HENEVER a public company enters into negotiations to acquire or merge with another company, the directors of the public company must decide if and when such negotiations should be reported to the public. If the company discloses the existence of its confidential business negotiations too soon, the publicity could cause the transaction to fall apart. Furthermore, early disclosure of negotiations (prior to the time an agreement in principle has been reached) could unduly raise the public’s expectations that the transaction will be completed, even if the completion of the proposed transaction is still speculative at best. On the other hand, if the information is disclosed too late, the company and its directors could face liability for failure to disclose material information on a timely basis.
The federal courts and the Securities and Exchange Commission (SEC) have weighed the interests of investors in receiving early disclosure of the confidential business negotiations against the burdens that such disclosure would impose on public companies; unfortunately, no bright line tests have emerged for practitioners to apply, and the SEC requirements continue to evolve and have changed significantly during the past several years. This article will overview the current policies of the courts and the SEC regarding required public disclosure of material information involving confidential business combination negotiations, and will focus in particular on the current SEC rules and regulations requiring such disclosure.
