The decline in public markets has been used to justify any number of deregulatory initiatives in recent years, from diluting securities regulators’ investor protection mandate to scrapping proposals for climate and board diversity disclosure.Nathan Denette/The Canadian Press
Douglas Sarro is a securities law professor at the University of Ottawa.
An upcoming Supreme Court of Canada case deals with public companies’ obligation to immediately disclose material changes that occur within their business rather than waiting until their next financial quarter to tell investors about these developments.
For decades, the Supreme Court and securities regulators have interpreted the obligation to disclose material changes broadly, encouraging companies to err on the side of disclosing new developments sooner rather than later. This counters managers’ natural temptation to delay disclosing negative developments, perhaps in the hope that things will turn around or at least come to seem not quite as bad as they first appear.
Now, however, the Supreme Court is being invited to reverse course by embracing the approach taken by a lower court judge in Markowich v. Lundin Mining Corporation, who seemed to think timely disclosure of bad news is only necessary when there is a ”threat to [a company’s] economic viability” – a very high bar. This approach would read the timely disclosure obligation largely out of existence.
That would be a mistake. The Supreme Court should stay the course in its upcoming securities case and uphold its long-standing guidance.
We require timely disclosure of information when it’s not only relevant to investors but also highly costly for them to discover without help from management. Rather than have investors compete to gather intelligence about developments like the ones in this case – a rockslide and shutdown at a Chilean copper mine in 2017 – it seems much more efficient for management to just disclose these developments when they happen.
By contrast, we typically don’t require public companies to make real-time disclosures about outside political or economic developments likely to affect their performance because investors can easily find out about these developments without management’s help. Often, all they need to do is read the news.
Some industry participants might feel that rewriting the rulebook will help reverse the significant decline in the number of Canadian public companies since 2000.
But the obligation to disclose material changes long predates this trend – in Ontario, it was enacted in 1978. And while investors only gained the power to sue for failures to meet this obligation in the 2000s (previously, only regulators could prosecute such failures), this regime came with caps on liability and other guardrails meant to placate corporate Canada’s concerns about frivolous lawsuits.
The decline in public markets has been used to justify any number of deregulatory initiatives in recent years, from diluting securities regulators’ investor protection mandate to scrapping proposals for climate and board diversity disclosure.
The trouble is no matter how much you cut down the regulatory burden of being a public company, it’s always going to be less burdensome to stay private. So as long as promising businesses can get the capital and liquidity they need through private investors there’s little reason for them to go public no matter how much we reduce the costs of doing so.
What’s more, deregulatory proposals like the one now being promoted before the Supreme Court come with costs of their own. Accurate, timely disclosure is the lifeblood of our public markets. Without it, we’re less able to trade stocks at fair prices. Analyses and recommendations by the financial professionals we rely on to meet retirement and other goals become less reliable. And frauds such as Sino Forest, Bre-X and YBM Magnex become tougher to discover and prosecute.
If we’re really concerned about the vitality of our public markets, maybe we should instead take a look at how law helps make the private markets such an attractive alternative.
For example, securities law lets business raise unlimited capital from pension funds and other institutions via private markets. This might not have been too important back when institutional investment was in its infancy, but today, it means businesses can access massive pools of capital without ever having to look to public markets.
If we think more of these businesses ought to be going public, maybe the answer is to require them to start taking on public company obligations once they reach a certain size. U.S. securities laws have long imposed such a requirement – it’s why Google went public.
You can criticize this proposal for interfering with free markets or potentially threatening our competitiveness, but it would seem to stand more of a chance of boosting the number of public companies in Canada than further deregulating our public markets.
And for that reason alone, it at least seems worth talking about.