Australia

The following describes the concept of materiality for the purposes of disclosure of information in connection with the offer of securities for subscription or purchase in Australia.

In Australia, disclosure in offer documents is governed by section 1022 (1) of the Corporations Law which became operative on January 1^st 1991. That provision does not generally require the disclosure of any specific item of information. Rather it requires that a prospectus contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of:

1. the assets and liabilities, financial position, profits and losses, and the prospects of the corporation; and

2. the rights attaching to the securities.

Under sub-section 1020A(2) the Commission is empowered to refuse to register a prospectus if:

1. ………

2. the Commission is of the opinion that the prospectus contains a false or misleading statement or that there is an omission from the prospectus.

In addition, section 996 (1) prohibits the issue of a prospectus in which there is a material statement that is false or misleading.

The above provisions have, to date, not been subject to judicial interpretation. The philosophy underlying them, however, is to facilitate better informed investment decisions and to minimize the risk of fraud.

Having regard to the foregoing therefore, information may be said to be material for the purposes of the disclosure requirements of the Corporation Law if it is required to enable prospective investors to reach an informed assessment of the matters specified in sub-section 1022 (1).

Two significant amendments were made to the Corporations Law by the Corporate Law Reform Act 1994 (CLRA) which relate to the concept of "materiality". These amendments took effect from September 5, 1994.

Firstly, the concept of "materiality" was defined in relation to the statutory obligations of continuous disclosure introduced under the amendments. For those purposes, a statement or omission is material if it is objectively capable of influencing the decision making of a person who commonly invests in securities (see s1001D and 1002C). This definition may be useful as guidance when considering the concept of "materiality" in relation to the content of a prospectus.

Secondly, the concept of materiality is altered in the case of a transaction specific prospectus which complies with the content requirements of s1022AA. Section 1022AA allows certain entities (e.g. entities with securities listed on the Australian Stock Exchange) to issue a prospectus with limited content. This was in recognition of the increased disclosure obligations imposed upon these "disclosing entities" under the enhanced disclosure and continuous reporting regime introduced by the CLRA. The rationale underlying s1022AA is that when a listed disclosing entity makes a fresh issue of its securities, the market will have already formed a view about the relevant securities based on previous disclosures which the issuer has made to the market about its activities, financial standing and prospects. As such the only new information which investors would require from the prospectus is:

1. information about the effect of the offer on the issuer and the rights attaching to the securities (s1022 (3) (2) (a) and (b)); and

2. any update to information previously disclosed to the market to cover confidential information held back under exceptions to the continuous reporting requirements (s1022AA (6)).

The European Union

The word "material" does not feature in European Law, and no definition of materiality exists; thus, the mechanistic application of a percentage test is inappropriate. However, Article 4 of the Listing Particulars Directive states that:

"The listing particulars shall contain the information which, according to the particular nature of the issuer and of the securities for the admission of which application is being made, is necessary to enable investors and their investment advisors to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the issuer and of the rights attaching to such securities."

An example is information regarding a company's financial position which was not disclosed in a fund raising document and which would have led to an investor of average intelligence and imaginative faculty not acquiring the securities of the company or to have at least influenced the price of the securities.

Each case is taken on an individual basis in the light of the circumstances. In general, practitioners tend to take a cautious view and advise full disclosure of items which are only debatably material.

The overriding disclosure requirement contained in Article 4 is in addition to the requirement to disclose a list of specific information set out in the Directive; the responsibility for ensuring the document contains all the relevant information rests with those making the "responsibility statement" in the document -- usually the directors of the issuer (see Responsibility Statement).

Nevertheless, each member state has the right (under Article 10 of the Admission Directive) to make the admission of a security subject to any special condition which the competent authorities consider appropriate and of which they have explicitly informed the applicant, when this is in the interests of protecting investors.

Hong Kong

The following is a description of the concept of "materiality" in the disclosure of information in listing documents and prospectuses in Hong Kong.

The listing of securities in Hong Kong is governed by the Stock Exchange of Hong Kong's Listing Rules ("Listing Rules") and the Companies Ordinance. Paragraph 11.07 of the Listing Rules imposes a general duty of disclosure in listing documents published in compliance with the Listing Rules, namely:

"In addition to these detailed requirements all listing documents issued ... must, as an overriding principle, contain such particulars and information which, according to the particular nature of the issuer and the securities for which listing is sought, is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and of its profits and losses and of the rights attaching to such securities."

