Originally published in Blakes Bulletin on Securities Law, May 2007
The Toronto Stock Exchange (TSX) has adopted and the Ontario Securities Commission (OSC) has approved amendments to the TSX’s rules on normal course issuer bids (NCIBs) and debt substantial issuer bids (the Amendments). The Amendments will be effective on June 1, 2007.
Proposed amendments to the TSX’s NCIB rules were published for comment on November 5, 2004 and October 21, 2005. Of note, in an effort to harmonize TSX rules to a greater degree with Rule 10b-18 of the U.S. Securities and Exchange Commission (SEC), the TSX has replaced the current 2% limit on repurchases of securities in a 30-day period with a new daily purchase restriction based on average daily trading volume. The Amendments do not include rules that the TSX had previously proposed relating to the use of derivatives and accelerated buybacks in connection with NCIBs. Most of the comments received by the TSX during the last comment period related primarily to these rules and, as a result, the TSX has decided to postpone their implementation.
The Amendments represent a significant shift in the landscape of NCIBs, such that listed issuers and brokers alike should consider how the Amendments may affect their approach to NCIB repurchase programs.
INTRODUCTION OF THE DAILY REPURCHASE RESTRICTION
Currently, the NCIB rules stipulate that no issuer making purchases under an NCIB may purchase in any 30-day period more than 2% of the relevant class of securities outstanding on the date of the TSX’s acceptance of the issuer’s notice of an NCIB (the 2% Restriction). The TSX has replaced the 2% Restriction with a daily repurchase restriction (Daily Repurchase Restriction) that permits issuers (other than investment funds) to purchase on the TSX, on a given day, up to the greater of (i) 25% of the average daily trading volume (ADTV) of the listed securities subject to the NCIB; and (ii) 1,000 securities. The ADTV is determined based on the total trading volume on the TSX in the most recently completed six calendar months preceding the TSX acceptance of the NCIB notice, excluding any purchases made by the listed issuer through the facilities of the TSX under its NCIB during such six months, divided by the number of trading days in that six months. The 2% Restriction was retained for investment funds having regard to their ability to effect redemptions.
The concept of a daily repurchase restriction based on ADTV is an important feature of the SEC’s Rule 10b-18 safe harbour, which is available for repurchases on the New York Stock Exchange and other U.S. exchanges. There is, however, a notable difference between the application of the Daily Repurchase Restriction under the Amendments and the way in which the comparable restriction is calculated and applied under Rule 10b-18. Under Rule 10b-18, the ADTV is based on the trading volume in the four calendar weeks preceding the week in which the purchase is effected, not the six calendar months preceding the date of acceptance of the notice of an NCIB.
The Amendments also permit a listed issuer to effect, once each week, a block purchase that is not limited as to the number of securities purchased. The block purchase exemption was introduced to provide some flexibility to the Daily Repurchase Restriction, particularly for issuers with limited liquidity. Once the block purchase exception has been relied on, the issuer may not make any further purchases under the NCIB for the remainder of that calendar day. Issuers are not permitted to purchase blocks from insiders under the block purchase exception.
All listed issuers will continue to be subject to the current TSX rule limiting aggregate purchases over the 12-month period of the NCIB to the greater of 10% of the public float and 5% of the issued and outstanding securities on the date of acceptance of the NCIB notice. This 12-month purchase limit and the 2% Restriction applicable to investment funds apply to all purchases by the issuer, whether made through the facilities of a stock exchange or otherwise, but exclude purchases made under a circular bid.
Issuers that have commenced an NCIB under current TSX rules prior to June 1, 2007 will be permitted to take advantage of the Amendments, such as the replacement of the 2% Restriction with the Daily Repurchase Restriction, once they become effective. Any such issuer wishing to rely on the Amendments will be required to file an amended NCIB notice and issue a press release.
The Amendments provide that a listed issuer is not permitted to purchase securities pursuant to an NCIB while the issuer possesses undisclosed material information. Issuers will likely restrict any purchases under their NCIBs during the trading black-outs prescribed by their insider trading policies.
This restriction does not apply to NCIBs carried out pursuant to automatic securities purchase plans by the listed issuer in accordance with applicable securities laws. All such plans must be precleared by the TSX. See OSC Staff Notice 55- 701 Automatic Securities Disposition Plans and Automatic Securities Purchase Plans.
REPURCHASE OF LISTED NON-CONVERTIBLE DEBT SECURITIES
The Amendments carry forward the TSX’s proposed restrictions on the repurchase of listed non-convertible debt securities. The repurchase of non-convertible debt securities is not currently subject to securities legislation since an "issuer bid" excludes "an offer to acquire or redeem debt securities that are not convertible into securities other than debt securities".
The Amendments provide that, among other requirements, listed issuers must observe the following procedures when implementing the repurchase of listed non-convertible debt securities (referred to by the TSX as a "debt substantial issuer bid"):
- A notice in prescribed form must be filed with the TSX, together with a filing fee.
- Upon acceptance of the notice of the debt substantial issuer bid, the listed issuer must disseminate the details of the bid by news release and communicate the terms of the bid by TSX-approved advertising.
- A book for receipt of tenders to the debt substantial issuer bid must be opened on the TSX not sooner than 35 days after acceptance of the notice and must be open for a length of time determined by the TSX.
- If more securities are tendered than the number sought under a debt substantial issuer bid, the listed issuer must take up the securities tendered on a pro rata basis.
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.