Canada: TSX Proposes Amendments Relating To Its Rules On Acquisitions And Backdoor Listings

Last Updated: December 16 2013
Article by Martine Guimond and Ali Amadee

The TSX has published proposed amendments to the TSX Company 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.

With regard to acquisitions, the proposed amendments would provide listed issuers additional flexibility to adopt security-based compensation arrangements for employees of target issuers. This added flexibility would allow listed issuers to offer new incentives to the employees of target issuers, thus providing issuers with additional tools to encourage the retention of such employees following an acquisition.

The proposed amendments would also clarify the criteria considered by the TSX in identifying a transaction as being a backdoor listing and broaden the scope of transactions that may be considered as such. This would minimize the occurrence of cases where unlisted entities use TSX-listed users to go public without having to meet original listing requirements, which must be met in the case of backdoor listings.

Over a 45-day period ending on January 13, 2014, the TSX will be receiving comments on the proposed amendments, which will become effective following the comment period and 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 (an "Arrangement") adopted by a listed issuer on the TSX must be approved by its security holders. However, there are two exceptions to this general rule:

  • where an Arrangement is offered as an inducement for employment to an officer, so long as the number of securities issuable does not exceed 2% of the issued and outstanding securities over a 12-month period under such exemption;
  • where a listed issuer assumes an Arrangement of a target issuer in the context of an acquisition pursuant to Section 611 of the Manual.

Currently, the listed issuer may only assume existing Arrangements and may not grant new awards to the employees of the target issuer without shareholder approval. Under the amendments proposed to Section 611 of the Manual, listed issuers will be allowed to adopt new Arrangements for employees of a target issuer in the context of an acquisition without security holder approval, if the number of securities issuable under the Arrangement and the acquisition does not exceed 2% and 25% of the number of issued and outstanding securities, respectively. New arrangements can only benefit employees of the target issuer and cannot be used for other Arrangements of the listed issuer.

It shall be noted that, although the assumption of awards of a target issuer and the creation of an Arrangement for the employees of a target issuer may benefit from an exemption from security holder approval, such awards will be subject to annual disclosure requirements, shall count towards dilution incurred as a result of security-based compensation arrangements, and shall be considered in the insider participation limit. 

In explaining the rationale for the proposed amendments to Section 611, the TSX notes that listed issuers have, from time to time, requested additional flexibility to adopt Arrangements for employees of target issuers, including the ability to provide new incentives to employees of a target issuer in order to encourage their retention following the acquisition. In the past, the TSX has permitted such new Arrangements on a discretionary basis. The proposed amendments will formalize this practice and provide additional transparency by expressly covering the practice in the Manual.    

Backdoor listings

A backdoor listing, also called a reverse takeover or reverse merger by other stock exchanges, is a transaction whereby a TSX-listed issuer is acquired by an unlisted entity. Under TSX rules, the entity resulting from such transaction must meet TSX original listing requirements.

Currently, Section 626 of the Manual provides that a transaction shall be considered a backdoor listing if (i) the transaction will result in a change in effective control of the listed issuer and (ii) 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. This means that the transaction would result in more than 100% dilution, taking into account the securities issuable as a result of the transaction and all securities issuable pursuant to any concurrent private placement.

The proposed amendments to Section 626 of the Manual include the following:

  • The TSX proposes a series of factors in determining whether there is a backdoor listing, including the business and the sizes of the listed issuer and of the unlisted entity, and changes to management (including the board of directors), voting power, security ownership and capital structure. The TSX believes these factors to be relevant indicia of an unlisted entity becoming listed through the acquisition of a listed issuer.
  • The amendments clarify that the TSX has discretion to exempt a transaction that may otherwise constitute a backdoor listing from the requirement to meet original listing requirements and has further discretion to consider a transaction to be a backdoor listing even if such transaction would not otherwise constitute a backdoor listing.
  • Currently, pursuant to Section 626 of the Manual, for a transaction to be a backdoor listing, it would need to result or have the potential to 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. In making this evaluation, the TSX rules only consider securities issued by way of a private placement upon a financing concurrent to the transaction. Under the proposed amendments, securities offered by way of a public offering will also be considered.

The TSX explains that its rationale for the proposed amendments to Section 626 of the Manual is to clarify drafting and to more fully and transparently support the policy objectives of the rules for backdoor listings. The TSX notes that the proposed amendments will broaden the scope of the transactions that may be considered as backdoor listings by taking into account a variety of relevant factors and by taking a more comprehensive view of the concept of dilution.

Request for comments

Interested parties are invited to submit their comments to the TSX. The Request for Comments published by the TSX poses a series of questions regarding which the TSX is particularly interested in hearing from the public. Comments should be in writing and delivered by January 13, 2014 to the persons identified in the Request for Comments, which may be found at the following link:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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