A similar requirement is imposed on a prospectus published under the Companies Ordinance.

Japan

The following describes the concept of materiality under the Japanese disclosure system:

1. In Japan, the concept of materiality is applied to various areas in the preparation of disclosure documents, including accounting, presentation of financial statements and disclosure of corporate information other than financial statements.

2. The concept of materiality is considered to have generally two functions. The first function is to select such information that is particularly useful as investment information and therefore is to be disclosed. The second function is to work as a criterion to clarify the scope of information that is to be disclosed or to permit a company to apply less strict accounting practices so long as such treatments are not contrary to the underlying purpose of disclosure (i.e., providing appropriate information for investors).

3. The application of the concept of materiality, in relation to the disclosure of corporate information other than financial statements, is mostly provided in the ministerial ordinances, circulars and so forth under the Securities and Exchange Law. There are two types of such provisions: (1) the concept of materiality is specifically stated in the provisions and (2) the scope of disclosure requirement is stipulated by numerical yardsticks that reflect the concept of materiality. An example of the former type is a ministerial ordinance that requires an issuer to provide a brief description of the transfer of a "material part of the business". The latter type includes a ministerial ordinance which provides that, in disclosing the changes in the amount of capital stock, the company may indicate only the sums of the increased amounts and decreased amounts for changes that are less than 10% of the capital stock as of the end of the fiscal year.

Mexico

The "Guidance for Prospectus Elaboration" in Rule 11-29 defines material information as any information that investors may need to form an opinion on the implicit risk, financial situation, operation results of a company, and its securities. It also states that it is the responsibility of each issuer to determine which information is material according to the above definition in the context of the issuer's own affairs. The materiality of information shall be determined taking into account qualitative and quantitative factors.

Rule 11-28 requires registered companies to disclose to the Commission, the Mexican Stock Exchange and the public, all the material information, which is defined as any developments, facts or events capable of influencing the price of their issued securities. Rule 11--8 also states that Stock Exchanges may request information of the causes of any uncommon change in the market price of the issuer's securities, and any other information that is considered material or may be of clarifying interest for investors. The Stock Exchanges must immediately inform the Commission of the requested information.

Ontario

Both "material fact" and "material change" are defined terms under the Securities Act (Ontario) (the "Act"). The term "material fact" where used in relation to securities issued or proposed to be issued is defined under the Act as "a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities". See the Act, Section 1 (1) (22). Particulars in respect of any material fact relating to the securities proposed to be offered must be disclosed in the offering prospectus. See Securities Act Regulation, Form 12, Item 32. In Ontario, an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading constitutes a misrepresentation under the Act. See Section 1 (1) (24).

Certain disclosure requirements expressly incorporate the concept of materiality. Examples include, the requirement to disclose in a prospectus any legal proceedings material to the issuer, and the requirement to provide certain financial disclosure in the case of a material business acquisition. See e.g., Securities Act Regulation, Form 12, Item 16 and OSC Policy Statement No. 5.1, respectively. Other requirements give more specific guidance as to whether and when disclosure is necessary; however, the obligation to disclose all material facts provides an overriding requirement in addition to such specific requirements.

A prospectus filed in Ontario must contain a certificate stating that the prospectus constitutes full, true and plain disclosure of all material facts relating to the securities offered. Such certificates are signed by certain officers and any two directors of the issuer, underwriters in a contractual relationship with the issuer or selling securities holder and, where appropriate, a promoter of the issuer. See the Act, Section 57-58. A "material change", where used in relation to the affairs of an issuer, is defined under the Act to mean 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 and includes a decision to implement such a change made by the board of directors of the issuer or by senior management of the issuer who believe that confirmation of the decision by the board of directors is probable.

When a material change occurs in the affairs of a reporting issuer, the reporting issuer must issue and file a press release authorized by a senior officer which discloses the nature and substance of the material change. A material change report must be filed by the reporting issuer as soon as practicable and, in any event, within ten days of the date of the material change. Procedures exist such that a confidential material change report may be filed in lieu of a press release where the disclosure would be unduly detrimental to the interests of the reporting issuer. Such a confidential report is filed, together with written reasons for non-disclosure, and must be updated every ten days with reasons for continuing to keep the material change confidential.

