First Merits Decision in a Securities Class Action for Secondary Market Misrepresentation Upheld by Court of Appeal – Reliability is an Element of Materiality
Last year we wrote about Justice Belobaba’s decision on the merits of this secondary market securities class action, which was reported at Wong v. Pretium Resources Inc., 2021 ONSC 54. The decision was instructive. Courts had spilled a great deal of ink on a “reasonable possibility of success” when granting leave to assert the statutory cause of action for secondary market misrepresentation. More than a speed bump but not the Matterhorn, and that sort of thing. But when the plaintiff in Wong was obliged to prove his case on a balance of probabilities, he came up short. Justice Belobaba confirmed that you could get leave – from the same judge – and still lose on the merits.
On July 22, 2022 a unanimous Court of Appeal for Ontario upheld the dismissal of the action in a decision reported at Wong v. Pretium Resources Inc., 2022 ONCA 549. Writing for the Court, Justice van Rensburg rejected the plaintiff’s argument that Justice Belobaba has essentially decided the merits by granting leave. The Court also rejected the plaintiff’s contention that the omission of a material fact and the public correction were apparent from the decline in the price of the issuer’s securities. Rather, it was necessary to prove that the current state of disclosure required correction. On that score, the Court affirmed that a consultant’s erroneous opinion did not constitute a material fact that had to be disclosed.
The Court of Appeal’s decision confirms that reliability is an element of materiality. This is particularly true when determining the materiality of an opinion. Objective reliability determines the importance that reasonable investors would ascribe to information. The defendants’ decision to withhold information was not a matter of business judgment; it was an objective assessment of the accuracy of the information and the existing state of disclosure. It is no answer to say that the issuer should disclose all available information, regardless of reliability, and let the market decide what matters. As the Court of Appeal affirmed, disclosure of erroneous information would be misleading, and it would represent a failure of the continuous disclosure regime.
By way of our own disclosure, we acted as counsel for the defendant throughout.
Wong concerned an allegation that a gold miner, Pretium Resources Inc. (“Pretium”), and its then-CEO failed to disclose an adverse opinion about its mineral resource estimate. The adverse opinion was tendered by Strathcona Mineral Services Ltd. (“Strathcona”). Pretium had engaged Strathcona to oversee a bulk sample program. However, Pretium had not engaged Strathcona to assess the resource estimate, which had been prepared by Snowden Mining Industry Consultants Pty Ltd. (“Snowden”).
Pretium did not believe Strathcona was qualified to estimate the mineral content of the unique deposit at issue. Accordingly, Snowden remained engaged to update its resource estimate at the conclusion of the bulk sample program. Snowden considered Strathcona’s concerns and advised Pretium that the existing resource estimate remained valid. Pretium’s own technical team likewise concluded that Strathcona was wrong. Pretium communicated these views to Strathcona, which was unmoved. Frustrated that Pretium would not disavow Snowden’s resource estimate, Strathcona resigned.
Pretium publicly disclosed Strathcona’s resignation, and shortly thereafter it disclosed Strathcona’s concerns about the resource estimate. The plaintiff alleged that these disclosures caused the price of Pretium’s securities to fall, and that both disclosures constituted corrective disclosure of a material misrepresentation: namely, the omission of Strathcona’s concerns about the resource estimate. The plaintiff advanced claims for both common law misrepresentation and statutory misrepresentation under Part XXIII.1 of the Securities Act.
Days after Strathcona resigned, however, Pretium began to receive mill results from the bulk sample, which proved that Snowden was right and Strathcona was wrong. With the benefit of fulsome analysis, the results of the bulk sample materially confirmed Snowden’s earlier resource estimate. Ultimately, Pretium built the mine and brought it into commercial production. In time, the price of Pretium’s securities rose to new highs.
The question in Wong was whether investors could recover any damages that they actually suffered, or were statutorily deemed to have suffered, on account of the temporary decline in the price of Pretium’s securities following the impugned disclosures.
Leave and certification
Justice Belobaba granted leave to assert the cause of action for secondary market misrepresentation under part XXIII.1 of the Securities Act: Wong v. Pretium Resources Inc., 2017 ONSC 3361. In so doing, he explained that, while Pretium had conducted a reasonable investigation of Strathcona’s concerns, “there still remains a reasonable possibility” that the defendants would fail to prove at trial that “they had no reasonable grounds to believe that the omission about Strathcona’s findings and concerns was an omission of a material fact that a reasonable investor would find important and would reasonably want to know”. The Divisional Court refused leave to appeal. Thereafter, the action was certified as a class proceeding on consent.
After making documentary production, the defendants moved for summary judgment. In the months that followed, the plaintiff sought several adjournments and moved to amend his claim to expand the allegations. Shortly before the defendants’ summary judgment motion was to be heard, the plaintiff brought a mirror cross-motion for summary judgment in his favour. The motions for summary judgment proceeded to a hearing before Justice Belobaba on a record that was voluminous, but that did not disclose any material questions of credibility.
The merits at first instance
Justice Belobaba began by noting that “leave to proceed will be granted if there is enough evidence to clear the ‘reasonable possibility’ hurdle”, but “when the matter is litigated in full and the plaintiff’s hurdle is the more demanding ‘balance of probabilities’, the defendants may prevail and the securities class action will be dismissed”. He explained that he had granted leave to proceed under Part XXIII.1 because it appeared that “by any objective measure, reasonable investors would have considered it material that two respected mining consultancies retained by Pretium – Snowden and Strathcona – fundamentally disagreed as to whether there were valid mineral resources”.
