Superior Court Decision Refuses Leave To Proceed For A Securities Class Action Based On The Difference Between "Material Facts" And "Material Changes"

Published date30 September 2022
Subject MatterCorporate/Commercial Law, Litigation, Mediation & Arbitration, Class Actions, Securities
Law FirmAffleck Greene McMurtry LLP
AuthorMr Michael Binetti, Jeremy Brodeur, Adam Casey, Kenneth Dekker, Alyssa Hall, Meredith Hayward, Masiel Matus, Kyle Peterson, Ardita Sinojmeri, Christopher J. Somerville and David N. Vaillancourt

In a recent decision declining to grant leave under Part XXIII.1 of the Securities Act to proceed with a proposed class action on behalf of purchasers of securities on the secondary market, the Ontario Superior Court clarified and highlighted the difference between "material change" and "material fact" under the Ontario Securities Act. Material facts and material changes both require similar effects on market price of a public company's securities, but the reason for those effects must be internal for it to be a material change. The only exception is where external effects are so overwhelming that the company is no longer able to carry on its principal business, in which case it amounts to a material change.

The clarification comes from Markowich v. Lundin Mining Corporation, which centered around a rockslide in the defendant's Chilean mine, which the defendant knew about in October, but only reported publicly in November. The plaintiff, a shareholder, argued that this rockslide constituted a material change, which required disclosure within 10 days (per s. 75(2) of the Securities Act) and sought to bring a class action on behalf of all the investors who lost money as a result of this failure to disclose. The defendant argued that the rockslide was a material fact, which needed only to be reported to shareholders in the ordinary course of periodic disclosure.

The Facts and Findings

On October 25, 2017, Lundin Mining Corporation ("Lundin") detected a pit wall instability in its copper mine in Chile. This ultimately led to a rockslide in that mine on October 31, 2017, which reduced Lundin's global annual mining operations by 5%. Lundin disclosed all this on November 29, 2017, during its regular news release. The next day Lundin's shares dropped 16%, representing $1 billion of market capitalization.

The plaintiff sought leave to claim damages under a statutory cause of action under Part XXIII.1 of the Securities Act. Justice Glustein denied the plaintiff leave because there was no possibility for the plaintiff to succeed on the evidence, as this could not be established as a material change. It was not necessary to determine whether the events were a material fact, because if they were, Lundin met its disclosure obligations by reporting the events in its regular news release.

Analysis

Section 1(1) of the Securities Act, defines a material fact as "a fact that would reasonably be expected to have a significant effect on the market price or value of the...

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