On January 14, 2008, the Ontario Securities Commission (the “Commission”) issued its decision In the Matter of AiT Advanced Information Technologies Corporation (“AiT”), Bernard Jude Ashe (“Ashe”) and Deborah Weinstein (“Weinstein”). This decision provides guidance for parties to a proposed M&A transaction as to when merger negotiations constitute a “material change” within the meaning of the Securities Act (Ontario) (the “Act”) and must be publicly disclosed. At the time of the alleged non-disclosure of the material change, Ashe was the CEO and a director of AiT and Weinstein was a director of and external counsel to AiT. Commission staff initially commenced proceedings against AiT, Ashe and Weinstein; however AiT and Ashe entered into settlement agreements with the Commission regarding the allegations and the hearing proceeded against Weinstein only.

Prior to Commission staff initiating the proceedings, the generally accepted practice by the securities bar was not to disclose negotiations of a potential acquisition transaction, based on a concern that premature disclosure could have a negative impact on a target if a transaction was not ultimately agreed upon. The Commission’s decision, in essence, supports the position of the securities bar on this issue, while at the same time providing some useful guidance.


  • The determination of whether a material change has occurred is not a bright-line test and will vary depending on the specific facts and circumstances of each case.
  • In the context of merger negotiations, a material change has occurred when there is evidence of a sufficient commitment from the parties to proceed and a substantial likelihood that the transaction will be completed.
  • In certain circumstances, a material change can occur in advance of the execution of a definitive binding agreement.
  • Care should be taken in preparing the wording of board minutes and resolutions as this will be important evidence in determining the status of the transaction at a particular point in time.


Commission staff alleged that AiT failed to disclose merger negotiations which were ongoing between AiT and 3M Company (“3M”) during the period between April 25, 2002 and May 9, 2002 (the “Relevant Period”) and such negotiations constituted a “material change” under section 75 of the Act. The key dates during the Relevant Period were:

  • April 25, 2002: AiT board authorizes the execution of a non-binding letter of intent (the “LOI”) with 3M regarding the purchase of AiT. Approval is subject to certain conditions including the fairness of the price proposed by 3M and board satisfaction with the final terms of the transaction.
  • April 26, 2002: AiT and 3M execute the LOI, subject to completion of favourable due diligence by 3M and the execution of a definitive merger agreement. Insiders of AiT are informed of their confidentiality and insider trading obligations.
  • May 7-9, 2002: 3M completes its due diligence.
  • May 9, 2002: Market Regulation Services Inc. informs AiT of an unusual increase in the trading volume and price of AiT shares and AiT issues a press release which does not refer specifically to its negotiations with 3M but which states that AiT is “exploring strategic alternatives” to enhance shareholder value.
  • May 23, 2002: A definitive merger agreement is executed and AiT issues a press release and subsequently files a material change report.


Commission staff alleged that the disclosure of the merger negotiations by AiT was required prior to the signing of the definitive merger agreement. Specifically, Commission staff alleged that a material change in the business, operations or capital of AiT occurred as a result of the AiT board meeting of April 25, 2002, the negotiation and signing of the LOI on April 26, 2002, ongoing discussions between 3M and AiT, and the completion of the onsite due diligence review undertaken by 3M between May 7 and May 9, 2002.


The Commission concluded that a material change in the business, operations or capital of AiT did not occur during the Relevant Period and, accordingly, AiT was not required to disclose the merger negotiations during that period.

Distinction between Material Fact and Material Change

The Commission recognized the distinction between a “material fact” and a “material change”. A material fact is defined as:

[…]where used in relation to securities issued or proposed to be issued, […] a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities.

(emphasis added)

In contrast, a material change is defined as:

[…]where used in relation to the affairs of an issuer, […] 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 any of the securities of the issuer and includes a decision to implement such a change made by the board of directors for the issuer or by senior management of the issuer who believe that confirmation of the decision by the board of directors is probable.

(emphasis added)

The Commission recognized that not all material facts are significant enough to constitute material changes. The disclosure obligations and restrictions with respect to material facts and material changes are different and the obligation to publicly disclose and file a material change report under the Act arises only in respect of the latter. Early stage negotiations of a merger may be material and persons with knowledge of such material facts should be prohibited from trading on such knowledge. However, notwithstanding such a prohibition on trading, such early stage negotiations may not yet be properly characterized as a material change requiring public disclosure and the filing of a material change report.

No Bright-line Test for Material Change

The Commission further concluded that there is no bright-line test as to whether a material change has occurred. Instead, the assessment of whether a material change has occurred will depend on the circumstances and series of events that took place. It affirmed that each case is unique and the specific facts and circumstances will vary case by case.

Board of Directors’ Decision

The Commission specifically considered the meaning of the words “a decision to implement such a change made by the board of directors” which is included in the definition of material change. The Commission concluded that a decision by a board of directors of an issuer to pursue a potential transaction which is not within its control to effect would not ordinarily be a material change in the business, operations or capital of a issuer unless the board believes that the other party is committed to completing the transaction. Further, the retaining of legal and financial advisors is not sufficient in and of itself to demonstrate that a material change has occurred.

Where a proposed transaction is “speculative, contingent and surrounded by uncertainties", the fact that one party is committed to proceed is not sufficient to constitute a material change. Determining that a “decision to implement” the transaction has taken place requires cogent evidence of a commitment by all parties to proceed.

Effect of Letter of Intent

The Commission found that the AiT board’s April 25, 2002 decision to enter into the LOI was not a decision that constituted a material change. Further, the Commission also found that the execution of the LOI on April 26, 2002 did not constitute a material change. While the Commission indicated that, in some cases, the signing of a letter of intent may trigger disclosure, this will depend on the content of the letter of intent and the degree of commitment reached by the parties. In the circumstances at issue:

  • the LOI was non-binding;
  • the proposed price was not a firm commitment and was subject to renegotiation downwards if the due diligence review identified substantive problems;
  • 3M was prepared to continue evaluating the transaction in return for a 30-day “no shop” and exclusivity period; and
  • most of the conditions of the LOI which needed to be satisfied before 3M would commit to the transaction could not be resolved by AiT.

The Commission determined that during the Relevant Period there was insufficient evidence by which the AiT board could have concluded that 3M was committed to proceed with the transaction or that there was a substantial likelihood that the transaction being discussed would be completed.


While the determination of when a material change has occurred in the context of M&A transactions will continue to be a difficult one for issuers and their advisors, the decision confirms that each set of negotiations must be individually assessed having regard to all the circumstances. The decision articulates two important principles. First, it is not merely the commitment of the issuer to proceed that will trigger the material change reporting requirement; rather there must be evidence of the commitment of all parties to proceed with the transaction. Secondly, there must be a “substantial likelihood” that the transaction will proceed.