A gold mining company chooses not to disclose preliminary mineral sampling results that it viewed as unreliable. Further testing eventually proves the preliminary sample to be inaccurate. In Wong v Pretium Resources, 2017 ONSC 3361 the Ontario Superior Court of Justice granted leave for a plaintiff to proceed with a securities class action under s. 138.3 of the Ontario Securities Act (the OSA) alleging secondary market misrepresentation for failing to disclose the preliminary results. What gives?
Is there gold in the hills?
Pretium Resources (Pretium) is a mineral exploration company listed on the TSX and NYSE that operated a gold mine in northern B.C. The mine’s feasibility was predicated on a mineral resource estimate. Pretium agreed to extract a large bulk sample to validate the estimate to be carried out by a well-known mining consulting firm. First, however, Pretium decided to conduct a much smaller, and less reliable, “tower” sample as the bulk sample would be delayed.
The tower sample failed to substantiate the resource estimate and the consultant urged Pretium to disclose the results to the market. Pretium disagreed that the results of the tower sample were material. The consulting firm would later resign over the disagreement. Pretium disclosed the consultant’s resignation along with the reasons for the resignation to the market, and its shares dropped by over 50%.
As it turns out, Pretium was correct all along. The bulk sample confirmed the validity of the mineral resource estimate. Nevertheless, the company was hit with a class action for an alleged misrepresentation by not disclosing the tower sample results and the consultant’s findings and concerns.
Subjectivity and materiality
In order to obtain leave, the plaintiff needed to prove that its case was not so weak and not so successfully rebutted that there was no reasonable possibility of success. Pretium argued that there was no misrepresentation and relied on the reasonable investigation defence under s. 138.4(6) of the OSA.
The Court emphasized that the materiality standard that calls for the disclosure of information is focused on information that a reasonable investor objectively would consider important in making an investment decision, not information that the issuer subjectively believed or did not believe to be true. The Court reasoned that the findings of an expert mining consulting firm going to the heart of Pretium’s business model was information that was important to investors in deciding whether to invest and at what price. The Court noted that Pretium had every right to qualify such information with its own opinions regarding the accuracy of the testing and the true mineral content of the mine in their disclosure, but failing to disclose the information in the first place was potentially a misrepresentation.
The Court’s decision may be surprising and suggest that the leave test is a low bar, but there are some important facts which may help explain the result. In particular: Pretium publicly announced the involvement and reputation of the consulting firm, previous disclosure referenced the tower sample as an integral part of the testing procedure, and the consultant genuinely believed in the integrity and reliability of the tower testing method. Once Pretium built up the credibility of the testing process and the consultant’s involvement to gain leverage in the market, it was tricky to argue that the outcome of the testing and the consultant’s advice were immaterial.
Curiously, just a month before the Ontario decision, a parallel securities class action in the U.S. was dismissed. It remains to be seen whether the Ontario Superior Court of Justice’s decision in Pretium will be subject to an appeal.
The author would like to thank Alexandre Kokach, Articling Student, for his assistance in preparing this post.