Canada: Amendments To TSX Venture Exchange Policy 4.4. Incentive Stock Options

Last Updated: June 17 2013
Article by Francesco Tallarico

On May 8, 2013, the TSX Venture Exchange (TSXV) implemented amendments to Policy 4.4 - Incentive Stock Options (Policy 4.4). The amendments are intended to clarify and provide guidance on existing requirements and procedures; however, other amendments constitute new policies. In connection with the amendments to Policy 4.4, the TSXV has also made corresponding minor amendments to Policy 4.7 - Charitable Options in Connection with an IPO (Policy 4.7) and Form G - Summary Form - Incentive Stock Options. This bulletin provides a summary of certain significant amendments to Policy 4.4.

Summary of Certain Significant Amendments to Policy 4.4

Multiple Option Plans

Section 2.2(c) of Policy 4.4 now provides that the TSXV acknowledges that there may be circumstances where it is necessary or prudent for an issuer to have more than one stock option plan in effect at the same time. Where an issuer has more than one stock option plan or has granted stock options outside of its stock option plan, the limitations set forth in Policy 4.4 on the maximum number of options that may be granted apply to all stock option plans and grants when taken in the aggregate. In addition, Policy 4.4 now clarifies that an issuer may not have both a rolling stock option plan and a fixed number stock option plan in effect at the same time if, when taken in the aggregate, the number of shares reserved for issuance under both plans could exceed the 10% limit set forth in Policy 4.4.

Minimum Exercise Price

Section 3.6 of Policy 4.4 now provides that if an option is granted by a newly listed issuer, or by an issuer which has been recalled for trading following a suspension or halt, the issuer must wait until a satisfactory market has been established before setting the exercise price for and granting the option. In general, the TSXV will not consider that a satisfactory market has been established until at least 10 trading days have passed since the date of listing or the day on which trading resumes.

Conditions/Provisions to be Included in Stock Option Plans

Policy 4.4 has been amended to clarify that for stock options granted to employees, consultants or management company employees, it is the responsibility of the issuer and the optionee to ensure and confirm that the optionee is a bona fide employee, consultant or management company employee. In addition, the amendments also provide that anything not exceeding a 12 month period would be a reasonable time period for the expiry of options granted to an optionee that ceases to be a director, employee, consultant or management company employee of the issuer.

Blackout Period

Policy 4.4 now provides that a stock option plan may contain a provision for the automatic extension to the expiry date of an option if such expiry date falls within a period (Blackout Period) during which an issuer prohibits an optionee from exercising their stock options. In such circumstances, the following requirements are applicable:

  1. The Blackout Period must be formally imposed by the issuer pursuant to an internal trading policy as a result of the bona fide existence of undisclosed material information. 
  2. The Blackout Period must expire upon the general disclosure of the undisclosed material information. The expiry date of the affected stock options can be extended to no later than 10 business days after the expiry of the Blackout Period.
  3. The automatic extension will not be permitted where the optionee or the issuer is subject to a cease trade or similar order.

Shareholder Approval for Plans, Grants and Amendments

The amendments to Policy 4.4 provide that a fixed number stock option plan that, together with all of the issuer's other previously established plans or grants, could result at any time in the number of listed shares reserved for issuance exceeding 10% of the issued shares as at the date of implementation of the stock option plan must receive shareholder approval at the time the plan is to be implemented and at such time the number of shares reserved for issuance under the plan is amended.

In addition, a fixed number plan that, together with all of the issuer's other previously established plans or grants, could not result at any time in the number of listed shares reserved for issuance under the plan exceeding 10% of the issued shares as at the date of implementation of the plan ("<10% Fixed Plan") does not require shareholder approval at the time the plan is to be implemented or amended, unless disinterested shareholder approval is required under Policy 4.4.

Rolling stock option plans must receive shareholder approval at the time the plan is to be implemented and yearly thereafter at the issuer's annual general meeting.  In the event that the issuer fails to obtain yearly shareholder approval for a rolling plan, the TSXV would expect the issuer to immediately replace the existing plan with a <10% Fixed Plan having terms that do not require shareholder approval.

Generally, the TSXV will require that any amendment to a stock option plan that is not a <10% Fixed Plan be subject to shareholder approval as a condition to TSXV acceptance of the amendment. The amendments to Policy 4.4 set forth a list of amendments that would require shareholder approval.

