Merger discussions… to disclose or not to disclose

We’ve all read the stock trailers across the bottom of MSNBC “..after the acknowledgment of merger talks, the company’s shares jumped $9.35 yesterday, to $24.50, more than double the closing price of…  

Working with virtual data room (M&A) clients, one issue that arises quite often is “when does a company need to disclosure their merger discussion? When is the information material?”


Our answer comes in two parts – one a firm and concrete response, the other a vague-ish, common-sense-ish directional response:

  • Ask your counsel
  • A merger is material and the timing for corporate disclosure of material information is left to the good faith business judgment of management.

Firstly, we know that the SEC’s core definition of material information is the widely acknowledged “total mix of information” test. Under the total mix test, companies need to ask themselves whether there is a substantial likelihood that a reasonable investor would have viewed the misrepresented information, or disclosure of omitted fact(s), as having significantly altered the “total mix” of information available to the investor.

In plain English: A fact is material if a reasonable person would consider that fact important when deciding whether to buy or sell shares of stock.  

In the past, issuers have tried to define a hard edge for merger materiality, but the courts rejected any bright-line rule that preliminary merger discussions do not become material until an “agreement-inprinciple” has been reached. Instead, the court developed a “probability versus magnitude” approach to materiality. This approach requires the working group to make a fact-specific inquiry to assess the materiality of the merger’s negotiation. If the acquisition is meaningful to the company on all financial levels, then the probability of the transaction being consummated must be considered high. If there is a low probability that the transaction will occur, the need for disclose decreases despite the significance of the transaction. Likewise, although the probability of a transaction may be high, if its impact on the company, i.e. its magnitude, is low, the need for disclosure is also low. 

When determining the timing for disclosure of material information on corporate M&A, management must find balance between keeping its investors informed while guarding competitive information. This balance is possible to achieve if, before the merger talks even began, management has strictly adhered to its well-practiced RegFD policies and procedures… “no comment.”

Click here to download our 5 Stages of M&A quick guide

Click here to download our Five Stages of M&A quick guide

As investor relations departments know well, absent the affirmative duty to disclose, a company does not have an obligation to disclose material non-public information. In other words, a company is not required to disclose information as soon as it arises simply because it is material. Silence, absent a duty to disclose, is not misleading under Rule 10b-5.

When no circumstances are present that require immediate disclosure, the timing for disclosure of material information is left to the good faith business judgment of management. This is the 50 shades of RegFD investor relations breathes each and every day. Make sure the IRO is in the M&A working group.

And, it goes without saying, we’d be pleased to be your vendor-of-choice for your shareholder disclosure, both across the wire and with the SEC.

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