The Toronto Stock Exchange (TSX) has adopted amendments relating
to security-based compensation arrangements in acquisitions (the
"Compensation Arrangement Amendments")
and to the circumstances in which the TSX will consider a
transaction to be a backdoor listing (the "Backdoor
Listing Amendments"). The amendments will become
effective on October 1, 2014.
Highlights of the Adopted Amendments
Greater Flexibility for Listed Issuers
The Compensation Arrangement Amendments will provide listed
issuers with greater flexibility to adopt security-based incentives
for employees of target issuers in connection with an
Listed issuers will be permitted to provide arrangements to
target issuer employees without security holder approval, provided
1. the number of securities issuable under such arrangements
does not exceed 2% of the listed issuer's issued and
outstanding securities; and
2. the number of securities issuable pursuant to the
acquisition, including any related arrangement, does not exceed 25%
of the listed issuer's issued and outstanding securities.
Under the current regime, without discretionary relief, listed
issuers may only assume existing arrangements in an acquisition,
and may not grant new awards to target issuer employees without
However, the TSX often provides relief from such approval
requirements on a discretionary basis. The new amendments will
formalize this existing practice.
Enhanced Clarity and Investor Protection
The Backdoor Listing Amendments will broaden the scope of
transactions that may be considered backdoor listings (also
referred to as reverse takeovers or reverse mergers). Entities that
engage in backdoor listings must meet TSX original listing
Under the current framework, a transaction is characterized as a
backdoor listing if (i) the transaction would 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 (ii) the transaction would result in a
change in effective control. As a result, transactions pursuant to
which listed issuers were effectively acquired by unlisted entities
(sometimes with greater than 100% dilution) were not considered
back door listings because there was no effective change of control
(for example, because the acquirer was widely held and/or there was
a concurrent financing).
The Backdoor Listing Amendments will:
1. clarify the definition of a "backdoor listing" as
occurring when a transaction (or series of transactions) results in
the acquisition of a listed issuer by an entity not currently
listed on the TSX;
2. articulate a series of factors to be considered by the TSX in
determining whether a backdoor listing has occurred, such as 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 capital structure of the listed
issuer, as well as concurrent (public or private) financings;
3. clarify the discretion of the TSX in characterizing a
transaction as, or exempting a transaction from the requirements
applicable to, a backdoor listing.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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