Redefining Corporate Disclosure of Material Change

October 16, 2024

Written By Jon Truswell and Raghav Sodhi

As the Supreme Court of Canada (the SCC) prepares to deliver its decision in Lundin Mining Corporation v Dov Markowich (Markowich), the legal community and corporate stakeholders are closely watching for implications that may redefine the concept of "material change" within Canadian securities law. This case presents a pivotal moment that could reshape how companies disclose information to shareholders, particularly in the mining and oil and gas sectors, where operational risks and environmental concerns are ever present and unavoidable.

Background of the Case

Dov Markowich, a minority shareholder of Lundin Mining Corporation (Lundin), brought an action against Lundin for alleged unlawful delay in Lundin's disclosure of a pit wall instability and a rockslide at its open pit copper mine in Chile. The rockslide restricted access to part of the mine, which constituted a major asset for Lundin, generating 55 percent to 60 percent of Lundin's sales revenue in the years 2016 and 2017. Lundin disclosed the events through a press release about a month later and upon this disclosure, the price of the Lundin's securities listed on the Toronto Stock Exchange fell by 16 percent, a drop amounting to over $1 billion of Lundin's market capitalization. The ultimate impact of the pit wall instability and rockslide on Lundin's operations was a 5 percent drop in its copper production for the year 2018. Mr. Markowich argued that the pit wall instability and landslide constituted a "material change" for Lundin under the Canadian securities law and Lundin failed to adequately disclose such change in a timely manner.

The trial judge decided the case in favor of Lundin and held that the plaintiff had not demonstrated a reasonable chance of establishing that the pit wall instability or rockslide constituted a "material change". The judge highlighted that pit instabilities and rockslides were common occurrences in open pit mining businesses, and it was unreasonable to expect Lundin to provide a running commentary on its day-to-day operations. The decision was overturned by the Ontario Court of Appeal (the ONCA), which ruled in favor of the plaintiff shareholders. The ONCA elaborated a two-step analysis to evaluate whether a material change has occurred. First, the ONCA examined whether Lundin experienced a change, but this first step did not involve an assessment of the change's magnitude. Secondly, the ONCA considered whether the change could reasonably be expected to impact the market price of Lundin's securities. This two-step approach of the ONCA gives a more generous and wider interpretation to the term "material change", as compared to the approach of the trial judge.

Lundin appealed the decision to the SCC. The SCC granted leave to appeal to Lundin in March 2024.

Understanding "Material Change"

At its core, the term "material change" refers to any change or alteration in a company's business, operations or capital that would reasonably be expected to have a significant impact on the market price or value of any of the company's securities. Under Canadian securities law, companies are required to disclose such changes "as soon as practicable and in any event within 10 days of the date on which the change occurs". This provision ensures that investors can make informed decisions.

However, the nuances of what constitutes a "material change" can be subject to interpretation, leading to potential legal disputes, such as the one at hand in Markowich.

Potential Implications of the Supreme Court's Decision

1. Clarification of Disclosure Standards: The SCC's ruling has the potential to establish clearer standards regarding what constitutes material change. A more detailed definition could result in companies providing more frequent disclosure about risks, operational challenges, and their potential impact on financial performance.
2. Higher bar for qualification of bad news as "material change": Section 2.1(2) of the National Instrument 51-201 Disclosure Standards, requires that unfavourable news must be disclosed as promptly as favourable news. Should the SCC agree with the decision of the trial judge, it could create a much higher bar for bad news to qualify as a "material change". With such a ruling, bad news would need to be disclosed as material change only where there is a threat to the company's economic viability.
3. Increased Scrutiny in the Mining and Oil & Gas Sectors: Given the unique risks associated with the mining and oil and gas industries—such as environmental impacts and market volatility—a ruling by the SCC affirming the ONCA judgement could encourage a higher level of scrutiny for operations in these sectors. Companies may need to be more proactive in identifying and communicating risks that could be seen as a material change.
4. Precedent for Future Cases: The ruling could set a precedent for future litigation regarding materiality and disclosure. A more detailed standard could lead to an increase in legal challenges from shareholders who feel that companies have not fulfilled their disclosure obligations, thereby impacting corporate behavior and investor relations.

Conclusion

As we await the SCC's decision in Markowich, the implications surrounding the meaning of "material change" loom large. The outcome could redefine the landscape of corporate disclosure, impact governance practices, and reshape investor relations—especially in sectors like mining and oil and gas, where operational transparency is crucial.

Ultimately, this case serves as a critical reminder of the importance of effective communication between reporting issuers and their securityholders. Whatever the court decides, the ripple effects will likely influence corporate behavior and investor expectations for years to come.

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