Timing is Everything: Public Disclosure Obligations in M&A Transactions
Increased volatility in the financial markets and overall economic uncertainty continue to affect corporate planning and go-forward strategies. The drive to increase shareholder value may cause management to seek out and assess a broader range of enhancement and maximization alternatives. Current market conditions have created opportunities for both the hunter and hunted.
Canadian reporting issuers (sometimes referred to as public companies) should be keenly aware of their continuous disclosure obligations as they proceed down the path towards a business combination, corporate sale or other strategic opportunity.
Canadian securities legislation distinguishes between a ‘material fact’ and a ‘material change’. A material fact is defined broadly to mean a fact that would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities. In the context of a business combination, the decision to canvass market opportunities and engage in preliminary negotiations may constitute a material fact. Canadian securities legislation strictly prohibits the purchase or sale of securities with the knowledge of an undisclosed material fact. Think ‘insider trading’.
A ‘material change’ is defined to mean:
(a) 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 a security of the issuer, or
(b) a decision to implement a change referred to in paragraph (a) made by the directors of the issuer, or by senior management of the issuer who believe that confirmation of the decision by the directors is probable.
The Alberta Securities Act, RSA 2000, c. S-4, requires reporting issuers to provide disclosure of a material change in accordance with National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”). Upon the occurrence of a material change, section 7.1 of NI 51-102 requires the issuer to:
(a) immediately issue and file a news release authorized by an executive officer disclosing the nature and substance of the change; and
(b) as soon as practicable, and in any event within 10 calendar days of the date on with the change occurs, file a Form 51-102F4 Material Change Report with respect to the material change.
The premature disclosure of a material change in the context of a business combination, corporate sale, or other strategic opportunity can increase deal risk and reduce the likelihood of completing the transaction. Timing is everything. Counsel and client must work closely to ensure that the transaction path is designed in a way that allows the parties to negotiate and settle business terms without prematurely triggering public disclosure obligations and thereby jeopardizing completion.
The 2007 decision of the Ontario Securities Commission in Re AiT Advanced Information Technologies Corp., 31 O.S.C.B. 712, sought to clarify the triggering of a material change in a merger transaction and remains the leading authority on this topic. The OSC hearing arose as a result of the 2002 merger of Advanced Information Technologies Corporation (“AiT”) and 3M Company. The OSC Staff alleged that in the course of negotiating and completing the merger, AiT failed to publicly disclose a material change as required by securities legislation and as a result, engaged in conduct contrary to the public interest. The OSC ultimately found that no material change occurred during the period in question. In reaching their decision, the OSC confirmed that:
- The assessment of whether a material change has occurred, particularly in the context of an arm’s length negotiated transaction, will depend on the specific facts and circumstances of each case and will vary from case to case. There is no bright-line test.
- A signed definitive agreement is not a prerequisite to finding a material change in a material transaction. The determination must be made on the specific facts surround each negotiation, including the nature of the parties to the negotiations, their specific circumstances, the progress of the negotiations towards agreement on all material terms, outstanding conditions or contingencies, and all other relevant factors.
- Even in the absence of a legally binding agreement, there can be a material change if both parties to the negotiations are clearly committed to completing the transaction.
- In determining whether public disclosure is required, the overall approach is to be fact-based, contextual and purposive, and based on three questions. The first two questions address whether there is a ‘material change’: first, whether the information or event in question is ‘material’; second, whether a ‘change’ has occurred. If it is concluded that there is a material change, the third question is whether disclosure should be made publicly, or whether there is sufficient reason to disclose to security regulators confidentially.
- In the context of a merger transaction, a board resolution will constitute a ‘decision to implement a material change’ if there is sufficient evidence for the board to conclude that there is sufficient commitment from the parties to proceed and a substantial likelihood that the transaction will be completed.
- An intention by a person or company to do something, which once implemented would constitute a material change in the affairs of the issuer, but which at the time the intention is formed, for reasons beyond the control of the person or company is still not capable of achievement, is not ordinarily a material change in the affairs of the issuer.
- For AiT, the OSC found that the material change had only occurred once the board “approved the definitive merger agreement and related documents and received a fairness opinion from CIBC Investment Banking, which concluded that the consideration offered to the shareholders of AiT in connection with the merger transaction was fair, from a financial point of view, to the shareholders. At this time, AiT’s shareholder plan was also waived.” The following day the parties executed the definitive agreement and AiT satisfied its public disclosure obligations by issuing a press release and filing a material change report.
The OSC’s pragmatic analysis in AiT continues to inform public disclosure best practices in merger and acquisition transactions. As companies continue to seek out and assess enhancement and maximization alternatives, careful consideration ought to be given to public disclosure obligations. A proactive approach is preferable, particularly one that is well thought out and implemented from the outset of negotiations. Failing to properly plan can lead to increased deal risk and may jeopardize the completion of your business combination, corporate sale or other strategic opportunity.
If you would like to discuss public disclosure obligations in the context of M&A transactions or otherwise, or any other matter concerning Canadian securities legislation, please do not hesitate to contact one of the “Corporate Finance” lawyers in the “Business Law” group at SNC Law.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. The foregoing purposely omitted discussion regarding confidential disclosure to securities regulators and stock exchange disclosure policies. If the issues discussed herein affect you or your company, you are encouraged to promptly seek proper legal advice.