Determining Materiality of Drill Results

On August 7, 2013, a British Columbia Securities Commission Hearing Panel (the “Hearing Panel”) released a decision providing guidance for resource issuers in determining whether drill results will trigger disclosure obligations under section 85 of the Securities Act (the “Act”) as “material changes”.

The executive director of the British Columbia Securities Commission issued a notice of hearing alleging, among other things, that Canaco Resources Inc. (“Canaco”) and certain directors of Canaco in their personal capacities, contravened the Act by failing to immediately disclose drill results as a material change.

Section 85 of the Act requires an issuer to provide prompt disclosure of a material change. The Act defines a “material change”  as “a change in 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”.

In determining that Canaco and its directors were not required to disclose the drill results in question, the Hearing Panel laid out, in great detail, appropriate considerations in determining “materiality” in the context of section 85 of the Act:

  • The test for materiality is objective – would the disclosure of the drill results have reasonably been expected to significantly affect the market price or value of Canaco’s shares?
  • The test for materiality is a market impact test – materiality must be viewed from the perspective of the trading markets, that is, the impact of an event on the buying, selling or holding of securities.
  • The reasonableness of market impact is assessed from the point of view of the reasonable investor, i.e. would a reasonable investor expect that the market price or value of the securities would be affected by the disclosure of the drill results?
  • Materiality is assessed in the context of the issuer’s industry and the market.
  • Canaco was a junior exploration issuer with no revenue and the property was its main exploration focus. For an issuer with this profile, information associated with drill results is more likely to be material than for a larger issuer with more properties and more diversity to its business.
  • Issuers are not held to perfection nor is the expectation of the market impact assessed with the benefit of hindsight, meaning the fact that disclosure of a change did impact the market price of an issuer’s shares is not conclusive evidence that it was a material change.
  • The test for materiality is not whether the change is something that a reasonable investor would want to know and does not defer to the business judgment of management or depend on subjective assessments of company executives or stock exchanges.
  • The language used in a news release disclosing a change will not be considered in determining its materiality, that is, “whatever an issuer might say in a news release, the language it chooses cannot make a change material when otherwise it would not be.”

The information contained in this bulletin is a summary and is not considered to be legal advice.  Boughton Law offers substantial depth and experience in all matters relating to continuous disclosure requirements under the Act, for more information, please contact any member of the Boughton Law Securities Group.


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