August 08 2007
In a regulatory environment which increasingly encourages greater disclosure by public companies, one judgement that is often difficult to make is when to disclose negotiations relating to a proposed M&A transaction. For example, if there are discussions which could lead to the takeover of a public company, at some point an announcement must be made. If it is made too late, shareholders that have already sold their shares will lose out on a takeover premium. On the other hand, if it is made too early and the deal falls apart, investors that have bought or sold may be disadvantaged.
In general in Canada, public issuers must make a public announcement whenever there is a:
"material 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."
Stock exchanges and internal disclosure policies may impose higher obligations relating to the disclosure of material information. In addition, certain provinces have or are proposing legislation which allows investors to sue public issuers that fail to make public disclosure of a material change in a timely manner. Accordingly, in the context of negotiating an M&A transaction, the question arises of when a material change occurs that must be announced.
Proceedings scheduled to go before the Ontario Securities Commission (OSC) in September 2007 may provide guidance on this point. The case involves AiT Advanced Information Technologies, which was acquired by 3M Canada in 2002. A settlement agreement has already been reached by the OSC with AiT and one of the directors, but another director (who is also AiT's outside counsel) is contesting the matter at a hearing.
The sequence of events is important. AiT had initiated a strategic review process which led to 3M being interested in acquiring the company. Following initial due diligence and discussions, 3M advised AiT that it was prepared to offer C$2.88 a share (a 67% premium) for all shares of AiT. The AiT board approved this price and agreed to recommend the transaction to shareholders, subject to the board receiving a fairness opinion and being satisfied with the other transaction terms. The next day, the parties signed a non-binding letter of intent giving exclusivity to 3M, and which was subject to 3M being satisfied with its due diligence and the parties executing definitive documentation.
Two weeks later, AiT received inquiries about unusual trading in its shares on the Toronto Stock Exchange from the market surveillance regulatory authority. In response, AiT issued a press release stating that it was exploring strategic alternatives to enhance shareholder value, but made no mention of the 3M negotiations or letter of intent.
Two weeks after that, a satisfactory fairness opinion was received by the AiT board and the parties executed a definitive merger agreement, which AiT then announced.
In its statement of allegations the OSC took the position that the material change requiring a public announcement took place on the day the board approved the C$2.88 share price or, at the latest, on the day AiT made its announcement in response to the regulatory inquiry.
The case raises difficult issues. At the time of the initial approval by the AiT board, 3M had not completed its due diligence and there was no assurance that the C$2.88 price would hold or that AiT would receive its required fairness opinion. If the deal had been announced at that point, and had then collapsed or suffered a reduction in price, potentially AiT would have had many unhappy shareholders. The OSC's position, on the other hand, serves to protect shareholders that sell without knowing that a premium offer may be on the way.
The hearing will pit two opposing views of disclosure against each other and the resulting decision is likely to provide useful guidance in Canada as to when disclosure of significant transactions must be made.
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