B.C. – failure to disclose existence of arbitration over only material asset alleged to breach securities legislation – #350

In Arian Resources Corp. (Re), 2020 BCSECCOM 89, an alleged failure to disclose arbitration prompted B.C.’s Securities Commission to issue a notice advising that a hearing would be held at which the Executive Director would tender evidence, make submissions and apply for orders under the Securities Act, RSBC 1996, c 418 for failure to disclose material changes.  The notice does not purport to assert determinations of fault or sanction but does remind that, despite the role and availability of confidentiality in arbitration, arbitration parties may still be required to share sufficient, timely information on arbitrations involving them and involving material change.

Respondent corporation, Arian Resources Corp. (“Arian”), was a mineral exploration company whose shares traded on the TSX Venture Exchange.  Arian, together with two (2) of its officers (Arian and officers together “Respondents”) received notice for a June 24, 2020 hearing (“Notice”) at which the B.C. Securities Commission would set a date for the hearing on the Executive Director’s application (“Hearing”).  

None of the allegations in the Notice presented at para. 1 as “the following facts” have been proven. The Notice contains no facts or arguments from Respondents on the substance of the upcoming applications. The Notice is only procedural and not substantive and breach of the Securities Act, if any, remains to be determined.

The Notice alleges that, in March 2014, Arian entered into an agreement (“Agreement”) with a company (“Vendor”) to acquire Vendor’s rights to an inactive copper mine in Albania (“Perlat Project”).  Between April 2014 and April 2017 (“Relevant Period”), Arian was a reporting issuer and the Perlat Project was Arian’s only material asset.  As part of the list of alleged failures to disclose, concealments and understatements listed in the Notice as breaches of the Securities Act, certain failures involved the Perlat Project and related dispute resolution including arbitration and litigation:

(i) “failing to disclose, and concealing the true nature of, actions by a vendor to take back Arian’s only asset”; and,

(ii) “failing to disclose, and concealing the true nature of, actions by Arian and government authorities that materially affected Arian’s only material asset”.

Material change – Para. 13 of the Notice outlines allegations made in support of the alleged failures to disclose and concealments.  After defining them, the Notice submits that “each”, including the “Arbitration” (defined below in the excerpt), was a material change for Arian.

13.  Under its Agreement with the Vendor:

(a) Arian acquired all the shares of an Albanian company (the Albanian Licencee) that held both an exploration licence and a mining licence for the Perlat Project, and

(b) Arian was required to pay $2 million to the Vendor by June 30, 2015, failing which Arian was required to return the shares of the Albanian Licencee.

14. Arian sought an extension of the payment deadline but:

(a) on June 29, 2015, the Vendor stated that it had not agreed to any extension and would “rely on all [its] rights if [the] payment was not made by” the following day (the Refusal),

(b) on August 24, 2015, after Arian missed its payment, the Vendor initiated arbitration (the Arbitration), and

(c) on November 12, 2015, the Vendor sued for the return of the shares of the Albanian Licencee (the Lawsuit). On July 4, 2017, an Albanian court ordered Arian to return the shares of the Albanian Licencee to the Vendor”.

At para. 15, the Notice grouped and defined together the above-defined “Refusal, Arbitration, and Lawsuit” as the “Vendor’s Actions”.

The Notice, at para. 16 alleges that Arian, between September 28, 2015 and September 29, 2016, filed financial statements and Management’s Discussion & Analyses (“MD&As”) as required by National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) and National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (“NI 52-107”).  In those financial statements and MD&As, Arian stated that it was “currently negotiating with [the Vendor] to extend payment deadline”, statements which the Notice termed as “Negotiation Misstatements”.

The Notice alleges that those actions by Arian constituted breaches of the Securities Act by failing to provide “timely and accurate disclosure” about “Vendors Action” and “Negotiation Misstatements”.

At para. 17, the Notice tags the alleged disclosure failures to sections 85(a), 85(b) and 168.1(1)(b) of the Securities Act and NI 51-102 and NI 52-107.  The failures included failing to issue and file news releases disclosing the nature and substance of “each” of the “Vendor’s Actions” or, alternatively, the Vendor’s Actions cumulatively.

No further information regarding the date of the Hearing appears online as of the date of posting this note.

urbitral note – First, the Notice reminds parties involved in arbitration that their arbitration may qualify as a “material change” and, despite confidentiality obligations arising by the agreement to arbitrate, the lex arbitri or both, must be disclosed to applicable securities commissions and appear in timely news releases.

Second, the Notice defines the Relevant Period as “between April 2014 and April 2017”. That Relevant Period covered statements made by Arian which therefore issued before any decision issued on the merits of the arbitration or litigation.  On its face, the Notice states that the existence, and not necessarily the outcome, of arbitration and litigation are “material changes” and ought to be disclosed regarding a listed corporation’s only material asset.  The disclosure obligation arises, it appears, on the existence of risk and not only upon a definitive determination.  That said, the list of allegations at para. 14(d) does list the July 4, 2017 decision of the Albanian court.

Third, the concluding three (3) paras to the Notice set out the process for the Hearing and advise that a default proceeding can proceed to the merits of liability and sanction failing participation by Respondents:

(1) Respondents or their counsel are required to attend if they wish to be heard by the Commission before a date is set for the Hearing;

(2) Respondents may make submissions and tender evidence at the Hearing; and,

(3) If Respondents do not appear at the Hearing, the Executive Director may apply to have liability questions and sanction heard at the same time and “[d]etermination adverse to the Respondents may be made in their absence”.