In a recent decision, the Ontario Superior Court dismissed a motion for leave to bring a secondary market misrepresentation claim and declined to certify a class proceeding against Lundin Mining Corporation (Lundin), a public mining company, after its share price dropped following the public disclosure of a rockslide at one of its mines.
The decision provides further guidance on what constitutes a “material change” under the Securities Act, and the circumstances which would require an issuer to disclose such a change to the public. The decision also adds to the body of recent case law on secondary market misrepresentation class actions.
In October 2017, Lundin discovered an unstable wedge in the open pit operations at one of its copper mines. The wedge created an instability in the mine’s pit wall. Several days later, the unstable wedge failed and caused a rock slide which ultimately blocked access to a part of the mine. Nearly one month after the rock slide, Lundin issued a news release advising investors about the pit wall instability and ensuing rock slide. Following the publication of the news release, the price of Lundin’s shares declined 16% on the Toronto Stock Exchange. This one-day drop represented a loss of more than $1 billion of market capitalization.
Markowich, an investor in Lundin’s stock, sought leave to bring secondary market misrepresentation claims against Lundin (and a number of its executives) and certify the claims as a class proceeding on behalf of investors who were impacted by the drop in share price. Markowich alleged that the discovery of the pit wall instability and the subsequent rock slide were each “material changes” within the meaning of the Ontario Securities Act, and that Lundin breached section 75 of the Act by failing to immediately disclose these changes to investors. Markowich also sought to certify common law misrepresentation claims against Lundin.
Lundin, in response, argued that Markowich could not reasonably succeed in establishing at trial that the pit wall instability or rock slide were a change to Lundin’s business, operation, or capital, as required by the Act. Lundin further argued that if, in the alternative, the pit wall instability and rock slide were found to be a change within the meaning of the Act, the change was not material.
Court confirms that not all events are changes under the Act
The motion judge agreed with Lundin that Markowich could not reasonably succeed in establishing at trial that the discovery of the pit wall instability and the rock slide constituted changes under the Act.
Central to the motion judge’s finding is the Act’s definition of “material change”: a material change means 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 any of the securities of the issuer.
The judge determined that neither the pit wall instability nor the rockslide changed Lundin’s lines of business, how it conducted its operations, or its capital structure, and therefore did not constitute a change within the scope of a “material change” under the Act. He found that pit wall instability and rock slides were inherent risks in open pit mining operations and that, following the rockslide, Lundin continued to engage in copper mining by making some changes to its resequencing plan. Although the plaintiff’s expert opined that the mine would have been shut down as a result of the rockslide, the Court found that such a shutdown did not arise from a material change to the business, operations or capital of the company and would not, in and of itself, constitute a material change.
The motion judge confirmed that:
- the requirement to make timely disclosure of a material change is not an obligation to provide a running commentary on the company’s progress during the quarter, or to comment on internal or external events that may impact its performance;
- a “change” requires a “different position, course or direction” to a company’s business, operations or capital;
- “capital” refers to the company’s share structure and rights of shareholders, not to increased costs;
- determining what counts as a “change” and whether it is material is intensely fact-specific; and
- events which affect a company, but which do not amount to a change in business, operations, or capital, do not constitute a material change requiring immediate disclosure.
The judge also confirmed that a drop in share price – even a significant one – is not necessarily evidence of a material change and that it would be a “mistake to reason backwards” from the price drop. While market impact is relevant to the question of materiality and share value is relevant to the question of whether there has been a change, value volatility does not determine whether a change has occurred.
For all of the above noted reasons, the motions judge dismissed the plaintiff’s motion for leave to bring the secondary market misrepresentation claim.
The judge also declined to certify the common law misrepresentation claims as a class proceeding. He held that a class proceeding was not the preferable procedure because the common law misrepresentation claims would require tens of thousands of idiosyncratic trials with respect to the issues of reliance, causation and damages.
This is a welcome decision to public issuers as it provides further guidance on the meaning of “material change” under the Act and confirms the limited circumstances in which an issuer’s disclosure obligations are engaged.
The fact-specific nature of determining whether a material change has occurred should prompt issuers to evaluate whether an event has impacted the issuer in such a way as to change its business, operations or capital. Where an issuer suffers a share price decline after a public disclosure, that fact-driven exercise will become all the more relevant in defending against misrepresentation claims and demonstrating that the timing of the disclosure was compliant with the issuer’s obligations under the Act.