In many commercial situations, legislation mandates a vendor, issuer or other party to disclose relevant information regarding the transaction at hand. In other situations, representations are given in the agreement itself. When a disclosure obligation exists either at law in or a contract through representations made in that contract, how much and what kind of information does a vendor have to provide? What constitutes “relevant” or “material” disclosure? What is the level of disclosure required? When a representation is made, when is a fact contrary to that representation required to be disclosed? Those are questions that are often asked and seldom answered. While these questions are likely to be asked for years to come, the Supreme Court of Canada (the “Court”) has provided some further direction.
In a recent decision of the Court, Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.  S.C.J. No. 23, the Court addressed disclosure standards in a commercial real estate and securities matter. The Court held that it is the purchaser’s responsibility to prove that a misrepresentation or omission was material in order to rely upon it as a basis for relief (such material to a “reasonable investor” standard). The decision, therefore, is good news for real estate vendors .
The Court brought more certainty to the idea of “materiality”, and disclosure obligations in general, declaring that “issuers are not subject to an indeterminate obligation, such that an unhappy investor may seize on any trivial or unimportant fact that was not disclosed to render an issuer liable for the investor’s losses”1. Further, the Court held that the materiality of a misrepresentation of a fact or statement or omission must be proven (except in those cases where common sense inferences are sufficient) through evidence by the party alleging materiality. This places the burden of proof squarely on purchasers.
The practical nature of this decision will ultimately provide benefits to vendors as they can feel more comfortable with the disclosure they provide and comfort in knowing that the burden of proving materiality now rests with the purchaser. The materiality test is an objective test however. A fact is not immaterial just because a vendor says it is immaterial. Similarly, a fact is not material just because a purchaser says it was material to that purchaser. The determination of what is and is not material is a highly fact specific inquiry and will need to be determined on the basis of what would be important to the “reasonable investor”; even if it does not change such investor’s ultimate decision.
The present case concerned a class action regarding whether a misrepresentation was made by the Vancouver Airport Centre Ltd. (“VAC”) to potential investors of strata lots in the Hilton hotel. It was well understood that VAC was a manager of multiple hotels on the same lot, however, VAC did not disclose the specific financial terms of their existing management agreements with potential investors in the Hilton. The investors that subsequently suffered losses claimed that had the details of the existing management agreements been disclosed, they would not have invested. The court found that because the investors failed to prove that the omitted facts were material, VAC’s failure to disclose the specific information did not constitute a misrepresentation and therefore VAC was not liable to the investors for the losses.
In this case, the Court defined what the common law requires for a fact to be material. “An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available”2. The fact need not change the decision.
What is and is not material to a reasonable investor remains a highly fact specific inquiry and therefore difficult to predict. What is important to the purchaser may be considered, and may ultimately influence the outcome of a given case if the judge feels they accurately represent a reasonable investor. While the purchaser’s views may be important, it is worthy to note that the behaviour of a single investor might not satisfy a judge that there is “a substantial likelihood that the disclosure of the omitted fact would have assumed actual significance in the deliberations of a reasonable investor”3. However, the Court did provide a non‐exhaustive list of some suggestions of evidence that could have assisted the plaintiffs in proving materiality of undisclosed information as follows:
- Evidence of potential investors who knew of the omitted information and declined to invest or exhibited concerns or doubts about the investment because of it.
- Evidence of potential investors that declined to invest because they found there was insufficient disclosure regarding the common management with VAC’s other hotels.
- Evidence that once those that did invest discovered the omitted details they expressed significant concerns about them.
- Evidence that VAC’s marketing efforts and management of the hotel were not carried out diligently and in good faith; and
- Evidence that VAC acted on the conflict of interest to the detriment of those that invested4.
Common industry evidence was of great assistance in defending the claims of insufficient disclosure and conflict of interest in this case. In addition to a statutory defence available to VAC, evidence that it was common industry practice for competing hotels to be commonly managed with the different owners not being aware of the terms of the contracts at each hotel assisted VAC’s case.
Purchasers are now going to have to think twice before starting an action regarding insufficient disclosure or misrepresentation by a vendor. The responsibility of proving that there was a significant likelihood that a misrepresentation would have effected a reasonable investor’s decision falls upon the party alleging the misrepresentation. Accordingly, it may be more difficult for a purchaser to rescind its contract or obtain damages.