In its recent decision in AiT Advanced Information Technologies Corporation, the Ontario Securities Commission gives direction to target corporations for determining when a material change occurring during the course of negotiating a merger and acquisition transaction would trigger a disclosure obligation under Ontario securities law.

The OSC dismissed allegations that a director of AiT breached the Securities Act (Ontario) when AiT failed to disclose the negotiations with 3M after the letter of intent was signed and during the due diligence period that followed.


3M made an unsolicited approach to AiT about a potential acquisition in February 2002. Executives of the two companies held meetings to discuss a transaction, 3M conducted some initial due diligence and then 3M indicated on April 24 that it would consider proposing a transaction at a price of $2.88 per share. The next day, AiT’s board approved a recommendation to its shareholders of 3M’s acquisition at a purchase price of $2.88 per share, subject to receiving a fairness opinion and the execution of a definitive agreement to be approved by the board. On April 26, AiT signed a non-binding letter of intent with an exclusivity clause. The letter of intent contained a number of conditions that had to be satisfied before 3M would commit to a transaction, many of which were beyond AiT’s control, including the completion of a favourable due diligence report and obtaining voting and stock option agreements from some key shareholders. After an unusual increase in the trading volume and price of AiT shares, Market Regulation Services (RS) contacted AiT. AiT informed RS that the company was in discussions to be potentially acquired and, on May 9, issued a news release that it was “exploring strategic alternatives.” The 3M board approved the acquisition of AiT on May 14, subject to its CEO’s approval of the due diligence report. 3M’s CEO approved the transaction on May 21, and the AiT board approved the definitive merger agreement on May 22. The agreement was executed the following day, and AiT then announced the transaction.

OSC Staff commenced a proceeding against AiT, its CEO and a director, alleging that a material change triggered a disclosure obligation as early as (i) April 25, when the board recommended the proposed price and authorized management to negotiate a letter of intent at a specified price; (ii) April 26, when the letter of intent was executed; or (iii) May 9, when AiT issued the news release. AiT and the CEO settled with the OSC. After a contested hearing, the OSC dismissed the allegations against the director, finding that a material change had not occurred during that period.

Significance of the Decision

Material Facts and Material Changes

The OSC confirmed the significance of the distinction between material facts and material changes, and held that the distinction applied in the context of disclosing merger negotiations. A “material change” is defined as a “change in the business, operations or capital of an issuer that would reasonably be expected to have significant effect on the market price or value of any of the securities of the issuer,” or a decision to implement such a change. The definition of a “material fact” does not require a change to have taken place in the business, operations or capital of the issuer. A fact is a “material fact” if it would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities.

In this case, the OSC found that the negotiations between AiT and 3M were a material fact relative to AiT, and hence insiders of AiT were prohibited from trading or tipping as a result of the negotiations. However, the negotiations and other preliminary steps to a binding deal were not a material change and did not trigger a disclosure obligation.

Assessment of Material Changes in the M&A Process

The OSC concluded that there is no “bright-line” test for determining when a material change has occurred in the context of an M&A transaction. The assessment will depend on the facts and circumstances of each case. The key is whether both parties are committed to proceed with the transaction and there is a substantial likelihood that the transaction will be completed. The OSC noted that a material change could occur before the signing of a definitive binding agreement, although it did not do so in this case. However, where the transaction is conditional and surrounded by uncertainties, a commitment from only one party to proceed will not normally be sufficient to constitute a material change.

In AiT, there was no material change or decision to implement a material change when the AiT board decided on April 25 to recommend an acquisition by 3M at a price of $2.88 per share. At that stage, while AiT may have been committed to completing a transaction with 3M if possible, significant uncertainties remained; the AiT board could not therefore conclude that 3M was also committed or that there was a reasonable likelihood of completing the transaction. The OSC identified a number of factors indicating the lack of certainty, including that AiT was dealing with a 3M executive several levels below the CEO and that 3M had to complete a highly structured due diligence process before the 3M board and the CEO would approve the transaction. Those hurdles were not overcome during the time frame at issue in the case (from the April 25 board meeting to the May 9 news release).

Judgment and Disclosure Decisions

In its recent decision in Kerr v. Danier Leather, the Supreme Court of Canada held that the “business judgment rule” does not protect disclosure decisions under securities laws against judicial second-guessing. Mindful of that decision, the OSC found that the determination of when or if a material change occurred could not be subordinated to the board’s business judgment regarding the potential negative impact of disclosure. However, the OSC also said that if a board’s governance process is effective and it reasonably believes that the board is therefore properly motivated in making determinations regarding a material change, the OSC is reluctant to interfere with judgments about disclosure that are the product of that process; furthermore, that it was not appropriate to evaluate disclosure decisions on the basis of hindsight.