Supreme Court Affirms Investors’ Right to Sue Over Delayed Corporate Disclosures

Canadian public companies must meet a higher standard of disclosure or risk more shareholder lawsuits in the aftermath of a landmark decision from the country’s highest court.

 

The Supreme Court of Canada ruled Friday that an investor can sue a company if it does not immediately disclose material changes in its operations. Securities law experts have been anxiously awaiting the decision on exactly what constitutes a “material change” for more than a year.

 

While a material change generally refers to something important enough to warrant disclosure by a public company, glaring differences between two lower court rulings have left the exact definition unclear.

 

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Writing for the majority, which included eight of the court’s nine judges, Justice Mahmud Jamal said an earlier Ontario Superior Court decision “erred by relying on restrictive definitions of ‘change,’ ‘business,’ ‘operations,’ and ‘capital.’”

 

“The Ontario legislature intentionally left these terms undefined to allow the legislation to be applied flexibly and contextually to a wide range of industries and corporate structures,” the 153-page ruling said. “Proper disclosure is the heart and soul of the securities regulations across Canada and is pivotal for an effective securities regime.”

 

In a dissenting opinion, Justice Suzanne Côté warned the “consequences of the majority’s overbroad understandings of the terms ‘change,’ ‘business,’ ‘operations’ and ‘capital’ will be that almost every event that affects the affairs of an issuer will have to be reviewed for materiality.”

 

Sarah Gingrich, co-leader of the capital markets and mergers and acquisitions practice at Fasken LLP, said most issuers and securities lawyers were hoping for the decision to look more like the dissent.

 

The ruling “is going to lead to the requirement for more disclosure,” Ms. Gingrich said in an interview. “For Canadian public companies, the key reason they won’t be happy with the ruling is it means the bar for something qualifying as a change is now lower than it has been.”

 

Frank Sur, head of the Canadian corporate law practice at law firm Gowling WLG, said the decision will also make it easier for investors to file class-action lawsuits against companies over alleged disclosure failures.

 

“The risk is now way higher than it used to be, so out of an abundance of caution, issuers will be more inclined to provide more material change press releases and material change reports,” Mr. Sur said in an interview.

 

Prior to Friday’s ruling, public companies that found themselves unsure about whether to share certain information with the market would have been more likely to decide against disclosure, he said. But now, companies in those situations will be more likely to disclose.

 

“Because otherwise they risk getting sued, if they are wrong and the stock drops they are going to get sued,” Mr. Sur said.

 

Understanding what qualifies as a material change and what does not is crucial for capital markets to function properly, as public companies must walk a fine line between ensuring they disclose enough without disclosing too much.

 

Companies that err on the side of disclosure run the risk of being sanctioned by securities regulators for market manipulation by disclosing things that aren’t actually material. Those that do not disclose enough also risk regulatory reprimands and shareholder lawsuits.

 

According to securities acts across Canada, a material change is defined as something that occurs to “the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer.”

 

Whenever a material change does occur, the law requires companies to issue a public statement “forthwith” (generally interpreted to mean as soon as possible) and to file a regulatory report within 10 days.

 

Doug Sarro, a law professor at the University of Ottawa who researches corporate law and securities regulation, heralded Friday’s ruling as “a great day for Canada’s capital markets.”

 

“The Supreme Court recognized that timely disclosure of material changes plays a vital role in fostering efficient markets and investor protection,” Mr. Sarro said via e-mail.

 

Despite expectations from securities lawyers that the ruling will reshape disclosure obligations, Mr. Sarro said the court’s position has been essentially unchanged for nearly two decades. He cited two prior Supreme Court cases in 2007 and 2015 as examples where a broader definition of material change was applied.

 

The 2007 case largely drew from comments made by then Ontario Securities Commission chair Peter Dey in 1983, Mr. Sarro said, “so this is pretty long-standing guidance.”

 

The basis of Friday’s decision centred on the question of whether Lundin Mining Corp. LUN-T +1.71%increase
should have moved faster to inform the public about a rock slide in late 2017 that forced the company to temporarily close part of its Chilean copper mine. When Lundin did eventually disclose the event, more than a month later, its stock fell 16 per cent in a single day, wiping out more than $1-billion in market value.

 

Paul Conibear, Lundin’s chief executive officer at the time, publicly apologized to investors shortly afterward for having “not communicated well enough.”

 

Dov Markowich, the lead plaintiff in the class-action lawsuit, purchased more than $90,000 worth of Lundin shares after the rock slide had occurred but before it was disclosed. The proposed class action covers anyone who acquired Lundin shares between Oct. 25 and Nov. 29, 2017, and continued to hold at least some of them until after that period.

 

Lundin declined to comment on Friday’s ruling. In a statement, the company said the merits of the case have not been decided and that it intends to “vigorously defend” itself.

 

In 2022, the Ontario Superior Court declined to certify the proposed class action filed against Lundin – a step that would have allowed the case to proceed to trial – ruling the rock slide did not meet the legal definition of material change requiring timely disclosure. The Ontario Court of Appeal unanimously overturned the lower court ruling in May, 2023, basing its decision on a much broader definition of material change and allowing the class-action lawsuit – which is seeking more than $180-million – to proceed.

 

Lundin appealed that decision to the Supreme Court, which agreed to hear the case in March, 2024. Now that the lawsuit has been allowed to proceed, if Lundin ends up losing at trial, experts expect public companies will become even more liberal in the amount of information they disclose.

 

 

 

 

This article was first reported by The Globe and Mail