Earlier this year, the Ontario Superior Court of Justice (ONSC) in Markowich v. Lundin Mining Corporation, 2022 ONSC 81 (Markowich) denied leave to commence a secondary market securities class action under Part XXIII.1 of Ontario’s Securities Act (the OSA) and denied certification of a common law negligent misrepresentation claim.
The decision of Markowich is significant because it clarifies the meaning of “change” within the OSA and provides guidance on the difference between a “material fact” and a “material change.”
Markowich’s claim stemmed from a pit wall failure at one of Lundin Mining Corporation’s (Lundin) mine site. Lundin detected a pit wall instability on October 25, 2017. The failure occurred six days later on October 31, resulting in a rockslide of 600,000 to 700,000 tonnes of waste material. Lundin addressed the pit wall instability in its news release on November 29, 2017. The following day, Lundin’s share price on the Toronto Stock Exchange dropped by 16%.
Markowich submitted that leave to commence a secondary market securities class action should be granted because the pit wall instability and rock slide were “material changes” to Lundin’s “business, operations or capital.” As such, Lundin failed to disclose them immediately by a news release and file a material change report within 10 days. Markowich also submitted that certification of its common law claim met the test under the Class Proceedings Act (the CPA) and should therefore be granted.
Lundin opposed both motions on the grounds that there is no reasonable possibility of success that Markowich could establish at trial that either the instability or rock slide constituted a “material change” to the company’s business, operations or capital, and further, that the class proceeding would not be preferable under the CPA.
The ONSC Decision
The Court agreed with Lundin that there was no reasonable possibility for Markowich to establish that the events constituted a “change” to Lundin’s “business, operations or capital” under the OSA. Further, the Court also agreed that the negligent misrepresentation claim would not satisfy the preferable procedure requirement set out by the CPA.
First, the Court cautioned that the concept of material change must not be conflated with material fact, as the distinction is “deliberate and policy-based.” The definition of a material fact encompasses any fact that could reasonably be expected to have a significant effect on the market price or securities value of the issuer. Thus, the definition of a material fact is broader than a material change because it includes more than just developments that affect the business, operations or capital of a business.
The Court held that the purpose of creating such a distinction was to relieve reporting issuers from having to continually interpret external developments (e.g., political, social, and economical) in relation to their business, unless these external developments caused a change in their business, operations or capital. As such, only material changes need to be disclosed immediately. However, if the development is borderline, then the information should be considered material and disclosed.
Second, the Court emphasized that determination of whether a material change occurred is fact-specific. In general, the definition of change requires establishing a different position, course or direction. In Markowich, the Court found no evidence to establish a change to Lundin’s business, operations or capital. The only effect was a deferral of 15,200 tonnes of copper mining, which represented less than 5% of Lundin’s annual production. In addition, the events did not pose a threat to Lundin’s economic viability, as the company was able to continue its operations.
Third, the Court found that the pit wall instability and rockslide were inherent risks in open pit mines. When such a risk occurs, it may be viewed as a material fact which impacts Lundin’s shares, however, there was no evidence to support the events were a material change to Lundin’s business. Further, the Court has previously held that market impact, such as a decrease in share price, is not determinative of change or materiality.
Lastly, with respect to the certification of the misrepresentation claim, the Court held that each investor would have to lead evidence as to whether they would have seen the representation if made. It cannot be “deemed” or “inferred” that each investor would have been aware of the representation. Ultimately, the Court held that the preferable procedure requirement outlined in the CPA was not met.
The decision in Markowich provides important clarification on the distinction between a material fact and a material change, and when a material change occurs. Issuers should take note of this distinction, as different reporting obligations are required. Where an event is material and causes a change in the business, operations or capital, its immediate disclosure is required.
The author would like to thank Marisa Kwan for her contributions to this article.