Continuous Disclosure Requirements in Canadian Securities Law

It is a pioneer in the market for technical athletic apparel–in particular clothing geared towards yoga–and styles itself as a retailer with deep ties to local communities. So how did Lululemon Athletica Inc. find itself at the centre  of a class action lawsuit that alleges the company made materially false and misleading statements and omissions in connection with a product recall? What can other public companies take from this incident and what lessons does it provide about the importance of continuous disclosure in securities regulation?

Sheer Pants and Allegations of Opaque Disclosure

On March 18, 2013 Lululemon Athletica Inc. (“Lululemon”) issued a press release advising that certain shipments of black luon pants did not meet the company’s “very high standards” and that the resulting product recall would have a “significant impact” on financial results. The press release stated that while the ingredients, weight and longevity of the pants remained the same, the coverage did not, resulting in a “level of sheerness in some of our women’s black luon bottoms”. As one commentator bluntly described, the issue was quite simply that the pants were “transparent”.

The developments in the ensuing months can be traced through Lululemon’s public disclosure. On March 21, 2013 the company announced its fourth quarter results and stated that it was working closely with manufacturers to resolve the luon pants issue. On April 3, 2013 the company disclosed that it had initiated various work streams to address quality control problems and that its Chief Product Officer, Sheree Waterson, would be leaving the company. It was not, however, until June 10, 2013, the eve of the annual shareholder meeting, that Lululemon released its first quarter results and announced that CEO Christine Day would be leaving the company. Shares fell 17.5% in the wake of the announcement, erasing more than $1.6 billion in market capitalization.

The allegations contained in filings associated with a class action now led by the Louisiana Sheriffs’ Pension & Relief Fund suggest that the details disclosed publicly contained materially false and misleading statements and omissions. Specifically, that during the class period Lululemon misrepresented the quality of its products and the measures in place to ensure such quality, the extent of price discounting it had used to generate sales and its intention to fire Christine Day. These actions, it is alleged, artificially inflated the price of Lululemon shares.

Continuous Disclosure Obligations

The incident sheds light on the importance of continuous disclosure and the potential fallout from allegations of impropriety. To that end, it is worth reviewing some of the salient disclosure obligations imposed on reporting issuers in Canada by securities legislation.

The mainstay of the continuous disclosure regime is the requirement to disclose all material changes through the issuance of a press release and the filing of a material change report. A material change is defined as 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 securities of the issuer. In addition to disclosure of material changes, a reporting issuer is required to make periodic disclosure, such as interim and annual financial statements and management’s discussion and analysis. All disclosures are subject to the general requirement under securities laws that such disclosures cannot contain an untrue statement of a material fact and cannot omit a material fact that is required to be stated in order to make a statement that was made not misleading in light of the circumstances in which it was made.

Separate and apart from the securities law requirements, companies listed on the Toronto Stock Exchange (“TSX”) cannot lose sight of the requirements of the TSX. The TSX imposes its own criterion for disclosure, referred to as “material information”, that encompasses both material fact and material change. It defines material information as any information relating to the business or affairs of a company that results in or would reasonably be expected to result in a change in the market price or value of any of the company’s listed securities. The TSX requires immediate disclosure, by way of a press release, of all material information.

There are two points at issue in the Lululemon class action that are central to questions of disclosure. First, what is the measure of materiality? We can tell from legislation that the two core ingredients of a material change are, one, a change affecting the business, operations or capital of the issuer and, two, a change that would reasonably be expected to have a significant effect on the market price or value of any securities. In Re YBM Magnex the regulator added some context to this definition and clarified that the test was objective and hinged on market impact. Essentially, the issue of whether something amounts to a material change must be considered from the perspective of the trading markets and the investor as an “economic being”.

Second, at what stage of a decision making process is the disclosure requirement realized? It is clear from legislation that a decision to implement a material change by the board of directors or a decision by senior management for which approval by the board of directors is probable is enough to require disclosure. Moreover, we know from Re AIT Advanced Information Technologies and Re Burnett that in the context of transactional work, disclosure is required when there is “sufficient commitment” and the issuer has control over the various factors required to implement the transaction.

How would the allegations contained in the Lululemon class action stack up under this framework? In the context of the product recall, the focus would likely be on the point at which the scope of the issue was understood with sufficient clarity to determine that there would be a significant effect on financial results.

The allegations surrounding the departure of Christine Day would likely center on the internal decision making process. The materiality of the departure of a chief executive officer is relatively clear and thus the ultimate question may surround the time at which a decision was made with respect to her departure and how quickly that decision was communicated by public disclosure.

The incident serves as a helpful reminder that if such an occurrence can befall this “retail darling” it is all the more important that companies exercise sound judgment and consult appropriately regarding their disclosure obligations.


Colin Cameron-Vendrig

Other Author

Gordon G. Raman


Securities, Capital Markets and Public Companies