The Timing of Public Information Disclosures in Mergers and Acquisitions

Under the provisions of Taiwan's current Securities Exchange Act, announcements of corporate mergers and acquisitions constitute information that can have a significant influence on the share prices of public companies. Consequently, in accordance with relevant regulations or market listing rules, companies must issue a notice of material information regarding a merger or acquisition. However, since M&A transactions are dynamic processes, from the initial preliminary discussions to the signing of a letter of intent and to the resolution by the board of directors, it is worth asking at which point is it appropriate to require that information be revealed to the markets.

According to Article 2, paragraph 12 of the "Procedures for Handling the Investigation, Verification and Publication of Material Information" of the Taiwan Stock Exchange and Gretai Securities Exchange, when a board resolution is for an M&A transaction is approved, that fact constitutes material information requiring a public explanation. As a consequence, the resolution approving such a transaction is always taken to mark the point at which to make public the said material information. However, according to paragraph 11 of the same article, the signing of important memoranda also constitute material information requiring a declaration, and it is still not entirely clear whether that includes the signing of a letter of intent for a merger or acquisition. Then again, paragraph 10 of the article excludes memoranda on mergers and divestitures, which constitutes a relatively clear rule, but given that it still does not encompass acquisition activity, it appears that a gap remains in the regulations.

Viewed in terms of day-to-day securities management, the timing of M&A announcements presents a dilemma. If the timing is too late, the excessive length of time makes it easier for related information to be leaked, thereby increasing opportunities for insider trading and disadvantaging market investors; if the announcement comes too soon, the uncertainness of the transaction might affect the confidentiality needed in M&A deals, and there may be suspicions of share price manipulation. Based on current practices, the passage of the board resolution is the point at which a deal becomes relatively certain, but given the 2~3 months needed to go from the initiation of business negotiations to the board resolution, misgivings over the lateness of the timing may be justified.

On this question, we can consult the U.S. Supreme Court's decisions on relevant securities laws. In the past, it has held that a public declaration was necessary once the transaction price and basic structure of the transaction were certain, which is to a large extent like Taiwan's requirement for an announcement after the board resolution. In 1988, however, the Supreme Court considered the degree to which the material information had factual confirmation, ruling that each case must be decided based on concrete facts. As a result, the previous less flexible method for determining the timing was discarded in favor of a combined assessment by each company of how likely a transaction is to take place in the future and the scale of its impact on the company, with the timing of public announcements hinging on the outcome of such assessment. In practice, signing a letter of intent is often viewed as making a transaction more certain, and to some extent the matter at that time has reached the point where making it public would need to be considered. In addition, if a company is in fact negotiating an M&A deal, if outside parties start to inquire, then there must not be any dissembling denials; otherwise, it will be seen as material information and require immediate public disclosure. Consequently, that sort of inquiry from outsiders should be responded to with "no comment".

Given the difficulty of timing the announcement of M&A information on the one hand, and the practical experience of the U.S. on the other, on balance, it is worthwhile for the governing authorities and the business community to reconsider whether the signing of a letter of intent to engage in M&A activity brings things to the point where one should go public with the information. Of course, any such change depends on the governing authorities as they consider whether to provide a clear-cut rule for determining the timing of M&A announcements, or follow the U.S. legal system's example by adopting a more flexible approach to determining the timing.