Companies should announce merger-related news sooner rather than later to avoid disclosure risks, says Phil Brown in Financial Post

August 14, 2006

A public company's "for sale" announcement used to imply a chance of an upcoming payday for shareholders, but that's changing as more of these potential deals drag on or end in failure.

When the news came out this year that three Canadian companies might be interested in selling, for example, their shares rose dramatically. But when the sale process took too long, many former investors sold their shares. Potential deals are also falling through frequently in the United States, plunging their share values.

In the past, investors might not have had to go on these roller-coaster rides, but companies are publicly releasing information about sale talks much earlier than before due to heightened concerns about corporate governance.

"In the past, companies were more inclined to wait until they actually had a sale," says Phil Brown. "I think a more cautious view--and not necessarily the right view, I might stress--is that companies now think they should get that news out sooner rather than later to avoid taking the disclosure risk."

In particular, public company executives and boards of directors are figuring out how to contend with a new bill regarding class-action lawsuits that came into effect in Ontario this year. The bill allows investors to file suit against companies for losses resulting from misleading statements or failure to disclose material information--without having to prove they relied on this information when they bought the stock.

There has been no case law yet to help companies figure out when they are required to disclose takeover talks under the new bill. Phil's interpretation is that an announcement is not required until a takeover offer has been made and accepted.

Another change leading companies to release information earlier is the increase in activist investors going after those with lagging share prices. Corporate executives would rather put the company up for sale than go through the humiliation of losing a proxy fight.

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