Canada: OSC Decision Provides Guidance On Timely Disclosure Obligations In M&A Transactions

Last Updated: January 21 2008

Article by Jennifer Woo & Leila Rafi, © 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Mergers & Acquisitions, January 2008


  • OSC confirms that determination of when disclosure is required in an M&A transaction is not a bright-line test and depends on specific facts and circumstances of each case
  • M&A negotiations must be disclosed when there is sufficient commitment from both parties to the transaction and a substantial likelihood that a proposed transaction will be completed
  • Decision supports a general practice in Canada to disclose an M&A transaction once parties have received requisite corporate approvals, executed a definitive agreement and resolved all material issues

When do issuers need to disclose merger negotiations? This difficult question now has guidance from the Ontario Securities Commission (OSC) in its long-awaited decision of January 14, 2008 in the matter of AiT Advanced Information Technologies Corporation (AiT), Bernard Jude Ashe and Deborah Weinstein regarding merger negotiations between AiT and 3M Company (3M). This question is critical for issuers as late disclosure could result in regulatory proceedings or class-action lawsuits for failing to disclose in a timely manner while premature disclosure could derail the completion of a transaction.


The timing of certain key AiT events was as follows:

By April 25, 2002 Parties enter non-disclosure agreement, preliminary due diligence and valuations.
April 25, 2002 AiT board authorizes the execution of a non-binding letter of intent (LOI).
April 26, 2002 Parties execute LOI; AiT sends letter to insiders advising of restrictions on trading.
May 9, 2002 Market Regulation Services advises AiT of unusual increase in trading activity; AiT announces that it is exploring strategic alternatives.
May 14, 2002 3M Board approves merger subject to certain substantive conditions.
May 22, 2002 Substantive conditions of 3M satisfied; AiT board approves merger agreement.
May 23, 2002 Parties execute definitive agreement; AiT files press release and subsequently files material change report.

OSC Staff alleged that AiT failed to disclose forthwith the merger negotiations between AiT and 3M as a material change by April 25, 2002 and in any event by May 9, 2002.


In its decision, the OSC confirmed the distinction between a "material fact" and a "material change" and that under Ontario securities laws the obligation to make disclosure by way of news release and material change report arises only in the event of a material change and not for a material fact. The OSC observed that such distinction recognizes the need for issuers to keep certain developing transactions confidential in the course of negotiations. A material change means a change or a decision to implement a change and the change must be in the business, operations or capital that would reasonably be expected to have a significant effect on the market price or value of the securities. The key issue in this decision for the OSC to consider was, when do negotiations progress from a material fact to a material change requiring disclosure?


The OSC held that the determination of a material change is not a "bright-line" test, but will depend on the specific facts and circumstances of each case, viewed objectively. In the context of a proposed acquisition, the OSC noted that there needs to be sufficient signs of commitment on behalf of all parties involved to proceed with the transaction and a substantial likelihood that a proposed transaction will be completed. Notwithstanding this finding, the OSC made the point that, in certain circumstances, a material change can occur in advance of the execution of a definitive binding agreement.

In its decision, the OSC focused its analysis on two particular events, the AiT board meeting on April 25, 2002, and the negotiation and signing of the LOI on April 26, 2002.

The Board Decision

OSC Staff argued that the board decision on April 25, 2002 was a decision to implement a material change. The OSC determined that at the April 25, 2002 meeting, the AiT board established a target ceiling price and authorized management to proceed with discussions with 3M and negotiate the LOI. Based on the factual evidence presented, the OSC concluded that the board approvals were not intended to be a decision to implement a change, as negotiations between the parties were at a preliminary stage, due diligence had yet to be carried out and key items important to the transaction still had to be negotiated.

The Letter of Intent

The OSC noted some factors to consider when assessing whether the execution of a letter of intent triggers a disclosure obligation, including: consideration of the nature of the commitment it represents, the substance of what has been agreed to in principle, whether all of the key terms are specified, and the nature of the conditions to the transaction, including consideration of how central the conditions are and the likelihood of such conditions being satisfied (both objectively and in the belief of the parties at the time). As noted by the OSC, where corporate approval by the acquirer's board and senior management is a condition, what the acquiree understands about the acquirer's approval process and its status and whether the acquiree has an understanding of the likelihood of those approvals being forthcoming are important considerations in determining whether disclosure is required.

In its decision, the OSC concluded that no disclosure obligations were triggered at the time of execution of the LOI. In reaching its decision, the OSC noted that it could not conclude that 3M was committed to the transaction at the LOI stage, or that AiT's CEO or the AiT Board could reasonably conclude at such time that there was a substantial likelihood that the LOI conditions would be satisfied and that the transaction would be completed. In support of its conclusion, the OSC noted the following facts that were present at the time of signing the LOI:

  • 3M had a number of outstanding substantive conditions to signing, including due diligence, structuring the transaction, drafting of definitive documents, and integration and business planning matters.

  • The level of awareness of AiT's board and management of the comprehensive due diligence process and structured approval process of 3M.

  • The price was subject to renegotiation following due diligence review.

  • Most of the conditions of the LOI necessary to be satisfied before 3M would commit to the transactions were beyond the ability of AiT to resolve.

  • Several key terms contemplated by the LOI had not yet been negotiated.


This decision leaves open the possibility that disclosure obligations in M&A transactions could be triggered at some point during negotiations prior to the parties executing a definitive agreement. As such, some practical considerations which arise from this decision are:

  • A material change occurs when a party to a potential transaction is committed to complete it and has a reasonable basis for believing that the other party is committed and that there is a substantial likelihood that the transaction will be completed.

  • An issuer needs to analyze the particular facts and circumstances at each stage of its negotiations to determine at what point its disclosure obligation has been triggered.

  • An understanding of the other party's commitment, as shown by its conditions to completion and approval process, is relevant to an issuer in assessing its disclosure obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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