A landmark case now with Canada’s top court could have a significant impact on the way public companies disclose operational changes to investors, one securities lawyer says, potentially leaving shareholders to sort through more and more disclosures.
The decision could have a “very long-lasting impact” regarding disclosure requirements in Canada going forward and will “impact every sector essentially,” said Frank Sur, a securities lawyer and the head of the corporate practice group at Gowling WLG.
“So any company, like mining companies, oil and gas companies, manufacturing companies, engineering companies…any company that actually has operations that can be impacted by an external factor (or) event, have to pay attention to this,” said Sur, in an interview with BNNBloomberg.ca last week.
“It’s not going to be limited to mining. It’s going to be way broader than that.”
In March, the Supreme Court of Canada granted leave to appeal from a judgment of the Court of Appeal for Ontario. The case is between Lundin Mining Corp. and an investor regarding whether he demonstrated that he had a reasonable chance of success in showing a rockslide at a Lundin copper mine constituted a material change, requiring an earlier disclosure under the Ontario Securities Act.
The investor alleges an unlawful delay in the company’s disclosure of the rockslide.
Lundin did not immediately respond to a request for comment.
To meet the definition of a material change under the Securities Act of Ontario, Sur said that two elements are needed. The first being an event that causes a change in business operations or capital of the company. Secondly, that change has to have, or is expected to have, a significant impact on the company’s share price, he said.
“Now the second part is not really disputed here…when Lundin ultimately disclosed this in their press release on Nov. 29, 2017, their stock dropped by (around) 16 per cent,” Sur said.
The hearing before the Supreme Court likely won’t occur until early next year, he said.
‘Err on the side of caution’
Ahead of the Supreme Court’s decision, Sur said publicly traded companies are now likely to “err on the side of caution and try to disclose as opposed to waiting until they have all the facts.”
Sur said that if a client were to come to him unsure about a potential disclosure, his advice would be to disclose.
“Because if you don’t disclose and you need to disclose later and your stock price drops, guess what? You’re going to get a class action lawsuit,” he said.
Given the amount of information out there regarding the operations of public companies, Sur said there needs to be a balance between disclosing information so investors can trade stocks in a fair manner, and “disclosing every single possible change” that a company thinks “may be a material change.” He said this is because investors could pay less attention if they have to sift through more and more releases.
“So that means there can be more disclosure of material changes by issuers, and so that means there’s just more information that the investor will have to sift through, and that just means they have to pay closer attention than before,” he said.
Canada’s capital requirements
Canada’s capital markets have some of the strongest regulations in the world regarding disclosures, according to Sur, adding that Canadian stock exchanges are resource-heavy with many companies in the mining, oil and gas, and energy sectors.
As Canadian exchanges compete with others around the world, he said he doesn’t think more cumbersome disclosure requirements around material changes would impact the number of companies listing in Canada but that it won’t help Canadian exchanges attract more listings either.
Mine landslide
The case now before the Supreme Court is centred around when the company decided to disclose a mine disruption to its investors.
According to Sur, Lundin uses radar technology to monitor faults or weaknesses in its open pit copper mine, which in 2017 accounted for between 55 and 65 per cent of the company’s sales revenue.
On Oct. 25, 2017, he said the company detected instability at the mine, leading to an evacuation of personnel and equipment ahead of a landslide occurring a few days later.
At the time, he said Lundin likely didn’t view the landslide-induced disruption as a “huge deal.”
The press release at the time mentioned the adjusted production forecasts for the mine dropped by 20 per cent for 2018 and 2019, Sur said, however, the company also raised its 10-year production forecast by 20 per cent.
“And of course, the 20 per cent drop on a global scale only represented about five per cent reduction in its global production.”
As a securities lawyer, Sur said he can see why the company may not have viewed the disruption as a material change at the time and “felt fine” disclosing it to investors at a later date.
“Of course, the market didn’t see it that way, because their stock price dropped by 16 per cent,” he said adding that the stock drop represented a one-day loss of $1 billion in Lundin’s market cap.
