In Dziedziejko v Canopy Growth, 2025 ONSC 6766, the Ontario Superior Court of Justice concluded that materiality can be inferred from a drop in a public issuer's share price following the correction of an admitted misstatement, justifying leave to commence a secondary market misrepresentation claim under the Ontario Securities Act.
Background: Canopy's Misstatements and Correction
The plaintiff, on behalf of investors who acquired shares in the defendant, Canopy Growth Corporation (Canopy), sought leave to proceed with a claim of secondary market misrepresentation under s.138.8 of the Ontario Securities Act and certification of a class proceeding for misrepresentation and oppression under s.5(1) of the Class Proceedings Act.
In May and June 2023, Canopy issued corrective disclosures that admitted misstatements in its prior financial statements and guidance relating to one of its business units, BioSteel.
Following the initial corrective disclosures, Canopy's share prices dropped by 14% on the TSX and 15% on the NASDAQ, and Canopy's stock price dropped another 12% on the TSX and 14% on the NASDAQ following the final set of corrective disclosures.
Inferring Materiality from a Drop in Share Price
In resisting the plaintiff's application for leave to commence a secondary market misrepresentation claim, Canopy argued that the alleged misstatements were quantitatively immaterial to Canopy's overall revenue. In effect, Canopy argued that the disputed BioSteel revenues were too small, relative to the group as a whole, to be material.
While both parties led extensive expert evidence to support their respective arguments on materiality, the Court concluded it was not necessary to resolve the conflicting expert evidence to determine whether the alleged misrepresentations were material. Instead, the Court inferred that Canopy's misrepresentations were material based on the significant drop in Canopy's share price, relying on the Supreme Court's decision in Danier Leather. To the contrary, the Court was openly skeptical that any expert evidence could ever overcome the inference of materiality arising from the drop in share price.
As a result, the Court held that there was a reasonable possibility that the plaintiff would succeed at trial on its secondary market misrepresentation claims and granted leave to proceed.
Takeaways
The approach endorsed in Dziedziejko departs from the usual contextual analysis taken by the courts–where a drop in share price is a factor considered, but not the sole consideration when determining whether a misrepresentation is material. While the Court may have been correct in Dziedziejko to conclude that there was a reasonable possibility the plaintiff would succeed at trial in demonstrating Canopy's misrepresentations were material, there is good reason to doubt that a drop in share price following corrective disclosure will always evidence a material misrepresentation. A company’s share price may move in response to any number of other external factors or simply because corrective disclosure has been issued at all.
The Court's approach in Dziedziejko may prove particularly challenging for public issuers with volatile share prices: any corrective disclosure may lead to the inference that the correction was material, when followed by a significant change in share price.
