Public companies are required to inform the market of material changes in their affairs. Issuers listed on the Toronto Stock Exchange (TSX) or the TSX Venture Exchange must also disclose material facts that have a bearing on their business. Determining when a material change has occurred or when the time has come to disclose a material fact can involve difficult judgments by management.

Earlier in 2008, the OSC provided guidance on when the fact of contractual negotiations becomes a material change. In its decision in the matter of AiT Advanced Information Technologies Corporation (AiT), the OSC clarified that, in some circumstances, a material change can occur in advance of the execution of a definitive binding agreement .There is no bright-line test of whether a material change has occurred.

More recently, the OSC had occasion to consider whether a mining company should have publicly disclosed that it was experiencing difficulties with a government authority in relation to its mineral tenure. In its decision in the matter of Rex Diamond Mining Corporation (Rex) dated August 21, 2008, the OSC concluded that certain events constituted material changes in Rex’s business, operations or capital, and that by failing to issue news releases and file material change reports following the relevant events, Rex had breached the Securities Act (Ontario) and acted contrary to the public interest. The OSC also found that Rex’s CEO had authorized or permitted this conduct, and that the CFO of Rex had acquiesced in it — thereby acting contrary to the public interest.

The facts

Rex is a diamond mining company that was listed and trading on the TSX until October 2006. Its head office is in Belgium and it has mining operations located in Paraguay and a number of African countries, including Sierra Leone. Serge Muller is the CEO and a director of Rex, and Benoit Holemans is the company’s CFO.

On January 3, 2003, Rex received an initial warning letter from Sierra Leone’s Director of Mines, advising Rex that the Minerals Advisory Board had recommended to the Minister of Mineral Resources that two mining leases relating to Rex’s diamond mining operations in Sierra Leone be cancelled because Rex had not complied with the conditions set out in the leases. Correspondence between Rex and the Government of Sierra Leone followed, culminating in a letter from the Minister of Mineral Resources to Rex dated February 7, 2003, advising Rex that its "Work Programme" had been accepted in principle, and setting out the amount Rex owed in respect of the two leases.

On February 28, 2003, Rex filed an MD&A indicating that it was engaging in operations in Sierra Leone, and issued a news release confirming that heavy mining equipment was being moved onto the property covered by one of the leases while the mining camp was being established. The OSC found that Rex never had the intention of developing operations on that property and that operations and drilling were never commenced.

On April 16, 2003, Rex received a second warning letter from the Director of Mines, advising Rex that its leases were not in good standing and that Rex had failed to honour its financial obligations.

On June 4, 2003, Rex received a final notice warning letter from the Minister of Mineral Resources, advising Rex that it had 90 days to comply with the conditions of the leases and that if it did not, the leases would be revoked.

A July 28, 2003, the letter to shareholders contained in Rex’s 2003 Annual Report did not mention the correspondence with the Government of Sierra Leone relating to the leases.

On August 15, 2003, Rex filed its 2003 Annual Information Form (AIF) without reference to the possibility that the leases were in danger of being cancelled. The AIF included cautionary language concerning the company’s prospects in Sierra Leone, but there was no mention of any specific risks that existed at the time the 2003 AIF was filed.

On November 28, 2003, Rex filed an MD&A that contained positive information about Sierra Leone, but made no reference to the possibility that the leases were in danger of being cancelled.

On December 15, 2003, Rex became aware of a Notice of Tender announcing that Sierra Leone Government was seeking tenders from mining companies with respect to the Tongo Diamond Field area. Rex previously held these mining rights pursuant to one of the leases.

From February to March 2004, Rex and the Sierra Leone Government were involved in reinstatement discussions regarding the "purported revocation and tender" of the leases. These discussions were not recorded in writing.

On February 19, 2004, Market Regulation Services (RS) contacted Rex upon identifying fluctuations in Rex’s share price. Counsel for Rex advised RS that he was only aware of a pending private placement, and that he had verified with Rex that there were no other corporate developments.

On March 30, 2004, the Government of Sierra Leone issued a Tender Evaluation declaring that a third party had been granted mining rights to the Tongo Diamond Field area and stating that Rex’s leases had been cancelled in October 2003.

