change”, “business”, “operations”, and “capital” by (i) adopting a narrow and definitive interpretation not previously adopted by any court, and (ii) applying that restrictive definition to the limited evidence available. Instead, the Court held that a more “generous approach” to the terms “change in the business, operation or capital” was warranted, especially in the context of a leave motion⁹.

In rejecting the motion judge’s definition, the Court accepted a more expansive approach to the interpretation of “change” adopted by an earlier decision of the Superior Court, which was upheld in a companion decision released at the same time as this decision¹⁰. That definition is:

Change encompasses alteration, amendment, conversion, contraction, development, difference, discovery, detection, disruption, divergence, expansion, innovation, makeover, metamorphosis, modernization, modification, renewal, renovation, reversal, revelation, revolution, transition, or transformation. The opposite of change is constancy, continuance, endlessness, immutability, permanence, perpetuity, prolongation, stability, and the status quo. Common experience reveals that sometimes change in philosophy, physics, and law is incremental and sometimes change is paradigm shifting. Common experience reveals that sometimes change happens instantly and perceptibly and sometimes change happens progressively and imperceptibly until it is perceived by some benchmark of difference¹¹.

Here, the issue was not whether Lundin completely changed directions in its line of business, stopped operating the mine, or changed its capital structure¹². Rather, especially in the context of a leave motion, a change in operations should be considered to refer to a broad range of changes within a company, including an interruption in production and a change in scheduling due to an accident or equipment failure (which is what occurred here). Since the slope instability and rockslide resulted in a change in scheduling for future production and shutdown operations for a period at the mine, the Court found that there was a reasonable possibility that the plaintiff could demonstrate that the pit wall instability and rockslide were material changes that Lundin should have disclosed forthwith.

The Court also affirmed existing case law regarding the distinction between material changes and material facts. Both require a consideration of the “materiality” of the fact or change and, in the case of material changes, this assessment is incorporated at the second step of the two-step analysis: (i) assessing whether there is a change in the business, operations or capital; and (ii) determining economically if the change is material¹³. However, while an external fact may affect a business and thus be disclosed as a “material fact”, a change that is external to the company and does not change its business, operations or capital cannot constitute a “material change”¹⁴. Material changes are thus narrower than material facts.

The Court allowed the appeal and granted leave for the action to proceed, though it remitted the certification motion back to the lower court. If this matter continues to the merits, additional arguments may be advanced on the definition of a material change. As discussed previously here, although the bar for leave to proceed with an action under the Securities Act is a meaningful threshold, simply because a plaintiff meets it does not guarantee that a plaintiff will succeed on the merits.

Key takeaways

This decision represents one of the most important and detailed appellate decisions to date regarding the definition of “material change” in the Securities Act, in the context of a motion for leave to proceed. It should be remembered, though, that at this stage the Court was only assessing whether the plaintiff had shown a reasonable possibility that he could succeed at trial in proving that the pit wall instability and rockslide constituted material changes. The decision does not conclusively determine that either of these occurrences should properly have been considered material changes to the issuer’s business, operations or capital.

However, notwithstanding this decision was only at the leave stage, the Court’s more expansive definition of material change does provide additional guidance to issuers on how broadly to interpret whether an event is a “change” that requires timely disclosure.

Finally, this expansive definition may also result in more proposed class proceedings in respect of material changes meeting the leave test under the Securities Act.