In August 2002 and November 2004, the Toronto Stock Exchange (the "TSX") published for comment proposed changes to its rules on normal course issuer bids ("NCIBs"). On October 21, 2005, the TSX published the third request for comment on proposed amendments (the "Proposed Amendments") to such rules. The following is a summary of the Proposed Amendments. If adopted, these changes will facilitate share buybacks and the use by issuers of accelerated share repurchase programs, forward purchase contracts, call options and put options on the issuer's own shares. We expect the Proposed Amendments will be adopted substantially in the form proposed by early 2006 and will include grandfathering provisions for issuers who are in the course of an NCIB at the time the Proposed Amendments become effective.
Daily Repurchase Restrictions
- Under the current NCIB rules, issuers may not purchase more than 2% of the relevant class of securities in any 30 day period.
- The TSX is proposing to replace the current 2%-in-30-days restriction with a daily repurchase restriction for all issuers, other than investment funds.
- Issuers will be permitted to purchase up to 25% of the average daily trading volume ("ADTV") of the listed securities on any trading day. ADTV will be calculated based on trading on the TSX over the most recently completed six months immediately preceding acceptance by the TSX of the NCIB notice. If an issuer's securities have not been listed for six months, the ADTV will be calculated using the period commencing on the date of listing of the securities to the date of acceptance of the NCIB notice by the TSX, provided that the period consists of at least four weeks of trading.
- As a result of the introduction of the daily repurchase restriction, an NCIB is now defined in the Proposed Amendments, in part, as "an issuer bid by a listed issuer to acquire its listed securities where the purchases do not, when aggregated with all other purchases by the listed issuer during the same trading day, aggregate more than the greater of (a) 25% of the average daily trading volume of the listed securities of that class and (b) 1,000 securities".
- Issuers will continue to be subject to the aggregate 12 month repurchase restriction of the greater of 10% of an issuer's public float or 5% of its issued and outstanding securities (the "Aggregate Maximum Restriction").
Block Purchase Exception
- In an effort to harmonize the NCIB rules with the SEC’s safe harbour rule 10b-18, a block purchase exception from the daily repurchase restriction has been added to the rule. Accordingly, issuers will be permitted to buy one block per calendar week which exceeds the daily repurchase restrictions.
- A "block" is defined in the Proposed Amendments as a quantity of securities that either (a) has a purchase price of $200,000 or more, (b) is at least 5,000 securities and has a purchase price of at least $50,000, or (c) is at least 20 board lots of the security and total 150% or more of the ADTV for that security.
- The block purchase exception may only be used on a day during which the issuer has not made any other purchases under its NCIB.
- Securities purchased under the block purchase exception will count towards the Aggregate Maximum Restriction.
Purchases at the Opening and Closing
- The TSX believes that purchases at the opening and during the last half hour of trading are considered to be a significant indicator of the direction of trading, the strength of demand and the current market value of the security. As such, the TSX is proposing to prohibit any NCIB purchases at the opening of a trading session or during the 30 minutes before the scheduled close of a trading session, other than with respect to market on close orders.
- Issuers who meet the definition of "investment fund", as defined in National Instrument 51-102 Continuous Disclosure Obligations, will still be required to comply with the 2% repurchase restriction in any 30 day period. As a result, the block purchase exception discussed above will not be applicable to investment funds.
Use of Derivatives in Conjunction with NCIBs
- The TSX is proposing to formalize as part of the Proposed Amendments its internal guidelines with respect to the use of forward purchase contracts, put option agreements and call option agreements in conjunction with NCIBs. The NCIB rule will now provide requirements regarding the acceptable terms of derivatives, purchase restrictions and reporting and disclosure requirements.
- Only derivatives which are settled by physical delivery of the underlying securities, and not those which provide for exclusive cash settlement, are subject to the NCIB rule.
- Settlement of a derivative contract but not the hedging activity associated with the contract, will be exempt from the daily repurchase restriction and restrictions on prearranged trades and private agreements.
Accelerated Buy Backs
- In a further effort to align the NCIB rule with the SEC rules, additional provisions have been incorporated into the rule to allow for accelerated buy backs thereby permitting an issuer to purchase a block of its securities for cancellation on a short sale from a broker. These purchases are subject to a number of restrictions related to open market purchases, including restrictions related to pricing and quantity, similar to those restrictions proposed for the use of derivatives.
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