The Toronto Stock
Exchange (TSX) recently published for comment certain proposed
amendments to the TSX Company Manual (the Manual),
which regulates issuers listed on the TSX. The comment period
closed yesterday, on January 13, 2014.
The proposed amendments target two aspects of mergers and
acquisitions involving TSX issuers. Firstly, the changes seek to
modify the Manual's rules dealing with the creation of
security-based compensation schemes in the context of acquisitions
by TSX listed companies. Secondly, the amendments seek to clarify
and codify the rules that apply to reverse takeovers
("backdoor listings") of issuers listed on the
Security based compensation schemes
The amendments provide an exemption from the requirement for a
listed issuer to seek the approval of its shareholders to adopt a
security-based compensation scheme for the employees of a target in
the context of an acquisition of that target company.
Currently, no exemption from the general securityholder approval
requirement is available in respect of such security-based
compensation schemes. The TSX has in the past permitted such
schemes to be adopted on a discretionary exception basis and
subject to certain conditions. The new exemption provides that
general securityholder approval will not be required where a
security-based compensation arrangement is created by an issuer for
the benefit of an acquisition target's employees, provided (i)
that the securities issuable under such an arrangement do not
exceed 2% of the outstanding securities of the acquiror prior to
the acquisition, and (ii) that securities issuable under the
acquisition do not exceed 25% of the issued and outstanding
securities of the acquiror. In applying the tests, securities
issuable under the compensation arrangement are included in the
total securities issuable in connection with the acquisition.
Insiders and employees of the listed acquiror are prohibited from
participating in a plan created pursuant to the exemption.
The amendments will clarify when a transaction that effectively
results in the listed issuer being acquired by an unlisted entity
will be considered by the TSX to be a backdoor listing.
Currently, in order for an acquisition to constitute a backdoor
listing under the Manual, it must involve significant dilution
(over 100%) and a change in the effective control of the TSX listed
acquiror. If the transaction constitutes a backdoor listing, the
post-acquisition entity must meet the original listing requirements
of the TSX.
The proposed amendments to the Manual set out the criteria the
TSX will apply in determining whether a transaction will be
considered a backdoor listing. These factors include, but are not
the business of the listed issuer and the unlisted entity;
changes in management (including the board of directors);
name changes; and
the financial structure of the listed issuer.
The amendments clarify that the TSX will retain the discretion
to determine that a transaction is or is not a back door listing
and to provide an exemption from the requirement that the resulting
entity must meet the original listing requirements.
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