When Must You Publicly Disclose a Letter of Intent?


Canadian reporting issuers are subject to reporting obligations if there has been a “material change” in their business.

A “material change” is defined to mean: (a) 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; or (b) a decision to implement a change referred to in (a) made by the directors of the issuer, or by senior management of the issuer who believe that confirmation of the decision by the directors is probable.

In Kerr v. Danier Leather Inc., [2007] 3 S.C.R. 331 it was determined that only changes in an issuer’s business, operations or capital would, if material, require disclosure. Events or developments that are external to the issuer are not changes to the issuer’s business, operations or capital, even if the issuer’s results of operations are materially affected by such events or developments, and are therefore not required to be reported.

AiT Advanced Information Technologies Corp., (Re) (2008), 31 O.S.C.B. 712, sought to clarify the triggering of a material change in a merger transaction. The Ontario Securities Commission (the “OSC”) hearing arose as a result of the 2002 merger of Advanced Information Technologies Corporation (“AiT”) and 3M Company (“3M”). The OSC Staff alleged that in the course of negotiating and completing the merger, AiT failed to publicly disclose a material change as required by securities law. The OSC staff argued that as soon as the board of AiT gave the go-ahead to proceed with negotiating the offer with 3M, its obligation to disclose arose. The approval by the board of AiT was followed the next day by a non-binding letter of intent which contained a no-shop clause, a right to respond to unsolicited offers and a condition that any agreement was subject to a favourable due diligence review by 3M.

The OSC ultimately found that no material change occurred as a result of the AiT board approval and signing of the letter of intent. In reaching its decision, the OSC confirmed that:

  1. The assessment of whether a material change has occurred, particularly in the context of an arm’s length negotiated transaction, will depend on the specific facts and circumstances of each case and will vary from case to case. There is no bright-line test.
  2. A signed definitive agreement is not a prerequisite to finding a material change in a material transaction. The determination must be made on the specific facts which surround each negotiation, including the nature of the parties to the negotiations, their specific circumstances, the progress of the negotiations towards agreement on all material terms, outstanding conditions or contingencies, and all other relevant factors.
  3. Even in the absence of a legally binding agreement, there can be a material change if both parties to the negotiations are clearly committed to completing the transaction.
  4. In determining whether public disclosure is required, the overall approach is to be fact-based, contextual and purposive, and based on three questions. The first two questions address whether there is a “material change”: first, whether the information or event in question is “material”; second, whether a “change” has occurred. If it is concluded that there is a material change, the third question is whether disclosure should be made publicly, or whether there is sufficient reason to disclose to securities regulators confidentially.
  5. In the context of a merger transaction, a board resolution will constitute a “decision to implement a material change” only if there is sufficient evidence for the board to conclude that there is sufficient commitment from the parties to proceed and a substantial likelihood that the transaction will be completed. A letter of intent or similar agreement would constitute a material change, triggering disclosure obligations, only to the extent that there is a sufficient level of commitment from all parties, as embodied in the letter of intent (i.e., they are not “starting points” or proposals or to be negotiated, thus reducing the number of potential “deal-breakers”) and the fewer key conditions there are, the more likely there is a level of commitment that would be suggestive of the material change. The remaining approvals and the process to get such approvals for all parties should also be considered, as the more complex and involved and uncertain the remaining steps are, the further the parties could be said from being committed to the transaction.
  6. An intention by a person or company to do something which, once implemented, would constitute a material change in the affairs of the issuer, but which at the time the intention is formed, for reasons beyond the control of the person or company is still not capable of achievement, is not ordinarily a material change in the affairs of the issuer.

For AiT, the OSC found that the material change had only occurred once the board approved the definitive merger agreement and related documents and received a fairness opinion from CIBC Investment Banking, which concluded that the merger transaction was fair, from a financial point of view, to the shareholders.

The OSC also noted that while AiT, on the face of it, appeared to be committed to the transaction in the weeks following board approval, 3M was not. Even at the time of 3M receiving board approval, such approval was still conditional upon CEO approval of the due diligence report and integration plan. As a result, the transaction was insufficiently certain to require reporting as a material change at any point prior to the date the merger agreement was actually approved by the 3M CEO and executed by the parties.

AiT continues to set the standard for public disclosure best practices in merger and acquisition transactions. The use of letters of intent should be carefully considered by reporting issuers when involved in potentially material transactions. In order to avoid disclosure obligations at a time that is earlier than desired, parties may want to limit themselves to using confidentiality agreements, possibly supplemented by exclusivity agreements, during the negotiation period. Term sheets that are not “agreed to” or “approved” can be used to focus discussions, while not committing the parties. Where more precision is necessary, documents should be clearly subject to necessary approvals and to due diligence, each of which could change terms significantly.

If you have questions about disclosure of material changes, or about letters of intent, contact Clark Wilson’s Corporate Finance & Securities Group.