The Toronto Stock Exchange (the "TSX" or the
"Exchange") has released guidance on the use of the
"financial hardship exemption" to avoid securityholder
approval requirements for certain transactions.
The Exchange's rules generally require securityholder
approval of certain transactions, including issuances of securities
that (i) materially affect control of the issuer, (ii) provide
consideration to insiders of 10% or more of the issuer's market
capitalization, (iii) offer pricing at a greater discount than the
limits prescribed by the Exchange, and (iv) involve an issuance, at
a discount to market, of more than 25% of the issuer's
outstanding securities. As described in our update entitled
"TSX Rule Change Proposed to Require Acquiror Shareholder
Approval in Certain Public M&A Transactions" dated
April 13, 2009, it is proposed that securityholder approval will be
required in a greater number of public M&A transactions.
The "financial hardship" exemption was introduced in
2005 to permit listed issuers to enter into transactions in a
timely and efficient manner (shareholder approval can be a time and
resource consuming process) in circumstances of financial
difficulty. Reliance on the exemption was relatively
straightforward; the TSX relied entirely on the listed issuer's
board concluding that the issuer was in financial distress and that
the transaction was in the best interests of the issuer.
The TSX's proposed new rules reflect that a much higher
degree of scrutiny will be applied to the use of the exemption.
From a procedural perspective, the Exchange will now require
that the following be filed:
1. A detailed description of:
a. the events and factors which led to and contributed to the
listed issuer being in serious financial difficulty and whether
such information has previously been publicly disclosed,
b. alternatives considered by management and the board of the
listed issuer to improve the listed issuer's financial
c. the manner in which the proposed transaction will remedy the
financial problems of the listed issuer, including a budget of
sources and uses of capital for a six month period, a description
of how long the funds raised in the proposed transaction will
sustain the issuer and how the issuer will address any anticipated
d. why the listed issuer is not able to seek securityholder
approval, including consideration of whether approval in writing is
possible, particularly if the listed issuer is closely held,
e. any other material information.
2. An explanation as to why the proposed transaction is reasonable
for the listed issuer under the circumstances.
3. If insiders are participating in the transaction: (a)
confirmation that no such insider was involved in the negotiations
on behalf of the listed issuer, (b) information about other parties
that have been approached by the listed issuer to participate in
the proposed transaction and what role, if any, such insider played
in those negotiations on behalf of the listed issuer, and (c) any
other contemplated transactions (as applicable).
4. A list of the names of financial and legal advisors retained by
the listed issuer, its board of directors or the committee of the
board (if applicable) and the role such advisors, board of
directors or the committee of the board have played in considering
alternatives and in structuring the transaction and, in particular,
details as to any opinion they have arrived at in relation to the
transaction and its fairness to securityholders.
Issuers proposing to rely on the exemption will continue to be
required to issue a press release at least five business days in
advance of the closing of the transaction, disclosing the reasons
for the issuer's serious financial difficulty, the proposed use
of proceeds, the material terms of the transaction and that
reliance is being placed on the financial hardship exemption.
Notably, the TSX has indicated that it will not provide conditional
approval of the transaction until five days after issuance
of the press release, affording the issuer's securityholders an
opportunity to react.
The TSX will continue its practice of placing an issuer relying
on the "financial hardship" exemption under review for
Relying on the financial hardship exemption will now be more
difficult for an issuer, a consideration of increasing importance
given present market conditions.
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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