Materiality in Securities Legislation: Four Points from the Supreme Court of Canada
One of the issues in securities law generally is what constitutes "materiality". In a later post we will discuss "material adverse change" clauses in M&A agreements, but this post is about the fundamental question of what is "material". A recent case of the Supreme Court of Canada, Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. provides some guidance. In Sharbern, the Supreme Court looked at the test of what constitutes a "material false statement." While the Court was looking at a real estate related statute, the principles are similar under securities laws. Sharbern imposes burdens on plaintiffs and issuers alike; on plaintiffs to prove that an undisclosed fact really mattered, and on issuers to get the balance right by disclosing everything that is material, but without inundating potential investors with non-material information.
Let's look at what the Court said:
- The "Reasonable Investor Standard." Materiality is to be determined objectively, from the perspective of a reasonable investor.
- The Two-Part "Substantial Likelihood" Test. A fact omitted from a disclosure document is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making an investment decision. It is not sufficient that the fact merely might have been considered important. The Court noted that the materiality standard is a balance between too much and too little disclosure. Too little disclosure is obviously problematic, but so is too much: it is not in the interests of investors to be buried in an avalanche of trivial information. The issue is not whether the fact would have changed the investment decision of the reasonable investor, but whether there is a substantial likelihood that the fact would have assumed actual significance in a reasonable investor’s deliberations.
- Fact Specific. Materiality depends on the specific facts, determined in light of all relevant considerations and the surrounding circumstances forming the total mix of information made available to investors.
- Burden is on the Plaintiff. A plaintiff alleging non-disclosure has the onus of proving materiality and must lead evidence on the point, except where common sense inferences are sufficient.
To learn more, read our article discussing the Sharbern decision.
disclosure material material false statement non disclosure reasonable investor standard substantial likelihood Supreme Court of Canada