However, on the more developed summary judgment record, Justice Belobaba was able to conclude that “this initial characterization of Strathcona and Snowden as two equally skilled resource estimate consultants with equal expertise and qualifications offering equally valid opinions has now been dislodged”. Rather, he concluded that Strathcona was not qualified to estimate Pretium’s resource, and “Strathcona’s so-called concerns or opinions were not only unsolicited but inexpert, premature and unreliable”. In turn, Justice Belobaba was satisfied that “Pretium acted properly throughout and was right in not disclosing bad and misleading information”.
No material misrepresentation
Justice Belobaba accepted Pretium’s defence that there had been no material misrepresentation. He found that Strathcona’s concerns were the result of fundamental methodological errors, which Pretium and Snowden had immediately recognized. Justice Belobaba accepted that “unreliable information is not a material fact that must be disclosed” and “[n]othing is achieved by flooding the market with unhelpful information”. Because no material fact had been omitted, there was no misrepresentation. On this basis, the statutory cause of action was never made out, and the alleged link between the impugned disclosure and the decline in the price of Pretium’s securities was irrelevant.
In any event, there was a reasonable investigation
Justice Belobaba also accepted Pretium’s alternative defence of a reasonable investigation under s. 138.4(6) of the Securities Act. The defence is available on proof that (i) the defendant conducted a reasonable investigation before the impugned document was released, and (ii) at the time of the release the defendant had no reasonable grounds to believe that the document contained a misrepresentation. In granting leave to proceed, Justice Belobaba had been satisfied with the reasonableness of Pretium’s investigation, and he affirmed that finding on the summary judgment record. The first branch of the defence was established.
However, Justice Belobaba granted leave to proceed because, in his view, it was possible that the defendants’ subjective belief that Strathcona’s concerns were wrong might not be objectively reasonable. On the amplified summary judgment record, however, he was convinced of the “objective dimension to the defendants’ subjective perspective of why the Strathcona data was ‘inherently unreliable’”. On this basis, he concluded that the second branch of the reasonable investigation defence was satisfied and the defendants were entitled to a complete defence.
The merits on appeal
The plaintiff pursued a very broad appeal. Indeed, the plaintiff went so far as to challenge the appropriateness of summary judgment, despite the fact that he had sought summary judgment by way of cross-motion in the court below.
As below, the plaintiff argued that Justice Belobaba got it right in his leave decision and a reasonable investor would want to know that Strathcona was concerned about the validity of the resource estimate. The reliability of the information should play no role in the materiality analysis. Rather, materiality was self-evident from the decline in Pretium’s share price when Pretium disclosed Strathcona’s concerns. In these circumstances, the plaintiff argued, it would be unfair to rely on affidavits made years after the fact to explain the issuer’s rationale. What mattered was Pretium’s contemporaneous decision, as a matter of business judgment, to withhold a material fact that was needed to correct the misimpression that the bulk sample program was proceeding according to plan.
Justice van Rensburg, writing for a unanimous Court of Appeal, noted that Justice Belobaba had appropriately considered the context in which the alleged omission was made. Pretium’s continuous disclosure had made clear that it would disclose the results of the bulk sample program after all data had been received and analyzed. No one was expecting interim disclosure. Furthermore, Pretium properly and repeatedly consulted its internal and external consultants and its board of directors and they confirmed that Strathcona’s concerns were wrong. The Court found that this factual context appropriately shaped the materiality analysis.
The Court rejected the plaintiff’s argument that the reliability of Strathcona’s concerns was irrelevant. Reliability is an element of materiality where there fact is actually an opinion. In determining materiality, a reasonable investor would want to know whether the opinion was objectively reliable. Here, Strathcona’s concerns were wholly unreliable, and there was no need to correct continuous disclosure that promised results at the end of the bulk sample program.
The Court held that it does not further the policy objectives underlying the continuous disclosure regime to flood the market with unreliable information on the expectation that investors will sort out what matters. Excessive disclosure without regard to materiality would overwhelm investors and impair their ability to make decisions. In the circumstances, the Court held that it would actually have been misleading to disclose Strathcona’s concerns.
Justice van Rensburg rejected the argument that Pretium relied on after-the-fact evidence, noting that the defendants had tendered a significant volume of contemporaneous documents to make its case. The Court also rejected the argument that Pretium impermissibly relied on business judgment to omit Strathcona’s concerns. Pretium did not withhold disclosure because it expected the bulk sample program results to improve with time. Rather, it withheld disclosure because Strathcona’s concerns were obviously wrong.
Justice van Rensburg also rejected the plaintiff’s invitation to “work backwards” from the decline in the price of Pretium’s securities following the disclosure of Strathcona’s concerns. The plaintiff argued that the decline following disclosure proved that the disclosure corrected an omission of a material fact. However, the Court noted that Pretium’s disclosure did not correct any prior statement, nor did it validate Strathcona’s concerns. In any event, the Court held that market response is not determinative of materiality, particularly where purportedly corrective disclosure is presented together with other information, as was the case here.
Because the Court had determined that there was no omission of a material fact, it was unnecessary to consider the reasonable investigation defence. Taken as a whole, the Court’s decision is a vindication of Pretium’s disclosure practices, and it endorses a pragmatic, contextual approach to disclosure that will help to guide disclosure committees tasked with making real-time decisions.