On January 14, 2008, the Ontario Securities Commission (the “OSC”) released its much anticipated decision in the matter of AiT Advanced Information Technologies Corporation (“AiT”), Bernard Jude Ashe and Deborah Weinstein relating to the timing of disclosure of merger discussions. The case was followed closely by M&A practitioners because of concerns that the OSC decision might significantly change established market practice regarding the timing of disclosure of merger negotiations.
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 that 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 that 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 that 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 Leather Inc., 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.
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 that 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 that 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 that 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 Leather Inc., 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.
