National Policy 51-201 Disclosure Standards

Part IV Materiality

(1) The definitions of “material fact” and “material change” under securities legislation are based on a market impact test. The definition of “privileged information” contained in the “tipping” provision of the securities legislation of Québec is based on a reasonable investor test. Despite these differences, the two materiality standards are likely to converge, for practical purposes, in most cases.

(2) The definition of a “material fact” includes a two part materiality test. A fact is material when it (i) significantly affects the market price or value of a security; or (ii) would reasonably be expected to have a significant effect on the market price or value of a security. [FN 27v]

FN 27 Section 13 of the Québec Securities Act provides that a prospectus must disclose all material facts likely to affect the value of the market price of the securities to be distributed.

(1) In making materiality judgements, it is necessary to take into account a number of factors that cannot be captured in a simple bright-line standard or test. These include the nature of the information itself, the volatility of the company’s securities and prevailing market conditions. The materiality of a particular event or piece of information may vary between companies according to their size, the nature of their operations and many other factors. An event that is “significant” or “major” for a smaller company may not be material to a larger company. Companies should avoid taking an overly technical approach to determining materiality. [FN 28] Under volatile market conditions, apparently insignificant variances between earnings projections and actual results can have a significant impact on share price once released. For example, information regarding a company’s ability to meet consensus earnings [FN 29] published by securities analysts should not be selectively disclosed before general public release.

(2) We encourage companies to monitor the market’s reaction to information that is publicly disclosed. Ongoing monitoring and assessment of market reaction to different disclosure will be helpful when making materiality judgements in the future. As a guiding principle, if there is any doubt about whether particular information is material, we encourage companies to err on the side of materiality and release information publicly. [FN 30]

FN 28 See also Re Royal Trustco Ltd. et al. and Ontario Securities Commission (1983), 42 O.R. (2d) 147 (Div. Ct.), affirming (1981), 2 OSCB 322C, where the Ontario Securities Commission issued a denial of exemption order against two senior officers of Royal Trustco who disclosed to officers of a Canadian chartered bank that certain shareholders of Royal Trustco did not intend to tender their Royal Trustco shares to a hostile take-over bid by Campeau Corporation. The Ontario Securities Commission held that the disclosure constituted illegal “tipping”. On appeal the Divisional Court stated that the term “fact” should not be read “super-critically” and that “information” that shareholders of Royal Trustco did not intend to tender to a hostile take-over bid by Campeau Corporation “was sufficiently factual or a sufficient alteration of circumstances to be a material “change” to fall within the [tipping provision].”

FN 29 The range of earnings estimates issued by analysts following a company.

FN 30 See also Canadian Investor Relations Institute, “Model Disclosure Policy”, (February 2001) where CIRI noted in its explanatory notes that “Determining the materiality of information is clearly an area where judgement and experience are of great value. If it is a borderline decision, the information should probably be considered material and released using a broad means of dissemination. Similarly, if several company officials have to deliberate extensively over whether information is material, they should err on the side of materiality and release it publicly”.

The following are examples of the types of events or information which may be material. This list is not exhaustive and is not a substitute for companies exercising their own judgement in making materiality determinations.

Changes in Corporate Structure

• changes in share ownership that may affect control of the company
• major reorganizations, amalgamations, or mergers
• take-over bids, issuer bids, or insider bids

Changes in Capital Structure

• the public or private sale of additional securities
• planned repurchases or redemptions of securities
• planned splits of common shares or offerings of warrants or rights to buy shares
• any share consolidation, share exchange, or stock dividend
• changes in a company’s dividend payments or policies
• the possible initiation of a proxy fight
• material modifications to rights of security holders

Changes in Financial Results

• a significant increase or decrease in near-term earnings prospects
• unexpected changes in the financial results for any periods
• shifts in financial circumstances, such as cash flow reductions, major asset writeoffs or write-downs
• changes in the value or composition of the company’s assets
• any material change in the company’s accounting policy

Changes in Business and Operations

• any development that affects the company’s resources, technology, products or markets
• a significant change in capital investment plans or corporate objectives
• major labour disputes or disputes with major contractors or suppliers
• significant new contracts, products, patents, or services or significant losses of contracts or business
• significant discoveries by resource companies
• changes to the board of directors or executive management, including the departure of the company’s CEO, CFO, COO or president (or persons in equivalent positions)
• the commencement of, or developments in, material legal proceedings or regulatory matters
• waivers of corporate ethics and conduct rules for officers, directors, and other key employees
• any notice that reliance on a prior audit is no longer permissible
• de-listing of the company’s securities or their movement from one quotation system or exchange to another

Acquisitions and Dispositions

• significant acquisitions or dispositions of assets, property or joint venture interests
• acquisitions of other companies, including a take-over bid for, or merger with, another company

Changes in Credit Arrangements

• the borrowing or lending of a significant amount of money
• any mortgaging or encumbering of the company’s assets
• defaults under debt obligations, agreements to restructure debt, or planned enforcement procedures by a bank or any other creditors
• changes in rating agency decisions
• significant new credit arrangements

Companies are not generally required to interpret the impact of external political, economic and social developments on their affairs. However, if an external development will have or has had a direct effect on the business and affairs of a company that is both material and uncharacteristic of the effect generally experienced by other companies engaged in the same business or industry, the company is urged to explain, where practical, the particular impact on them. For example, a change in government policy that affects most companies in a particular industry does not require an announcement, but if it affects only one or a few companies in a material way, such companies should make an announcement.

(1) The Toronto Stock Exchange Inc. (the “TSX”) and the TSX Venture Exchange Inc. (“TSX Venture”) each have adopted timely disclosure policy statements which include many examples of the types of events or information which may be material. Companies should also refer to the guidance provided in these policies when trying to assess the materiality of a particular fact, change or piece of information.

(2) The TSX and TSX Venture policies require the timely disclosure of “material information”. Material information includes both material facts and material changes relating to the business and affairs of a company. The timely disclosure obligations in the exchanges’ policies exceed those found in securities legislation. It is not uncommon, or inappropriate, for exchanges to impose requirements on their listed companies which go beyond those imposed by securities legislation. [FN 31] We expect listed companies to comply with the requirements of the exchange they are listed on. Companies who do not comply with an exchange’s requirements could find themselves subject to an administrative proceeding before a provincial securities regulator. [FN 32]

FN 31 For example, securities legislation provides that a recognized stock exchange may impose additional requirements within its jurisdiction.

FN 32 See In the Matter of Air Canada, supra, note 16. In this case, the parties to the settlement agreed that by disclosing earnings information to 13 analysts and not generally disclosing the information, the company failed to comply with the provisions of the TSX Company Manual and thereby acted contrary to the public interest. In the Excerpt from the Settlement Hearing Containing the Oral Reasons for Decision, the Ontario Securities Commission said, “[w]e feel that it will help foster confidence in the financial markets to know that the law requires, and that good corporations will comply with the requirement for, full disclosure of all material information on a timely basis as required by … the Toronto Stock Exchange’s listing agreement and listing requirements.”