OSC Clarifies Material Change Reporting Obligations 

publication 

March 2008 - (Securities Brief Spring 2008)

Securities Brief Spring 2008
Leo Raffin, Khorshid Hakemi

In a highly anticipated decision, the Ontario Securities Commission ("OSC") provided new guidance to the business community as to when a public issuer is required to disclose its intention to complete an M&A trans­ion.

Chronology of Events

In 2002, AiT Advanced Information Technologies Corporation ("AiT") began discussing a potential transaction with 3M Canada Company ("3M").

On April 25, 2002 3M verbally offered $2.88 per share of AiT. AiT's board unanimously passed a resolution and agreed to recommend 3M's offered price to its shareholders, subject to receipt of a fairness opinion and satisfaction of AiT's board with the other terms of the transaction.

On April 26, 2002 AiT and 3M entered into a non-binding letter of intent giving exclusivity to 3M but which was subject to significant conditions to closing, many of which were beyond AiT's control, including 3M's due diligence review and the parties entering into a definitive agreement.

On May 9, 2002 the staff at Market Regulation Services Inc. ("MRS") contacted AiT to inquire into the unusual increase in the trading volume and price of AiT shares. AiT issued a press release that same day indicating that AiT was "exploring strategic alternatives that would ultimately enhance value" for its shareholders, without mentioning the possible transaction with 3M.

On May 14, 2002 3M's board approved the transaction, subject to the approval by 3M's CEO of the due diligence report and the integration plan.

Following further negotiation of the merger agreement, on May 22, 2002 AiT's board received a favourable fairness opinion and approved the formal merger documentation.

On May 23, 2002 AiT and 3M signed a definitive merger agreement and AiT issued a news release and filed a material change report announcing the transaction.

OSC Ruling

In its statement of allegations, the OSC staff contended that a material change had occurred by April 25, 2002 (the date AiT's board conditionally approved the transaction) and in any event, had occurred not later than May 9 (the date MRS contacted AiT and AiT issued its first news release). The OSC's February 2007 notice of hearing was issued against AiT, Bernard Ashe (AiT's CEO and a director) and Deborah Weinstein (AiT director and a partner at LaBarge Weinstein LLP, AiT's legal counsel).

AiT (now owned by 3M) and Ashe entered into settlement agreements with the OSC (the "Settlement Agree­ments"). AiT agreed to pay costs and a $40,000 fine; Ashe agreed to pay costs and a $15,000 fine.

Weinstein, thankfully, chose to fight the allegations. Absent her actions and the subsequent favourable ruling of the OSC, the settlement agreed to by AiT and Ashe would have left considerable tension in business transactions be­tween the very practical desire to make a public announcement only after binding agreements were entered into and the regulator's view that, in certain circumstances, transactions that were still in the negotiation stage should be announced.

In its ruling, the OSC panel held that no material change occurred for AiT until the definitive merger agreement was signed and all final approvals were granted. The OSC stated that the determination whether a material change has occurred is not a "bright line test." Instead, the assessment is driven by the particular facts of each case, whether there is "sufficient commitment" from both parties to proceed with a merger and if there is a "substantial likelihood" that the merger would be completed.

According to the decision, a resolution by the board of directors of one party to pursue a potential transaction is not a material change unless there is reason to believe that the other party is also committed to completing the transaction. In the AiT case, the OSC concluded that the purpose of the April 25th AiT board meeting was to obtain directors' support for 3M's valuation and study of AiT, an initial step in negotiations that were still in a preliminary stage. At this point, nothing had been received in writing on the proposed transaction and key items still had to be negotiated.

Similarly, the OSC concluded that the signing of the letter of intent did not constitute a material change. The OSC found that the AiT letter of intent was non-binding and did not contain any commitment on the part of 3M to complete the acquisition. Further, the OSC determined that the proposed price of $2.88 per share was not a firm commitment and was subject to renegotiation downwards if 3M's due diligence review identified problems or if AiT's financial condition worsened. While it was clear to the OSC that AiT's board would support the completion of a transaction with 3M at the offered price, it was unclear whether 3M was also committed to the transaction at the letter of intent stage and whether there was a substantial likelihood that the transaction would be completed.

The OSC agreed with its staff that in certain circumstances, how­ever, it might well be appropriate to conclude that a material change has occurred at the letter of intent stage and, in that case, a company should make disclosure based on a determination of the level of commitment of the parties to complete the trans­action and the likelihood that completion would occur.

Practical Considerations

Although the OSC decision does not purport to provide a bright line test, it does provide considerable comfort to public issuers that sale or acquisition transactions will not be a material change requiring disclosure until all parties are firmly committed. In almost all commercial cases, we expect that the "firm commitment" time will be when definitive agreements are signed.

The decision is also helpful in confirming the generally accepted practice of not disclosing non-binding letters of intent. However, the OSC decision suggests the issuer is likely to have a disclosure obligation when, in what we expect would be a highly unusual circumstance, the letter of intent contains all of the key terms of the transaction and such terms are binding. Additionally, the AiT fact pattern serves as a caution to drafters of resolutions that appear to approve transactions before the terms have been fully negotiated or finally settled.

The OSC staff's statement of allegations and the Settlement Agreements led many to believe that, if the OSC decision followed the reasoning behind the Settlement Agreements, public issuers would be required to disclose non-binding letters of intent, or even M&A negotiations, at an early stage. However, issuers can now breathe a sigh of relief as the OSC decision departed from the staff's recommend­ation and, instead, confirmed the current practice in the context of M&A transactions.

Khorshid Hakemi is an alumnus of Lang Michener.

This article appeared in Securities Brief Spring 2008.