In respect of continuous disclosure required by the Annual Information Form and management discussion and analysis requirements, "materiality" is defined as "a matter of judgment in particular circumstances, and should generally be judged in relation to an item's significance to decision makers. An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. In determining whether information is material, an issuer shall take into account both quantitative and qualitative factors. While this concept of materiality is broader than the definition of "material change" in the Securities Act ... it is consistent with the financial reporting notion of materiality contained in the CICA Handbook (The Canadian Institute of Chartered Accountants' Handbook)". See OSC Policy Statement No. 5.10.

Material information is any information relating to the business and affairs of an issuer that results in or would reasonably be expected to result in a significant change in the market price or value of any of the issuer's securities. Material information consists of both material facts and material changes relating to the business and affairs of an issuer.

It is the responsibility of each issuer to determine what information is material according to the above definition in the context of the issuer's own affairs. The materiality of information varies from one issuer to another according to the size of its profits, assets and capitalization, the nature of its operations and many other factors.

An amendment to a preliminary prospectus must be filed where a material adverse change occurs after a receipt for the preliminary short form prospectus has been issued and before the receipt for the prospectus is issued, and an amendment to a prospectus must be filed where a material change occurs after a receipt for the prospectus has been issued but prior to completion of the distribution under the prospectus.

The above concepts are narrower than the concept of materiality in relation to the financial reporting notion contained in accounting rules and used in a consistent manner in continuous disclosure requirements in the AIF and MD&A which is that materiality is a matter of judgment in particular circumstances, and should generally be judged in relation to an item's significance to decision makers. An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. In determining whether information is material, an issuer shall take into account both quantitative and qualitative factors.

Quebec

The concept of materiality is defined in Schedule VII - Annual report - of the Quebec Regulation, as a matter of judgment in particular circumstances and should be judged in relation to an item's significance to decision makers. An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. In determining whether information is material, an enterprise shall take into account both quantitative and qualitative factors. According to paragraph 73 of the Act, where a material change occurs that is likely to have a significant influence on the value or the market price of the securities of a reporting issuer and is not generally known, the reporting issuer shall immediately prepare and distribute a press release disclosing the substance of the change. Certain disclosure requirements of the Act and Regulation incorporate the concept of materiality. However, there is an overriding requirement that material facts and changes must be disclosed.

Switzerland

The principle of materiality in Switzerland is similar to that in the European Union.

The United States

The following is a description of the concept of "materiality" under the United States' federal securities laws.

Disclosure under the federal securities laws generally is based on detailed disclosure requirements on a variety of topics. The liability provisions of the Securities Act of 1933 (the "Securities Act"), however, impose liability if the registration statement, prospectus or other communications made in connection with an offering contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Other liability provisions relating to material misstatements and omissions are found in the Securities Exchange Act of 1934 (the "Exchange Act"), in connection with the registration and sale of securities in the secondary market and with the solicitation of proxies by means of a proxy or information statement. Under these general antifraud provisions of the securities laws, an issuer may also be obligated under certain circumstances (such as when it is trading in its own securities or where it is responsible for leaks in the marketplace) to disclose all material information.

The concept of "materiality," except as used in connection with certain specific disclosure regulations, is not defined under the Securities Act or the Exchange Act, but instead has developed in case law. The question of what constitutes a material fact is a mixed question of law and fact. In 1976, the U.S. Supreme Court, in TSC Industries, Inc. v. Northway, Inc., articulated the following definition of "materiality" in connection with proxy soliciting materials:

"[A]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."

The TSC Industries definition of materiality has been followed under the federal securities laws in contexts other than proxy solicitations. In 1988, the Supreme Court, in Basic Inc. v. Levinson, held that the TSC Industries definition applies under the antifraud provisions of the securities laws. This standard applies to both misstatements and to the omission of information.

In certain instances, the specific disclosure requirements of the Securities Act and the Exchange Act, and the rules and regulations thereunder, contain express limitations on what information needs to be disclosed. For example, no information need be given regarding a lawsuit or other proceeding that involves primarily a claim for damages if the amount involved, exclusive of interest and costs, does not exceed 10% of the current assets of the company and its subsidiaries on a consolidated basis. Similarly, the interest of an "expert" (other than an accountant) or counsel in an offering will not be deemed substantial and need not be disclosed if it does not exceed $50 000.

The liability provisions of the Securities Act and the Exchange Act provide a strong incentive for issuers to take an expansive view of materiality.