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Flash: OSC Releases Decision on Timely Disclosure of Merger Transactions
January 15, 2008 |
While the decision does not create a bright-line test for determining the appropriate time to announce an M&A transaction, it supports the established practice of disclosing such a transaction only once both parties are clearly committed to the transaction and there are no remaining material issues to be settled between the parties, such as due diligence, board or other internal approvals, or material business terms.
The decision was issued following a complaint by OSC staff against AiT in the context of its 2002 merger with 3M Canada ("3M"). AiT commenced a strategic review process which resulted in 3M expressing an interest in acquiring AiT. After initial discussions, 3M indicated to AiT that it was prepared to acquire AiT at a specified price. At a board meeting held on April 25, 2002, the AiT board allegedly approved the specific price put forward by 3M and decided, subject to receiving an acceptable fairness opinion and being satisfied with all of the other elements of the transaction, to recommend the transaction to its shareholders. The parties then signed a non-binding letter of intent on April 26, 2002 which contained a typical 30-day no-shop and exclusivity period and was subject to customary conditions, including 3M being satisfied with its due diligence and the parties executing a definitive agreement. Following inquiries received by AiT with respect to unusual trading in its shares, it issued a press release on May 9, 2002 stating that it was exploring strategic alternatives but did not mention any negotiations with 3M or the price which its board had allegedly approved and recommended. Following completion of 3M's due diligence and further negotiations, the AiT board received a fairness opinion from its financial advisor, and on May 23, 2002 the parties executed a definitive agreement and issued a press release announcing the transaction.
OSC staff took the position that disclosure of the merger negotiations by AiT was required prior to the signing of the definitive agreement. This position was based on staff's view that a "material change" had taken place at the April 25 board meeting at which the AiT board agreed to the price and to recommend the transaction to its shareholders, despite the conditionality of the transaction at that time. In support of its position, OSC staff relied in part on the minutes for the April 25 board meeting. Staff also alleged that entering into the April 26 letter of intent between AiT and 3M was a material change which triggered AiT's disclosure obligations.
In its decision, the OSC concluded, after an in-depth analysis of the facts and evidence, that there was no material change in the business, operations or capital of AiT as a result of the merger discussions with 3M prior to the signing of the definitive agreement, and that AiT was therefore not required to make timely disclosure of its negotiations with 3M prior to that time.
In reaching its conclusion, the OSC clearly recognized the distinction between a material change (which must be immediately disclosed) and a material fact (which does not) recently made by the Supreme Court of Canada in Kerr v. Danier,[2] and confirmed that the assessment of whether a material change has occurred depends on the specific facts and circumstances of each situation. In the OSC's view, there is no "bright-line" test for such determination. Where the transaction is speculative, contingent and surrounded by uncertainties, a commitment from one party to proceed with a transaction is not sufficient to constitute a material change. In order for public disclosure to be required, it is instead necessary to establish that there is sufficient commitment from both parties to the transaction to proceed and a substantial likelihood that the transaction will be completed.
A material change includes a decision to implement such a change made by the board of directors of an issuer. In this case, the OSC disagreed with staff's allegation that the AiT board had made a decision to implement the transaction at its April 25 board meeting, stating that a decision by a board of directors of an issuer to pursue a potential transaction that is not yet within its control to put into effect (and therefore is not capable of achievement) would not ordinarily be a material change in the business, operations or capital of an issuer at that point in time, unless the board has reason to believe that the other party is also committed to completing the transaction.
The OSC also found that the board minutes for the April 25 meeting, which were prepared several weeks after the board meeting as a "clean-up" item in connection with the mailing of the proxy circular and by a lawyer who was not present at the meeting, did not properly convey the substance of the discussions and resolution of the AiT board. This highlights the importance of keeping an accurate record of the decisions and discussions that take place at board meetings, particularly in the context of M&A negotiations.
The OSC also found that the signing of the letter of intent between AiT and 3M did not trigger AiT's disclosure obligations given its non-binding nature, the absence of a firm price commitment by 3M and the fact that most of the conditions necessary to be satisfied before 3M would commit to the transaction were beyond the ability of AiT to resolve.
The OSC also held that the fact that legal and financial advisors are retained in connection with a potential merger transaction is not determinative of the existence of a material change.
While the OSC stated that there may be circumstances where a material change can occur prior to the execution of a definitive merger agreement, the AiT decision generally supports the established practice of disclosing M&A transactions only upon the signing of a definitive merger agreement between a target and an acquiror. Of course, if unusual trading activity occurs as a result of leaks, a target company may be compelled to make premature disclosure of its merger negotiations. It therefore continues to be essential that target companies take active steps to keep their merger negotiations confidential.
Premature disclosure of M&A transactions can be very damaging to target companies in terms of impact on employees, customers and other stakeholders and on the target itself which may be seen as damaged goods if the transaction fails. The AiT decision should give target company management, boards and M&A practitioners comfort that, absent unusual circumstances, they are not compelled to run this risk.
Please do not hesitate to contact Vincent A. Mercier, Patricia L. Olasker or Philippe C. Rousseau in our Toronto office (416.863.0900) or Neil Kravitz in our Montréal office (514.841.6422) if you would like further information.
Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.
The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.
[1] In connection with the proceedings, AiT previously entered into a settlement agreement and agreed to pay $40,000 to the OSC for the benefit of third parties and $60,000 to the OSC for costs. The proceedings were therefore continued only against Weinstein, who acted as a director of AiT and was a partner in the law firm representing AiT in connection with the merger transaction with 3M.
[2] The definition of a material fact is much broader than that of a material change. "Material fact", in relation to securities issued or proposed to be issued, means a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities. On the other hand, a "material change" is defined, in relation to the affairs of an issuer, 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 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. As a result of this distinction, not all material facts are significant enough to constitute a change in the business, operations or capital of the issuer, and therefore be a material change requiring immediate disclosure.
>flash
January 15, 2008