On April 2, 2004, Rex’s management first became aware of the Tender Evaluation and issued a news release, but did not file a material change report acknowledging that Rex was aware that its leases had been cancelled.

Subsequent to the April news release, Rex continued to correspond with the Government of Sierra Leone to try to reinstate the two leases.

On October 6, 2004, RS requested Rex to provide a chronology of events leading up to the April news release, and to state when Rex had first become aware that the Government of Sierra Leone had cancelled the leases.

On October 28, 2004, Muller responded to RS’s request, but provided an incomplete chronology that was inconsistent with certain documents, and also failed to disclose certain correspondence, leaving RS with the impression that Rex had not become aware of the cancellation of the two leases until January 30, 2004. During the subsequent OSC Staff investigation, when Muller was asked why the information contained in the omitted correspondence was not disclosed, he replied that since negotiations with the Sierra Leone Government were ongoing, Rex’s officers determined that certain information was not material and did not require disclosure.

OSC’s Decision

The OSC found that it is likely there was a material change in Rex’s business, operations or capital when Rex received both the first warning letter and the second warning letter. It also found that material changes certainly did occur in the business, operations or capital of Rex when:

  1. Rex received the final notice warning letter,
  2. Rex became aware of the Notice of Tender; and
  3. the Government of Sierra Leone issued the Tender Evaluation.

The OSC held that Rex should have issued news releases and filed material change reports following its receipt of the first warning letter, then done so again following receipt of the second one — and yet again following receipt of the final notice warning letter. By failing to do so, Rex had breached the disclosure requirements in Section 75 of the Act and acted contrary to the public interest.

Rex was also found to have acted contrary to the public interest by:

  1. providing inaccurate and incomplete disclosure regarding its operations in Sierra Leone in each of its public filings of February 28, 2003, August 15, 2003 and November 28, 2003; and
  2. providing RS with an inaccurate and incomplete chronology of events. In order for the OSC and self-regulatory organizations such as RS to monitor market participants, those involved in the capital markets must co-operate and provide accurate information to the regulators.

Finally, the OSC found that Muller, as a director and the CEO of Rex, had authorized or permitted — and Holemans, as the CFO of Rex, had acquiesced in — Rex’s breaches of the Act and actions contrary to the public interest, and thereby also acted contrary to the public interest.

 The OSC emphasized the following points in its decision:

  1. A determination of materiality is not always straightforward, and there is no "simple bright-line standard or test." The assessment of whether a material change has occurred is a fact-specific exercise.
  2. The test for materiality is objective and one of market impact. An investor wants to know the facts that would reasonably be expected to significantly affect the market price or value of securities.
  3. Abnormal fluctuations in share prices, volume and the number of trades per day demonstrate market impact, and indicate that the market is reacting to something.
  4. The concept of material change requires an exercise of judgment. Best disclosure practices dictate that when in doubt, an issuer should consider the information to be material and err on the side of public disclosure.
  5. The value of mining assets is highly relevant in a material change determination. In the mining industry, mineral properties are constantly being assessed to determine whether there is a change in the characterization of the property. From the point of view of investors, new information relating to a mining property bears significantly on the question of that property’s value.

McCarthy Tétrault Notes:

The OSC emphasized the following points in its decision:

  1. A determination of materiality is not always straightforward, and there is no "simple bright-line standard or test." The assessment of whether a material change has occurred is a fact-specific exercise.
  2. The test for materiality is objective and one of market impact. An investor wants to know the facts that would reasonably be expected to significantly affect the market price or value of securities.
  3. Abnormal fluctuations in share prices, volume and the number of trades per day demonstrate market impact, and indicate that the market is reacting to something.
  4. The concept of material change requires an exercise of judgment. Best disclosure practices dictate that when in doubt, an issuer should consider the information to be material and err on the side of public disclosure.
  5. The value of mining assets is highly relevant in a material change determination. In the mining industry, mineral properties are constantly being assessed to determine whether there is a change in the characterization of the property. From the point of view of investors, new information relating to a mining property bears significantly on the question of that property’s value.