If an issuer requires shareholder approval for a new or amended plan, TSXV acceptance of the plan will be conditional upon requisite shareholder approval having been obtained.  The TSXV will generally permit the new or amended plan to be implemented prior to the requisite shareholder approval having been obtained. In addition, the TSXV will generally permit the issuer to grant options under the new or amended plan prior to the requisite approval having been obtained, provided that the issuer also obtains specific shareholder approval for such grants and otherwise complies with the applicable requirements of Policy 4.4. Such approval must be separate and apart from the shareholder approval for the new or amended plan.

Where shareholder approval is not obtained: (i) in the case of a new plan, the new plan and all options granted thereunder will terminate; (ii) in the case of an amended plan, the amended plan will terminate (and the issuer will revert back to its existing plan) and any options granted under the amended plan will terminate; (iii) in the case of an option grant, the granted options will terminate; and (iv) in the case of an amendment of options, the amendment will be of no force and effect.

Where shareholder approval is required, the information circular to be provided to shareholders in respect of a meeting at which the approval of the stock option plan or the grant or amendment of an option will be sought, must disclose the particulars of the plan or the option grant or amendment in sufficient detail to permit the shareholders to form a reasoned judgment concerning the acceptability of the plan or option grant or amendment. The amendments to Policy 4.4 provide that the disclosure for a new plan should include, without limitation: (i) a description of the persons eligible to be granted options under the plan; (ii) the maximum number or percentage of shares that may be reserved; (iii) the limitations under the plan on the number of options that may be granted to any one person or any category of persons; (iv) the method for determining the exercise price; (v) the maximum term of options; and (vi) the expiry and termination provisions. In addition, where disinterested shareholder approval is required, those persons that cannot vote and the number of voting shares they hold should be disclosed in the information circular.

Initial shareholder approval will not be required where: (i) a stock option plan was implemented by an issuer prior to listing on the TSXV; (ii) the issuer files an initial public offering prospectus in conjunction with a listing application; and (iii) the issuer has disclosed the details of the plan and existing options in the prospectus.

Lastly, Policy 4.4 now clarifies that issuers must receive TSXV acceptance of any amendment to a stock option plan.

Disinterested Shareholder Approval

The amendments to Policy 4.4 now provide that disinterested shareholder approval must be obtained where any individual stock option grant would result in any of the limitations relating to grants to insiders or to any one person being exceeded if the plan does not permit these limits to be exceeded. In addition, the amendments to Policy 4.4 indicate that for the purpose of these limitations, options held by an insider at any point of time that were granted to such persons prior to becoming an insider are considered options granted to an insider irrespective of the fact that the person was not an insider at the time of the grant.

The amendments to Policy 4.4 also provide that where an option grant would result in the limitations relating to grants to insiders or any one person being exceeded, or where there is an amendment to stock options held by an insider that would decrease the exercise price of the option, or where a grant would otherwise require shareholder approval under section 3.9(e) of Policy 4.4, such shareholder approval cannot be a non-specific or blanket approval. The information circular must disclose the particulars of the grant or amendment in sufficient detail to permit the shareholders to form a reasoned judgment concerning the proposed grant or amendment. For example, for an amendment that would decrease the exercise price of an option held by an insider, the disclosure should include, without limitation, the identity of the insider, the number of options the insider holds, the current exercise price and the proposed exercise price.

Options to Eligible Charitable Organizations

Policy 4.4 now permits an issuer to grant options to "eligible charitable organizations" (as defined in Policy 4.7) subsequent to listing.  Prior to the amendments to Policy 4.4, the TSXV policies only permitted such grants prior to or in connection with the issuer's initial public offering.  The aggregate number of options granted and outstanding to "eligible charitable organizations" must not exceed 1% of the issued shares of the issuer at any time, as calculated immediately subsequent to the grant.  This limitation is inclusive of any grants under Policy 4.7.  Options granted to "eligible charitable organizations" under Policy 4.4 will be included within the option limitations set forth under section 2.2(a) of Policy 4.4.  In contrast, options granted to "eligible charitable organizations" under Policy 4.7 will not be included within such option limitations.

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