Good Laws Gone Bad: Continued Confusion Over The Materiality Standard In Civil Misrepresentation Actions

Civil liability for secondary market disclosure was conceived by securities regulators with the best of intentions. But, left to the courts to develop without supervision by its makers, it has of late become an unruly child.

Two recent Ontario court decisions - Wong v Pretium Resources, 2017 ONSC 3361 (Wong), and Paniccia v MDC Partners Inc., 2018 ONSC 3470 (Paniccia) - have compounded the confusion over the appropriate standard for assessing materiality for the purpose of granting leave to proceed under the secondary market liability provisions of the Ontario Securities Act (OSA). Issuers should be aware of this uncertainty in the case law and should test their disclosure decisions against both the "market impact test" found in the text of the OSA and the lower threshold of the "reasonable investor test."

Wong: To Disclose or Not to Disclose? Consider the "Reasonable Investor"

In Wong, the Ontario Superior Court of Justice granted the plaintiff leave to proceed with an action under section 138.3 of the OSA for secondary market misrepresentation against Canadian mining company Pretium Resources Inc. (Pretium).

The allegations in Wong related to Pretium's decision not to disclose concerns raised by an external consultant regarding unfavourable mineral sampling results at Pretium's flagship Brucejack Project. Pretium believed that the concerns raised by its consultant were unfounded and that the mineral sampling results were inaccurate. It therefore decided not to disclose the consultant's concerns to the market when they were raised. The plaintiff argued that Pretium's failure to disclose the external consultant's concerns in its press releases, material change reports and MD&A's issued during the relevant period were a misrepresentation by omission.

Despite Pretium's genuine belief that the concerns raised by its external consultant were unfounded, and that Pretium's belief was ultimately proven correct, the Court found there was a reasonable possibility that the plaintiff would succeed at trial and accordingly granted the plaintiff leave to proceed with the action.1

The Court found that the consultant's concerns regarding the mineral sampling results were material facts requiring disclosure by Pretium at the time they were raised by the consultant. In assessing the alleged materiality of the consultant's concerns, the Court applied the "reasonable investor test" and found that a reasonable investor would have considered the consultant's...