Full Disclosure: Share Price Is Not Enough

If disclosure of information has no effect on a company’s share price, was that information really material to investors? A recent Ontario Divisional Court ruling suggests that the answer may be “Yes” if the information is of the kind that a reasonable investor would want to rely on in making an investment decision. In Cornish, the Court considers the test for when a “material change” has occurred and concludes that the market impact test for materiality can be satisfied even if the share price is not impacted following disclosure of the information. The case is an important one about what constitutes “materiality”; when external events may trigger disclosure obligations; and the breadth of the “public interest” power of the Ontario Securities Commission (OSC).


Cornish involved allegations brought by OSC Staff against Geoffrey Cornish (founder and former President and CEO of Coventree Inc.) and Dean Tai (founder and former director and officer of Coventree). They were alleged to have violated s. 129.2 of Ontario’s Securities Act by having authorized, permitted or acquiesced in Coventree’s non-compliance with the Ontario securities regime.

Coventree and a subsidiary managed and administered ten trusts, known as conduits, that issued asset-backed commercial paper (“ABCP”). Coventree was the conduits’ securitization agent and, as such, engaged in traditional securitization transactions and credit arbitrage transactions.

The Dominion Bond Rating Service (“DBRS”) assessed ABCP credit ratings and imposed conditions as a requirement of issuing those ratings. On January 19, 2007, DBRS announced changes to its credit rating criteria for certain credit arbitrage transactions (the “DBRS Announcement”). In accordance with the new criteria, DBRS required Coventree to secure a particular level of liquidity to back some of its transactions.

The level of liquidity was unattainable. The DBRS Announcement was addressed by Coventree in its second quarter MD&A, which explained that the new liquidity requirements would “have the effect of reducing the profitability of [Coventree] by substantially curtailing its ability to grow, if not halt in the short term, its credit arbitrage business.” There was no significant change in share price following this disclosure.

By July, dealers were struggling to sell new issues of ABCP and Coventree took various measures to attempt to increase demand. On August 1, 2007, Coventree’s Board of Directors met and considered whether material changes had occurred to Coventree’s business or operations. The Board continued to meet daily for this purpose. On August 13, 2007, the market for Coventree-sponsored ABCP collapsed. Coventree’s investors could neither sell nor redeem their investments, and Coventree’s share price dropped from $10.75 to $2.37. Coventree prepared and issued a press release disclosing a material change.

OSC Staff alleged that the Appellants authorized, permitted or acquiesced with respect to various Securities Act breaches, including:

  1. An alleged failure (contrary to s. 56) to make full, true and plain disclosure of all material facts in its prospectus, which did not disclose that DBRS had adopted a more restrictive credit rating criteria for ABCP;
  2. An alleged failure (contrary to s. 75) to comply with its continuous disclosure obligations with respect to material changes when it did not disclose DBRS’s decision to change its credit rating methodology in January 2007;
  3. Further alleged failures (contrary to s. 75) to comply with its continuous disclosure obligations with respect to material changes when it did not disclose liquidity and liquidity-related events and the risk of market disruption in the days leading up to August 13, 2007.

This conduct was also alleged to have been contrary to the public interest, in breach of s. 127 of the Act.

OSC Decision

The Commission found that the second and third allegations were made out with respect to Coventree. It also held that Mr. Cornish and Mr. Tai authorized, permitted or acquiesced in these breaches.

With respect to the second allegation, the Commission found that the DBRS Announcement had constituted a material change to Coventree’s business and operations despite it being an external event.

With respect to the third allegation, the Commission found that the inability to issue new ABCP, the difficulty rolling outstanding ABCP, the ABCP spread widening, the credit default swap spread widening and the sale of Coventree assets had all occurred by August 1, 2007 and constituted a material change to Coventree’s business and operations.

Having found that the Appellants breached the Act, the Commission determined that they had also acted contrary to the public interest.

Divisional Court Decision

Coventree’s officers appealed on the basis that the Commission’s findings that there were material changes were not reasonable, that the Commission inappropriately made findings on matters not properly before it and that the Commission unreasonably made orders in the public interest under s. 127 of the Act. The Divisional Court dismissed the appeal on all grounds.

Material Changes

The Court began its analysis regarding the material changes by emphasizing the importance of disclosure in the securities regime. It also, however, recognized that over-disclosure can be counterproductive. Therefore, it explained that “a central tenant of securities law is that disclosure obligations are limited to material matters”. A “material change” is defined in the Act at s. 1.1 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.

To determine whether a “material change” has occurred, the Court must undergo a two-part analysis as follows:

The first part of the analysis under s. 75 of the Act requires a determination as to whether a change in the “business, operations or capital” of the issuer has occurred and, if so, when. The second part of the analysis requires an assessment of whether the change was material in the sense that it “would reasonably be expected to have a significant effect on market price or value of the securities.”

