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:

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. A signed definitive agreement is not a prerequisite to finding a material change in a material transaction. The determination must be made on...