When to disclose merger talks

The OSC's AiT proceeding could start a trend towards earlier public disclosure.

Jeffrey Singer

Recent actions by the Ontario Securities Commission (OSC) in connection with the acquisition of AiT Advanced Information Technologies by 3M Canada may lead to tighter Canadian public M&A disclosure standards. The unexpected proceedings targeted AiT and two of its directors (its President/CEO and its legal counsel) over their alleged failure to make timely disclosure of the proposed transaction. The company and one of these directors have settled with the OSC, but the second director (the company's legal counsel) has chosen to defend her actions at a hearing.

Chronology

The chronology of events in the OSC's statement of allegations, set out below, is generally consistent with the agreed statement of facts in the settlement agreements.

On January 25, 2002, a committee of the AiT board accepted management's recommendation that the company seek out a strategic buyer or merger partner. Exploratory discussions ensued in February with 3M Canada, which confirmed its interest in a potential acquisition on March 4. On March 12, the parties entered into a non-disclosure agreement.

On March 27 and 28, representatives of 3M conducted preliminary due diligence on AiT, including receiving presentations from management. In the weeks that followed, representatives of AiT and 3M had preliminary discussions related to value. On April 23, 3M advised AiT that, upon approval by the AiT board, 3M's interest in pursuing a transaction would be confirmed in a non-binding letter of intent which would be subject to a number of conditions, including exclusivity until May 15, due diligence and 3M board approval.

On April 25, 3M advised AiT that it was prepared to offer $2.88 per fully-diluted common share of AiT. Later that same day, the AiT board unanimously passed a resolution recommending that shareholders accept the offer, subject to the receipt of a favourable fairness opinion from the company's financial advisor and the satisfaction of the AiT board with respect to certain other terms of the transaction (including the tax consequences to shareholders). A letter was then circulated to certain directors and employees of AiT who were known to be aware of the proposed transaction with 3M. The letter stated that the AiT board had approved "the entry into an agreement in principal" [sic] with 3M and reminded the employees that it was unlawful to trade in securities of AiT until the information was publicly disclosed.

The following day the two companies signed a non-binding letter of intent relating to the proposed acquisition. The letter of intent specifically noted that the proposed transaction was subject to a number of conditions, including a favourable due diligence review by 3M, the entering into of definitive documentation between AiT and 3M, certain AiT shareholders entering into agreements with 3M in support of its proposed transaction with AiT, and the receipt of 3M management committee and board approval as well as any required third party consents and approvals.

On May 9, AiT received a call from Regulation Services inquiring about unusual trading that had driven the company's share price up by 41%. In response, AiT issued a press release later the same day, advising that in response to recent trading activity in its stock, it was "exploring strategic alternatives that would ultimately enhance value for our shareholders". However, the press release did not mention the proposed 3M transaction.

On May 22, the AiT board received the favourable fairness opinion and approved the definitive merger agreement and related documents. The following day, AiT and 3M signed the merger agreement and AiT issued a press release and filed a material change report.

The transaction was approved by AiT shareholders on July 15 and completed July 19, 2002.

The OSC allegations

According to the OSC statement of allegations, the proposed transaction between AiT and 3M constituted a "material change" within the meaning of the Securities Act (Ontario) that should have been publicly disclosed by April 25 and in any event not later than May 9. Under the Act, a material change includes "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, or a decision to implement such a change by the board.of the issuer."

Market reaction

Regardless of how the matter is ultimately resolved, Canadian public bidders and targets likely will be treading all the more carefully (and, at times, perhaps impractically so) in the wake of AiT - both in relation to the manner in which they approach material transactions as well as in their approach to public disclosure thereof.

This trend is already manifesting itself in the marketplace, with the decision in February by the board of Algoma Steel Inc. to disclose early-stage merger talks with Salzgitter AG, which disclosure was followed by a steep increase in Algoma's stock price and the abandonment of the proposed deal. Tentative merger talks between Wolfden Resources Inc. and Zinifex Inc. were also recently publicly disclosed. In that case, Wolfden disclosed the expected offer price, producing a corresponding increase the trading price of its shares. Many purchasers were disappointed when Zinifex came in with a lower offer after completing its due diligence.

These examples demonstrate some of the dangers of early disclosure that were raised by leading Canadian M&A counsel at a meeting held at the Toronto office of Stikeman Elliott LLP in February. The AiT hearing, scheduled for July 9, 2007, will be watched with interest by Canadian M&A market participants.

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