The Supreme Court Of Canada Considers Materiality Standard

On May 11, 2011, the Supreme Court of Canada released a unanimous decision in Sharbern Holding v. Vancouver Airport Centre. This case provides securities law practitioners and public company officials with important guidance in determining materiality in the context of disclosure documents.

The facts of the case are relatively straightforward. Vancouver Airport Centre Ltd. (VAC) was incorporated for the purpose of developing and marketing two hotels on the same property, namely a Marriott hotel and a Hilton hotel. The two hotels were essentially identical and were joined by a shopping concourse. Strata lots in each hotel were marketed and developed at different times, resulting in differences in the financial arrangements offered to the purchasers of each hotel. VAC offered purchasers in the Marriott hotel a guaranteed gross return of 12%; VAC was entitled to a monthly management fee equal to a percentage of the gross rental revenue as well as an incentive management fee. VAC did not offer purchasers in the Hilton hotel a gross return guarantee; however, VAC's monthly management fee for the Hilton was lower than for the Marriott, Hilton owners were given increased revenue streams and were relieved of certain expenses. The Hilton disclosure statement prepared to solicit potential investors did not disclose the differences in financial arrangements between the Hilton owners and Marriott owners. The Hilton owners incurred losses.

The appeal arises from a class action lawsuit in which the appellant Sharbern Holding Inc. (Sharbern) purchased strata lots in the Hilton hotel and claimed that VAC was liable for failing to disclose details about differences in the financial arrangements given to the Hilton owners, and those given to the Marriott owners. Before the court, Sharbern alleged that the differences resulted in an undisclosed conflict of interest in that they created an incentive for VAC to favour the Marriott over the Hilton in VAC's operation and management of the two hotels.

The trial judge decided in favor of Sharbern on the basis that the undisclosed differences in financial arrangements gave rise to at least a potential conflict of interest, particularly in view of the potential for common management of the two hotels. She concluded that VAC negligently misrepresented both the absence of an actual or potential conflict of interest and the nature of the agreements between VAC and the Marriott owners.

The Court of Appeal found that the...