The Supreme Court of Canada (SCOC) in Ottawa on May 6.Sean Kilpatrick/The Canadian Press
Jean-Pierre Chamberland, Sarah Gingrich and Steve Saville are lawyers at Fasken. The views expressed herein are those of the authors.
It’s not often that Canada’s highest court considers key commercial issues. So when it does, it’s always important. Next up is the meaning of “material change” under securities law, a term that dictates what information companies listed on the stock market must publicly disclose.
In March, the Supreme Court of Canada agreed to hear the case, and written arguments are now being made. As the court weighs the right approach, several policy issues warrant close consideration. The stakes for Canada’s capital markets are potentially high.
The concept of “material change” reflects a balancing of investors’ interests and the company’s interests. While investors need timely disclosure of important events, it’s overly burdensome to require the company to continually report every development affecting its business. Excessive disclosure can also be counterproductive by overwhelming investors with data and would have a great impact on Canada’s capital markets.
So what qualifies as a material change? It’s a question Canadian public companies often wrestle with. When does a change actually occur, as opposed to being merely anticipated or threatened? When is the change to the company’s business, as opposed to the company’s market or industry? When is enough about the change known so the company can accurately discuss it? When is a change material in that it can be reasonably expected to significantly affect share price?
In the case before the Supreme Court, the issue is whether a rock slide at a mining project that partially shut down the mine’s operations was a material change. The Supreme Court will decide whether to apply “change” narrowly as did the lower court, broadly as did the Court of Appeal, or to take another path.
It’s important that the Supreme Court not apply an overly broad or vague definition to “material change.” The choice made by the court could have meaningful, and potentially unintended, consequences. Capital markets in Canada (and elsewhere) have been facing increased challenges, and their struggles highlight several critical policy considerations.
First, “material change” disputes commonly arise in class-action lawsuits where investors seek damages for an alleged failure to disclose by the company. These lawsuits are very expensive and resource-draining to defend. Too low or ambiguous a standard of “material change” can only encourage speculative litigation and thus increase risk and costs for Canadian public companies.
Second, the number of Canadian public companies has been steadily decreasing for more than a decade. According to the University of Toronto Capital Markets Institute, 1,340 companies were listed on the TSX in 2007. By 2020, this number had fallen to 758. This marked decline, which generally parallels that seen in the United States, is the result of a greater tendency for public companies to go private coupled with a prolonged drought in IPOs.
Unfortunately, it’s become more common for companies to calculate that the benefits of being (or going) public no longer outweigh the burdens, especially as such burdens – for instance, enhanced reporting requirements and costly regulations – have been steadily rising. Too low or ambiguous a standard of “material change” can only further reduce the appeal of being public.
Third, Canadian stock exchanges are in an international competition to attract and retain listings. For example, the TSX rightfully boasts to being home to around 40 per cent of public mining companies globally. But in 2010, some estimates had this figure as high as 55 per cent, and fear that Canada could lose its dominance in capital raising in mining is intensifying.
It’s in our best interest to both defend and increase the market share of our stock exchanges, whether in mining, tech or otherwise. Developing any reputation as a jurisdiction with abnormal or excessive securities-law costs or risks will not do this.
To be sure, the Supreme Court’s decision will ultimately only be one part of the equation that decides the overall attractiveness of being publicly listed in Canada. That said, this doesn’t make the foregoing policy considerations any less relevant or meritorious. It’s in the national interest for Canada to have robust and vibrant capital markets. It’s also in the national interest for Canada’s capital markets to be as competitive internationally as possible.
Getting the balance right between protecting investors and not overburdening public companies is no easy task. But a clear, predictable and reasonable approach to what is a “material change” can only help. And it mustn’t be overlooked that there are bigger business concerns at issue than simply a super-technical legal term under securities law. We can no longer take our capital markets for granted, and neither should the courts.