TSX publishes proposed amendments to Stock Exchange Company Manual
On November 28, 2013, the Toronto Stock Exchange (the “TSX”) published proposed amendments (the “Amendments”) to the TSX Company Manual (the “Manual”) relating to the adoption of security-based compensation arrangements in the context of acquisitions and the criteria considered by the TSX in determining whether a transaction is a backdoor listing. The Amendments are open to comments up to January 13, 2014. The Amendments will become effective following the comment period and upon final approval by the Ontario Securities Commission.
Security-based compensation arrangements in the context of acquisitions
Under Section 613 of the Manual, any security-based compensation arrangement (the “Arrangement”) adopted by a listed issuer must be approved by its securityholders. There are two exceptions to the general rule:
- where an Arrangement is offered as an inducement for employment to an officer and the number of securities issuable does not exceed 2% of the issued and outstanding securities over a 12-month period under such exemption; or
- where a listed issuer assumes an Arrangement of a target issuer in the context of an acquisition pursuant to Section 611 of the Manual.
The Amendments would permit listed issuers to adopt Arrangements for employees of a target issuer in the context of an acquisition provided that the number of securities issuable under such an Arrangement does not exceed 2% and 25% of the number of listed and outstanding securities, respectively. The Amendments also clarify that the securities issuable to insiders under an Arrangement included in the determination of whether securityholder approval for an acquisition, on a disinterested basis, is required (pursuant to Subsection 611(b) of the Manual).
While the assumption of awards of a target issuer and the creation of an Arrangement for the target issuer’s employees may benefit from an exemption from securityholder approval, such awards will (1) be subject to annual disclosure requirements, (2) count towards dilution incurred, and (3) be considered in the insider participation limit.
The TSX has permitted such Arrangements in the past on a discretionary basis, taking into consideration a number of factors. However the TSX notes that these Amendments will formalize this practice and provide additional transparency.
Section 626 of the Manual provides that a transaction resulting in the acquisition of a TSX-listed issuer by an unlisted entity is to be considered a backdoor listing (also called a reverse takeover or reverse merger by other stock exchanges) and the resulting entity from the transaction (or the unlisted entity) must meet TSX original listing requirements.
Currently, Section 626 of the Manual provides that a transaction is considered a backdoor listing if:
- The transaction will or could result in the existing security holders of the listed issuer holding less than 50% of the securities or voting power in the entity resulting from the transaction. That is, the transaction will or could result in more than 100% dilution, taking into account the securities issuable pursuant to the transaction and including securities issuable pursuant to a concurrent private placement; and
- the transaction results in a change in effective control of the listed issuer.
The Amendments to Section 626 are intended to better define backdoor listings to help support investor protection and preserve the quality of the stock listing and quality of the marketplace. The TSX notes that the Amendments broaden the scope of the transactions that may be considered as backdoor listings by taking into account a variety of factors and considering a more comprehensive view of the concept of dilution. The Amendments include the following:
- Adoption of a series of factors in determining whether there is a backdoor listing. These factors include, but are not limited to, the business of the listed issuer and the unlisted entity, changes in management (including the board of directors), voting power, ownership, name changes and the financial structure of the listed issuer. The TSX believes that these factors are all relevant indicia of whether a transaction results in an unlisted entity becoming listed by acquiring a listed issuer.
- Clarification that the TSX has discretion to: i) exempt a transaction from the requirement to meet original listing requirements that may otherwise constitute a backdoor listing; or ii) consider a transaction as a backdoor listing even if it may not otherwise constitute a backdoor listing.
- In assessing whether the transaction will or could result in the existing security holders of the listed issuer holding less than 50% of the securities or voting power in the entity resulting from the transaction, and in assessing the various factors set out in Subsection 626(b), the TSX will take into account securities issued or issuable upon a concurrent financing, whether it is by way of private placement or public offering (rather than only by private placement under the current regime).
Interested parties are invited to submit comments on all aspects of the Amendments to the TSX up to January 13, 2014.
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