The Court considered National Policy 51-201, which states that various factors must be taken into account when determining whether a material change has occurred and concluded that “a single factor such as share price movement will not conclusively determine whether a material change has occurred”. The Court stated:

Not only is such evidence not necessary, but it may not always be of assistance in a materiality analysis. There are at least three reasons why evidence of historical price and volume fluctuations for a reporting issuer’s shares may not always be of assistance in this regard. First, if the reporting issuer is a new issuer, or if the issuer has never disclosed the same type of material change in the past, there may not be any relevant trading data to refer to for the purpose of determining how the market might react to a particular type of information. Second, where disclosure of the material change is limited or not made at all, a review of the market price and trading volume may not assist in the analysis of materiality. Third, if the material change is disclosed by the issuer along with other information, the market reaction to the combined disclosure may not be a reliable indicator of the market impact of the disclosure of one particular piece of information in isolation.

The Court relied on Kerr v. Danier Leather to note that even if the financial impact of a material change is only felt later on, the disclosure obligation “arises when the material change occurs” and is not “delayed to that later date.”

With respect to materiality, the Appellants appealed on three grounds.

First, the Appellants alleged that the Commission erred in applying the “reasonable investor test” to determine materiality instead of the statutorily mandated “market impact test”. The Court found that, despite various references to the “reasonable shareholder” in the Commission’s decision, the Commission correctly applied the “market impact test” for materiality and not the “reasonable investor test”. It found that the Appellants were inappropriately parsing a few sentences from the decision, which was incorrect as reasons must be read as a whole and in context. The Court explained that “the concern with using the reasonable investor test rather than the market impact test is that it could broaden the definition of materiality to include matters that may be important to an investor in making investment decisions, but that would not reasonably be expected to have a significant effect on the market price or value of an issuer’s securities”. However, in this case, “because investors could reasonably be expected to react negatively to this information, the market impact test was satisfied”. Moreover, it determined that there was nothing inappropriate about the references to the reasonable shareholder because such references “simply reflect the reality that the market impact test subsumes the perspective of the reasonable shareholder”.

Second, the Appellants alleged that the Commission erred in finding that there was a material change in the absence of any evidence capable of supporting that finding. The Court found that the Commission had considered an evidentiary framework that included evidence of Coventree’s business and operations and detailed evidence of market conditions, among other evidence. The Appellants argued that the fact that the disclosure of the DBRS Release in the MD&A did not affect the share price was clear evidence that no material change had occurred. The Commission found that there were a number of reasons why a disclosure may have no market impact. For example, in this case, the news had been released in the MD&A and not by way of the mandatory news release and material change report, the ABCP market was opaque, and the absorption of information into the market was hindered by the low volume of trading in Coventree shares. The Appellants argued that the Commission’s approach reversed the burden of proof. The Court rejected the Appellants’ submissions and held that the Commission had simply applied its expertise to explain “why the lack of a change in share price was not determinative of the material change issue”. The Court also added that “while shareholder evidence or expert evidence may be relevant or useful, it is not necessary”.

Finally, the Appellants alleged that the Commission erred in failing to distinguish between a “material fact” and a “material change” in finding disclosure was required and submitted that the Commission erred by failing to conclude that the DBRS Release and August events were external developments which did not result in a change to Coventree’s business or operations. The Court found that Coventree’s business was “radically changed” by the external events and, therefore, that this argument was “simply untenable”.

Public Interest

The Court also dismissed the Appellants’ arguments regarding the breach of s. 127. The Appellants had argued that the OSC failed to consider evidence of their good character as well as their reasonable belief that the changes were not material and their reliance on other expert members of the Board of Directors. They argued that the OSC should have considered that the decisions were made with management consensus. The Court held:

The disclosure cases cited by the Commission make it clear that it is not necessary for the Commission to conclude that a respondent acted willfully or deceitfully in order to exercise its public interest jurisdiction. A breach of the disclosure requirements under Ontario securities law will generally involve conduct contrary to the public interest. The prior good character of the appellants and the fact that they acted in good faith, while relevant to sanctions, does not preclude a finding that their conduct was contrary to the public interest.


This decision is interesting for a number of reasons.

The Court expressly confirms the market impact test but recognizes that the market impact test is considered from the perspective of the reasonable investor. By doing so, the Court determines that the reasonable investor test is subsumed within the market impact test. The decision also confirms that the market impact test can be satisfied even if the share price was unaffected by the ultimate disclosure of the information at issue. Moreover, the Court allows that an external event may trigger a disclosure obligation if the external event affects the company’s business, operations or capital. For all of these reasons, therefore, the decision arguably only serves to further confuse the material change analysis undertaken by issuers as they try to determine whether a material change has occurred following external events that may affect their business, operations or capital.

Furthermore, the decision is notable for its holding that the OSC may find that conduct was contrary to the public interest regardless of whether the person acted in good faith, relied on expert advice and/or made the relevant decisions with the consensus of the Board, so long as the OSC has found a breach of the Act.

Case Information

Cornish v. Ontario Securities Commission, 2013 ONSC 1310

Docket: 33/12 and 35/12

Date of Decision: March 19, 2013

asset-backed commercial paper conduits disclosure obligations Dominion Bond Rating Service market impact test material change material fact Ontario Securities Commission reasonable investor test reasonable shareholder Securities Act share price



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