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Disclosure in M&A: When Is it the Smart Call?

Disclosure in M&A: When Is it the Smart Call?

Courts have said it over and over again in one form or another:  a corporation involved in a merger or an acquisition is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.

It’s a virtual truism that a company need not inform its shareholders of its intent to merge, acquire or be acquired—even if it is in the midst of negotiations and an agreement is imminent—unless it is required to do so in specific instances under securities law.  But does it ever make sense for a company to affirmatively disclose a deal under discussion when it isn’t legally obligated to do so?

Michael G. O’Bryan, a San Francisco-based partner at Morrison Foerster and co-chair of its M&A practice, says yes.  First, though, you need to be clear as to whether your company does in fact have a duty to disclose.

“There’s a lot of things companies do that may trigger that duty,” O’Bryan says.  “And what we see the most are things that the company does like stock repurchases, stock buy-backs.  Secondly, there may be an insider trading program that may be affected by knowledge of a pending or proposed transaction.  You could be in a circumstance where you’ve got no obligation to make a public statement, but to have that information and to continue on with a buy-back program, or to allow at least the insiders to know about the potential transaction and continue trading, might be problematic.”

Tactical Disclosures

But assuming you’ve done your homework and assured yourself that your company is in the clear as far as disclosure obligations, what might prompt you to go ahead and disclose the transaction anyway?

There may be sound tactical reasons to do so, O’Bryan suggests.  For example, a company finding itself an unwilling target for acquisition might want to go public with that information as part of a strategy to block the attempt and get out in front of any story.  Or, if the company receives a friendlier bid and is negotiating with the would-be suitor, it may want to bring other companies into the mix for a targeted auction.

“If you start to get concerned about leaks, if you start to think that maybe the best tactical way of ginning up interest in this auction is to tell the world that ‘we’re up for sale,’ or if you think there’s going to be so much litigation about this transaction that the best thing to do is to conduct it in the public limelight as much as possible — for all those sorts of reasons, you may just decide that ‘I’m going to go ahead and disclose the fact that these negotiations are taking place,’” O’Bryan says, although he notes that circumstances like these are in the minority.

There’s also the rumor mill to consider, O’Bryan notes.  Word of a deal about to go down can take a company’s stock on a wild ride; disclosing information about the deal can help make that ride a little less bumpy.

“One of the ways that you end up with a duty to make some disclosure is where you’ve got incorrect or misleading or selective disclosure,” O’Bryan says.  “The rumors sometimes fall under that category, so that if some of your personnel or bankers or representatives have been out telling people and they start spreading rumors, then sometimes that leads back to an obligation to the company to make some comment.”

Watch Your Language

Once you’ve made your tactical decision to say something about the transaction, O’Bryan cautions, it’s critical to think about what you’re actually going to say; once you’ve said something, you have a duty to make sure the information is accurate and not misleading.

“The more detail you put out there, the harder it is to not inadvertently trigger a duty to correct what you said,” according to O’Bryan.  “There’s a difference between updating and correcting.  It’s hard to avoid the duty to correct if you’ve said something and it’s just wrong.  You don’t see that very much because people are usually pretty careful about what they say.  That’s why you end up being very measured in what you say.”

O’Bryan adds that a company is best served by a general “no comment” policy whenever questions about mergers or acquisitions arise — even if no deal is pending.  That way, the company is not in the position of having to switch from saying that there is nothing planned to the legally permissible “no comment” when a deal is in the works, a switch that undoubtedly would draw closer attention from the questioner.  The best answer any day of the year is “we don’t comment on that sort of stuff.”