Canada: New TSX Rules Governing Special Purpose Acquisition Corporations Now In Effect

The Toronto Stock Exchange (TSX) announced amendments (Amendments) to Part X — Special Purpose Acquisition Corporations (SPACs) of the TSX Company Manual (Manual), which came into effect on October 4, 2018. Notable changes to the TSX SPAC rules include codifying exemptions previously provided to SPACs by the TSX and removing the requirement for shareholder approval of a qualifying acquisition subject to the SPAC satisfying certain requirements.

The Amendments reflect comments received by the TSX on the proposed amendments (May 2018 Proposal) that were originally published by the TSX on May 31, 2018. For a summary of the May 2018 Proposal, please see our Blakes Bulletin: TSX Seeks Input on Proposed Changes to Rules Governing Special Purpose Acquisition Corporations.

Subject to changes highlighted below, the Amendments are consistent with the May 2018 Proposal.

WHAT IS A SPAC?

A SPAC is a publicly traded corporation with no operating business, which acts as an investment vehicle for the public to invest in companies and industry sectors. Pursuant to a long-form prospectus, a SPAC issues "units" to be listed on the TSX. Each unit is typically comprised of a share and a full (or half) of a share purchase warrant. The gross proceeds raised from the public through the initial public offering (IPO) are placed into an escrow account to be used toward the SPAC's qualifying acquisition or to satisfy redemptions of shares by shareholders in specified circumstances. If a qualifying acquisition is not completed within the SPAC's permitted timeline (typically 21 months, but may be up to 36 months under the TSX rules), the escrowed funds, plus interest earned thereon, will be returned to the SPAC's shareholders. For an overview of the Canadian SPAC market, please see our Blakes Bulletin: The ABCs of SPACs: Canadian Experience.

Amendments

The Amendments:

  • Codify certain market practices and exemptions previously granted by the TSX
  • Remove the requirement for shareholder approval of a qualifying acquisition subject to certain requirements
  • Include certain non-material amendments to clarify various provisions as well as ancillary changes.

Approvals and Prospectus Requirements

Prior to the Amendments, a SPAC's qualifying acquisition required approval by a majority of the votes cast by securityholders of the SPAC (including the SPAC's founding securityholders). The Amendments remove the requirement for shareholder approval on the condition that an amount equal to at least 100 per cent of the gross proceeds raised by the SPAC from the public on its IPO is placed in escrow. The SPAC must also mail a notice of redemption to shareholders and make the prospectus for the resulting issuer publicly available on its website at least 21 days prior to the redemption deadline, and deliver such prospectus to shareholders at least two business days prior to the redemption deadline. In addition to physical delivery of the SPAC's prospectus, the Amendments also allow for electronic delivery of the prospectus to satisfy the delivery requirement.

The Amendments also clarify that shareholder approval will not be required for matters related to the qualifying acquisition, such as dilutive transactions or the adoption of a security-based compensation arrangement, provided that such matters are disclosed in the prospectus filed in connection with the qualifying acquisition and the foregoing conditions are satisfied.

The Amendments also require disclosure in the SPAC's IPO prospectus if shareholder approval would be a condition of the SPAC's qualifying acquisition. If approval is required, the qualifying acquisition will require approval by a majority of the votes cast by shareholders of the SPAC entitled to vote at a duly called meeting. Comprehensive disclosure is required for all material aspects of the transaction including valuation requirements for non-arm's-length transactions. The Amendments also codify the exemption permitting founding shareholders, subject to the related party rules, to vote with respect to the approval of a qualifying acquisition.

Public Distribution Requirements

A TSX listed issuer is required to meet the minimum public distribution requirement, which generally requires corporate issuers to have a minimum of 300 public board lot holders at all times. However, the Amendments: (i) reduce the minimum number of public board lot holders required following the SPAC's IPO to 150; and (ii) provide the resulting issuer with up to 180 days from the completion of a qualifying acquisition to provide evidence that it meets the 300 public board lot holders public distribution requirement. The May 2018 Proposal initially provided for a 90-day cure period following completion of a qualifying acquisition but that period was extended to 180 days in the Amendments.

Redemption Mechanics

The Amendments codify an exemption that permits a SPAC to limit the maximum exercise of redemption by any shareholder, provided that the limit is not lower than 15 per cent of the shares sold on the IPO, such limit is disclosed in the SPAC's IPO prospectus and that such limit applies equally to all shareholders entitled to a redemption right.

Debt Financing

The Amendments allow a SPAC to obtain unsecured loans on reasonable terms from its founders or others, up to a maximum aggregate principal amount equal to 10 per cent of the funds held in escrow, with the limit of such loans to be disclosed in the IPO prospectus. Such loans cannot have any recourse against the SPAC's escrowed funds and must be repayable in cash no earlier than the completion of the SPAC's qualifying acquisition. Prior to the Amendments, the TSX SPAC rules prohibited a SPAC from obtaining any form of debt financing prior to its qualifying acquisition; however, the TSX had granted exemptions to allow founders to provide loans to SPACs subject to certain requirements.

The exemption from the prohibition on debt financing is more favourable to SPACs, as the May 2018 Proposal looked to limit the loan up to a maximum aggregate principal amount equal to the lesser of: (i) 10 per cent of the funds held in escrow; and (ii) C$5-million.

Warrant Expiry Date and Annual Meetings

The Amendments provide that the share purchase warrants' expiry date could be based on the completion of the qualifying acquisition, rather than on a fixed date as is currently contemplated by the TSX rules. The Amendments also exempt SPACs from the requirements to hold an annual meeting within six months of the end of the SPAC's fiscal year. Again, these amendments codify previous relief granted by the TSX.

Restricted Share Policy

The Amendments exempt SPACs from the restricted share policy set out in the TSX rules, including that restricted securities include takeover protective provisions and a restriction on the issuance of securities that have voting rights greater than those of the securities of any class of listed voting securities of the listed issuer, prior to its qualifying acquisition. However, the TSX would review any proposed implementation of a dual class share structure or similar structure at the time of the SPAC's qualifying acquisition.

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© 2018 Blake, Cassels & Graydon LLP.

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