The Toronto Stock Exchange (TSX) has adopted – and the
Ontario Securities Commission has approved – public interest
rule amendments to the TSX Company Manual (Manual), which (i)
provide an expanded exemption to security holder approval
requirements for certain security-based compensation arrangements
adopted in the context of an acquisition and (ii) broaden the scope
of transactions that may be considered "backdoor
These amendments were originally published by the TSX for public
comment on November 28, 2013 and came into effect on October 1,
2014 for all TSX-listed issuers (listed issuers).
SECURITY-BASED COMPENSATION ARRANGEMENTS IN THE CONTEXT OF AN
The Manual provides that, subject to limited exceptions, any
security-based compensation arrangement (Arrangement) adopted by a
listed issuer must be approved by its security holders. One
exception provides that, in the case of an acquisition by a listed
issuer of a target issuer, the listed issuer may, without security
holder approval, assume the target issuer's existing
Arrangements. However, prior to the amendments, without the
approval of its security holders, the listed issuer could not grant
new awards under these Arrangements and any cancelled awards could
not be re-allocated or used for any other purpose. In connection
with acquisition transactions, the TSX has previously exercised its
discretion to permit listed issuers to grant new incentive awards
to target issuer employees under such Arrangements without
requiring approval of the awards by the listed issuer's
The recent amendments formalize this discretionary exemption
from the requirement that a listed issuer's security holders
approve new awards issuable to employees of a target issuer in
instances where an acquisition by the listed issuer includes the
assumption of an Arrangement of the target issuer, or the creation
of an Arrangement for employees of the target issuer, provided
The new awards are issuable by the listed issuer to employees of
the target issuer in connection with the listed issuer's
acquisition of the target issuer.
The aggregate number of securities issuable under the
Arrangement does not exceed 2% of the number of securities of the
listed issuer which are outstanding, on a non-diluted basis, prior
to the date of closing of the acquisition transaction.
The employees of the target issuer are not insiders or employees
of the listed issuer prior to the acquisition.
In addition, any securities issuable pursuant to such
Arrangement shall be included in determining whether security
holder approval is required as a result of the securities issued or
issuable in payment of the purchase price for the acquisition
exceeding 25% of the number of securities of the listed issuer
which are outstanding, on a non-diluted basis.
Any awards given under the exemption will be subject to annual
disclosure requirements and be considered part of the insider
participation limit of a listed issuer.
Issuers applying to list on the TSX – whether by initial
public offering, listing from other markets or a backdoor listing
(also referred to as a reverse takeover or reverse merger) –
are required to meet certain original listings requirements. Prior
to the amendments, the Manual provided that a transaction would be
considered a backdoor listing if the transaction would or could
result in the existing security holders of a listed issuer holding
less than 50% of the securities or voting power of the entity
resulting from the transaction, and if the transaction resulted in
a change in effective control of the listed issuer.
The recent amendments broaden the scope of transactions that may
be considered backdoor listings by taking into account a variety of
factors, including giving the TSX discretion to consider
transactions where a listed issuer continues to own 50% or more of
the securities or voting power of the entity resulting from a
transaction, among others. The Manual now also provides for a more
comprehensive approach to determine the 50% threshold by including
all securities issued or issuable upon a concurrent financing that
is contingent upon or otherwise linked to a transaction.
It is the TSX's view that these amendments will support
investor protection and maintain the integrity of the exchange by
ensuring that all issuers meet the original listing requirements in
order to list on the TSX.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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