Canada: Ontario Securities Commission Provides Guidance On Material Changes And M&A Negotiations

Last Updated: March 31 2008
Article by Andrew Gray

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 secondguessing. 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.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.