Current TSX Rules
Section 611(c) of the Toronto Stock Exchange Manual (the "TSX Manual") generally requires shareholder approval for acquisitions involving dilution in excess of 25%. Section 611(d) of the TSX Manual provides an exemption from this requirement for acquisitions of public companies. This exemption is subject to the right of the TSX to require shareholder approval under Section 603 or 604 of the TSX Manual.
Section 603 of the TSX Manual establishes broad discretion pursuant to which the TSX may impose shareholder approval and Section 604 provides that the TSX will generally require shareholder approval of a transaction if, in the opinion of the TSX, the transaction would materially affect control of the listed issuer.
Initial Proposal for Bright Line Test
On January 23, 2009, the Ontario Securities Commission set aside the TSX's approval of the listing of additional common shares of HudBay Minerals Inc. ("HudBay") to be issued in connection with its acquisition of Lundin Mining Corporation without requiring that the transaction be approved by HudBay shareholders. The acquisition would have resulted in just over 100% dilution of the shareholders of HudBay. Following that decision, there was considerable uncertainty as to the level of dilution at which shareholder approval would be required in future transactions.
On April 3, 2009, the TSX proposed amendments to the TSX Manual that would have established a bright line test for shareholder approval of acquisitions of public companies resulting in dilution in excess of 50%.
Rules as Adopted by TSX
On September 25, 2009, the TSX announced that after an extensive public consultation process and an analysis of global trends and best practices, it had decided to amend its rules by deleting the exemption from the shareholder approval requirement in Section 611(d) of the TSX Manual. Unlike the proposed rules that would have permitted a higher level of dilution (50%) for acquisitions of public companies without shareholder approval, the amendment will require TSX listed issuers to obtain shareholder approval when the number of securities issued in payment for an acquisition exceeds 25% of the number of outstanding securities (on a non-diluted basis) of the issuer, regardless of whether the target being acquired is a private or public company.
The amendment will be effective as of November 24, 2009. The amendment will not have any retroactive effect, so any transaction of which the TSX has been notified in writing prior to November 24, 2009, whether or not the TSX has already granted conditional approval, will be unaffected by the amendment.
The TSX has indicated that it will monitor the effect of the amendment on issuers and the marketplace and will seek to monitor the costs and benefits of the amendment, for its smaller issuers in particular.
Effect of the Amendment
This amendment will be well received by those advocating a greater role for shareholders in approving acquisition transactions that are material to a listed issuer. The amendment is likely to have a dampening effect on Canadian M&A activity, as some buyers and target companies may be reluctant to assume the risks associated with seeking buyer shareholder approval. Transactions also may now be structured with larger cash components to avoid triggering the 25% dilution bright line test. Larger, more liquid issuers are less likely to be affected by the amendment.
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