Current securities laws place extensive requirements on public companies to keep the public and the markets informed. Part of every public company's continuous disclosure obligations are to disclose material changes, which include "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." It is up to a company's management to determine what constitutes a material change and thus whether the disclosure obligation has been triggered.
A recent statement of allegations put forth by the Ontario Securities Commission ("OSC") staff against a public company and two of its directors (one of whom was the company's legal counsel) has raised serious questions over when a proposed material transaction (that is subject to conditions) should be publicly announced. While many take the view that a non-binding letter of intent or an offer subject to several conditions do not require immediate public disclosure, the position of the OSC staff In the Matter of AiT Advanced Information Technologies Corporation, Bernard Jude Ashe and Deborah Weinstein has cast some doubt over this view.
In 2002, AiT Advanced Information Technologies Corporation ("AiT"), a reporting issuer in Ontario, began seeking a strategic buyer or merger partner after an unsuccessful financing initiative. Representatives of AiT and 3M Canada Company ("3M") met to discuss the potential for integration of technologies and mutual opportunities. These discussions eventually led the two companies to enter into a non-disclosure agreement (on March 12, 2002) related specifically to a potential transaction, and preliminary due diligence was conducted. On April 8, the board of directors of AiT (the "AiT Board") struck a valuation committee, comprised of Bernard Ashe, Deborah Weinstein and one other director, to negotiate with 3M. Mr. Ashe was the President, CEO and a director of AiT and Deborah Weinstein was a director of AiT and a partner at LaBarge, Weinstein LLP, AiT's legal counsel.
On April 25, 3M's CEO advised that 3M was prepared to offer $2.88 per share of AiT. The AiT Board unanimously passed a resolution and agreed to recommend the offered price of $2.88 per share to its shareholders, subject to confirmation of the fairness of the offered price by its financial adviser and satisfaction of the AiT Board with the other terms of the transaction. On the same day, Mr. Ashe advised AiT's banker of the 3M proposal. Also on the same day, AiT circulated a letter to certain directors and employees of AiT indicating that the AiT Board had approved the "entry into an agreement in principal" [sic] with 3M and warning that it was unlawful to trade in securities of AiT until the information was publicly disclosed.
On April 26, AiT and 3M entered into a non-binding letter of intent giving exclusivity to 3M but which was subject to 3M being satisfied with its due diligence review and the parties entering into a definitive agreement. Due diligence resumed on May 7.
On May 9, the Toronto Stock Exchange ("TSX") contacted AiT and inquired into unusual trading in the shares of AiT. That same day AiT issued a press release which indicated that AiT was "exploring strategic alternatives that would ultimately enhance value" for its shareholders. The press release did not mention the transaction with 3M.
On May 14, the 3M board of directors approved the proposed transaction and on May 22, the AiT Board received the fairness opinion and approved the formal merger documentation
On May 23, the two companies signed a definitive merger agreement and AiT issued a news release and filed a material change report announcing the transaction.
In the statement of allegations, OSC staff contended that a material change had occurred by April 25 (the date the AiT Board conditionally approved the merger transaction and circulated the "tipping letter") and in any event the material change had occurred not later than May 9 (the date that AiT was contacted by the TSX and issued a news release). Accordingly, the OSC staff alleged that AiT had contravened section 75 of the Securities Act (Ontario) by failing to forthwith disclose the merger transaction with 3M as a material change and that Mr. Ashe and Ms. Weinstein engaged in conduct contrary to the public interest pursuant to section 122(3) of the Act by authorizing, permitting or acquiescing in AiT's failure to forthwith disclose the merger transaction.
AiT and Mr. Ashe entered into settlement agreements with the OSC with respect to the allegations and were fined. The settlement agreements do not provide an explanation of the views of the OSC staff. The allegations of the OSC staff appear to expand the scope of what constitutes a material change and, as a result, parties negotiating a transaction should carefully consider their related disclosure obligations. However, the question of what constitutes a material change continues to be a factual one to be assessed on a case by case basis. The hearing for Ms. Weinstein concluded on September 27, 2007 and a decision by the OSC, once rendered, may provide additional guidance on when such disclosure must be made.